Saturday, January 28, 2012

Wages and the Wal-Mart Effect

Wal-Mart has spawned a cottage industry in books and articles about Wal-Mart stores and what’s wrong with them for America. Discussion varies among many topics but low wages and high turnover get plenty of attention. Allow me to quote from a 2009 addition to the list of Wal-Mart books: the Retail Revolution by Nelson Lichtenstein. note(1) A Wal-Mart exec is quoted: “It’s hard to believe but turnover drops millions of dollars to the bottom line in cost savings for the company. When an experienced associate leaves the company he or she is replaced by an entry level associate at a lower wage. Turnover of associates, for this reason, actually appears from an expense standpoint, to be a competitive advantage.”

Nearly ten million people work as cashiers, retail salespersons, and first line supervisors/managers of retail sales workers. More than 80 percent of these three jobs are in the retail sector. Together they make up 6.8 percent of America’s jobs in 2010. (2)

The effect on wages from high turnover varies by occupation and industry. In the retail industry high turnover generates a specific pattern of wage compression for jobs like cashier and retail salesperson: lower wage employees replace higher wage employees. The pattern is not unique to Wal-Mart, but given its size, employment totals and the admission that turnover helps profit, it is a specific pattern of wage changes that deserves the title, Wal-Mart Effect.

The Wal-Mart Effect can be defined and illustrated using data from the Occupational Employment Survey published annually by Bureau of Labor Statistics (BLS), U. S. Department of Labor. BLS Survey data partitions occupational wages at five percentile ranks: 10th, 25th, median, 75th and 90th percentiles. For example, the 10th percentile wage rate for an occupation is the wage where 10 percent of all workers earn that amount or less and where 90 percent of all workers earn that amount or more. For cashiers in Table I the 10th percentile wage of $12,200 in 2002 meaning 10 percent of America’s cashiers have annual earnings of $12,200 or less and 90 percent have annual earnings of $12,200 or more.

Table I – Cashiers

For cashiers the 10th percentile wage increased to $15,720 by 2010, a 28.9 percent increase in wages for the eight year period. The consumer price index increased by 21.1 percent in the period, which means the lowest paid cashiers got a 6.31 percent increase in inflation adjusted buying power.

Conversely, the 90th percentile wage of $22,810 in 2002 meaning 90 percent of America’s cashiers have annual earnings of $22,810 or less and 10 percent have annual earnings of $22,810 or more. The 90th percentile wage increased to $25,780 in 2010, a 13 percent increase. However, at the 90th percentile wage the increase fell well below the inflation rate, causing a 6.75 percent decrease in buying power for the highest paid cashiers.

The cashier example illustrates the Wal-Mart Effect which can be defined for any occupation where the lowest 25 percent of inflation adjusted wages increase over time as the highest 25 or 50 percent of inflation adjusted wages decrease over the same time period.

Cashiers had 3.3 million jobs in 2010, but wages for retail salespersons in Table II shows the Wal-Mart Effect for the nearly 4.2 million Americans working as retail salespersons. Table III shows the Wal-Mart Effect for more than 1.1 million first line supervisors/managers of retail workers.

Table II – Retail Salespersons

Table III - First-line supervisors/managers of retail sales workers

What happens to the individuals who leave Wal-Mart or the retail industry is not known. We can hope some of them got higher paying jobs in another occupation, but what happens to individuals is irrelevant to what is certain for jobs: the Wal-Mart Effect degrades an occupation and its jobs, whoever holds them. In the eight year period the highest paid of the 3.1 million cashiers lost buying power to the lowest paid cashiers as wages compressed into a narrower distribution of real wages.

The Wal-Mart Effect depends partly on company policy. The more companies do as Wal-Mart does and actively pursue high turnover as a profitable strategy the more likely wages will show the Wal-Mart Effect. Occupations needing college degree skills or other specialized occupational skills tend to be more resistant to the Wal-Mart Effect. Increasing or stable employment also makes it harder for an employer to eliminate more experienced staff. However, skills are not a guarantee because one of the worst examples of the Wal-Mart Effect occurs in the airline industry where Pilots, Co-pilots and Flight Engineers have lost 20 thousand jobs over the last decade and low paid pilots have replaced high paid pilots by the thousand.

Table IV shows the distribution of wages for 1.5 million Elementary School Teachers, Except Special Education, an occupation resistant to the Wal-Mart Effect. Wages in education typically come from a predetermined salary scale published by the local School Board. Individual pay is determined from a grid or spreadsheet of pay steps that depend on education and years of experience. Pay scale pay in education reflects the opinion that teachers can be trusted to improve with experience and education.

Table IV – Elementary School Teachers, Except Special Education

Recent media reports on education incorporate increasing amounts of coverage from critics who attack teachers and teaching. Growing opinion from outside of teaching expect teachers to produce a quality product measured by student test scores. Manufactured products fail as a result of defective materials and workmanship and so the logic follows that students must fail from defective teaching and poor teachers.

The solution reformers demand will adjust teacher salary in proportion to student test scores. Critics emphasize their concern for education, but a merit pay plan puts teacher pay into competition, promotes higher turnover, and increases the chances school districts will cut their budgets with Wal-Mart Effect savings.

Pay scales act as a partial substitute for seniority rules that require layoffs to be in reverse order of years of service. Seniority rules usually have to be negotiated within collective bargaining agreements, but where pay scales have general acceptance then job skills and time on the job make an occupation resistant to the Wal-Mart Effect. The political attack on unions increases the chance that more occupations will show Wal-Mart Effects.

Of the more than 800 occupations reported in the Occupational Employment Survey 68 show the Wal-Mart Effect from 2002 to 2010. Regrettably the job count in these 68 occupations total 23.4 million, mostly concentrated in three occupational categories: sales and related occupations, food preparation and serving occupations, and personal service occupations.

Over 90 percent of retail sales workers including supervisors of sales workers show the Wal-Mart Effect along with almost half of food service workers. Waiters and waitresses escaped Wal-Mart Effect changes probably because they have the best access to customers and customer tips. In restaurant and food service occupations like fast food cooks, dishwashers, and serving staff like counter attendants and hosts and hostesses at restaurants, lounges, and coffee shops turnover helped replace higher wage jobs with lower wage jobs. Among personal service occupations a little over 40 percent show Wal-Mart Effect wage changes, which include hairstylists, barbers, and especially 686 thousand personal and home care aides where turnover can be expected to be high.

In a 2004 article in Workforce Management author David Shuit reported Wal-Mart turnover of 600,000 to 700,000 a year. (3) It is an amazing number for a company that analysts like to describe in superlative terms. It makes Wal-Mart unrivaled in its ability to convert wages to profit by promoting high turnover, which is why the consequence for wages should be known as the Wal-Mart Effect
(1) Nelson Lichtenstein, The Retail Revolution: How Wal-Mart Created a Brave New World of Business (New York, NY: Piccador, A metropolitan book Henry Holt and Company, 2009) page 150

(2) Occupational Employment Survey, United States Department of Labor, 2002, 2010.

(3) Douglas P. Shuit, “People Problems in Every Aisle,” Workforce Management, February 2004, pp. 27-34