Paul Krugman: Costco versus Wal-Mart

Paul Krugman is asked about the comparison between Costco and Wal-Mart:

Putting Pressure on Wal-Mart, by Paul Krugman, Money Talks: David Gross, Palo Alto, Calif.: I agree with you completely ["Big Box Balderdash"]. In addition, you could cite Costco, as a comparison, as a competing high-volume, deep-discount retailer which pays its employees well, with good benefits. In addition, its social posture is excellent, and quite unique in corporate America...

Paul Krugman: I didn't have space to get into comparisons between Wal-Mart and other big box employers. The contrast with Costco ... is telling. There is ... a counter-argument from Wal-Mart's defenders. Costco caters to a much higher-income clientele ..., so that Costco's customers may place a higher value on the intangible benefits ... from a workforce that is relatively content, and also more experienced because of lower turnover. It's probably true, given the relatively low income of its customers, ... that Wal-Mart's most profitable strategy is the one it has chosen: low wages, high turnover, and low prices at the expense of service.

But there are tradeoffs: if Wal-Mart were pressured into paying its workers better, the cost to the company would be much less than the added wages, because of all the factors that make treating workers decently profitable for Costco. What this means is that the corporate profitability case for low wages at Wal-Mart is true, but less compelling than ... the raw numbers might suggest. The message I take from this is that a pressure campaign against Wal-Mart has a good chance of succeeding. If public pressure makes a low-wage policy less attractive, Wal-Mart might well be persuaded to shift toward a more Costco-like wage structure.

Comments

[save_the_rustbelt]

Something interesting is happening.

Until the Delphi bankruptcy academic economists could have cared less about blue collar workers, they were all about celebrating creative destruction.

Suddenly, the Delphi mess, the impending bankruptcies of GM and Ford, the record trade deficits (see today's newspapers), the lost pensions, and now the economists are wailing about the fate of blue collar workers.

To paraphrase an old Motown song

"too little, too late"

[ilsm]

Pensions...........

One of the "selling" points about corporate and government pensions were they encouraged consumption rather than delayed gratification saving for future.

You often get what you wish for, really bad!!

A Chinese blessing (curse, maybe); "May you have an interesting life".

Define interesting.

[anne]

http://www.nytimes.com/2005/09/03/national/03walmart.html?ex=1283400000&en=299ddd55b2a61763&ei=5090&partner=rssuserland&emc=rss

September 3, 2005

Wal-Mart Workers Are Finding a Voice Without a Union
By STEVEN GREENHOUSE

TAMPA, Fla. - Having failed to unionize any Wal-Marts, American labor unions have helped form a new and unusual type of workers' association to press Wal-Mart Stores Inc. to improve its wages and working conditions.

With its first beachhead in Central Florida, the two-month-old group is already battling Wal-Mart, the nation's largest corporation, over what it says is the company's practice of reducing the hours that many employees work, often from 40 a week to 34, 30 or even fewer, jeopardizing some workers' health benefits.

Belva Whitt, a cashier who earns $7.40 an hour, said she had joined the new group, the Wal-Mart Workers Association, largely because she was unhappy with her wages and because her hours were reduced to part time from full time many weeks.

"I'm a single mother trying to raise my son, so not having that money makes it hard," said Ms. Whitt, 30. "Sometimes I have to decide, am I paying the rent or will I have food on the table?"

The association says it has nearly 200 current and former Wal-Mart workers and is growing by 30 workers a week. Members pay dues of $5 a month. In Florida, its membership includes workers from 30 stores in the Tampa, Orlando and St. Petersburg areas, and it is also seeking to enlist Wal-Mart employees in Texas.

The group's sponsors include the United Food and Commercial Workers Union, the Service Employees International Union, and Acorn, an advocacy group for low-income people. It has also received support from the Marguerite Casey Foundation, which helps low-income families, and the Nathan Cummings Foundation, which promotes social justice....

[anne]

http://www.nytimes.com/2005/12/14/business/14delphi.html?ex=1292216400&en=053e26e2f9583620&ei=5090&partner=rssuserland&emc=rss

December 14, 2005

Protests Well Up as Delphi Workers Ponder Cuts
By MICHELINE MAYNARD and JEREMY W. PETERS

DETROIT - First, Robert S. Miller, the chief executive of Delphi, had his turn to capture the public spotlight, looking for deep cuts from unions.

Now, workers at Delphi, the bankrupt auto parts supplier, are having their say against Mr. Miller's demands - on picket lines, in drafty union halls and on their bodies.

On Thursday, workers in Dayton, Ohio, plan to wear red clothing to their factories, symbolizing the wages and benefits they say will bleed away if the company wins its demand for sharply lower wages and benefits.

It is the most visible symbol yet of a grass-roots protest that is spreading among workers in cities like Toledo, Ohio; Kokomo, Ind.; and Rochester, home to plants with futures clouded by Delphi's bankruptcy filing in October.

Nowhere is the concern deeper than in western Michigan, where the company's initial demand for wages as low as $9.50 an hour, versus the $27 an hour workers now receive, provoked outrage at plants in Wyoming and Coopersville, both outside of Grand Rapids, Mich.

Workers at the two factories have joined forces to fuel the protests, holding meetings and staging informational picketing.

"You don't do a job like this all your life because you like it," Tom Mitchell, 49, a repairman at the Wyoming plant, said Tuesday. "You do it because there are rewards. And that's what they want to take away from us."

Jack White, president of the United Automobile Workers local at the plant, said workers were demanding fairness. "It boils down to promises made, promises kept," said Mr. White, 53. "And that's really what I have heartburn about." ...

[Mark Thoma]

I have never liked nor endorsed, certainly never celebrated, creative destruction. That term comes from a school of thought I do not endorse.

That term is actually not used much in academic circles - it comes from "popular" economics, though that's a term I don't much like. I hadn't heard it much before I started blogging, but here it is very common (though last week I asked a colleague about this - I was curious about the disconnect on this issue between bloggers and academics - and was told it is starting to appear in some textbooks, e.g. Hubbard's I believe. I've been gathering thoughts hoping to post something on this at some point).

I find it ironic that, from my observation, those who support creative destruction are in many cases also supporters of intelligent design because creative destruction is just a fancy term for an evolutionary model applied to markets. Survival of the fittest improves the genetic makeup of business over time and the stresses of the business environment are needed to bring that evolution about according to this line of thinking.

Some even advocate business cycles to help the process along, or as necessary. Personally I do not believe business cycles are necessary to motivate innovation through competition. It's possible to have a firm make a techonogical improvement, enter an industry, and displace an existing firm (think Wal-Mart?). In such a case there won't be a large swing in output in the market, but there will be evolution.

Survival of the fittest (competition) will still happen with a stable food supply (constant output growth). It may happen faster if you lower food output during some times of the year (produce business cycles), that will stress the population more, but that does not make it better or even necessarily optimal. Cut it too much, and you lose the healthy along with the unhealthy, genes that ought to survive don't. So I don't see how anyone can say that business cycles are necessarily good, and certainly not that making them bigger is better.

But not all advocate the business cycle part, just endorse creative destruction as a "good thing." Is it good that business improves over time through competition? Yes. Is it good that the unfit "die" (businesses fold, workers are unemployed) in the process? I wouldn't say that.

Much like pumping classical music into parking lots to cause loiterers to move along, I wonder if changing the name to something more descriptive, evolutionary destruction perhaps, might cause many to avoid the term, or at least shy away from the evolutionary label. Minimally, it might help them understand that while evolution is a process nature uses to improve species over time, and it may be necessary to endure, it is brutal and heartless, big fish eat little fish, and I'd prefer not to label as good that the sick, the old, or the genetically inferior die in the process.

I hope that Delphi/GM did not mark the first time I thought about the plight of blue-collar workers...

[anne]

Nice comment :)

[anne]

Well, where oh where are the Wal-Mart war room folks? What's the point of a war room if the warriors are missing? Boo :)

[Bill Conerly]

re Wal-Mart and Costco benefits structure: given a heterogeneous labor force, we should not be surprised by heterogeneous compensation packages. Wal-Mart attracts one set of workers, Costco attracts another. Neither is necessarily better in terms of corporate profitability. As a former banker, I think that banks have traditionally offered low wages but good security packages (health, disability, etc.) because they want to attract people who are reliable, conscientous, concerned about risks.

[save_the_rustbelt]

"I find it ironic that, from my observation, those who support creative destruction are in many cases also supporters of intelligent design because creative destruction is just a fancy term for an evolutionary model applied to markets. Survival of the fittest improves the genetic makeup of business over time and the stresses of the business environment are needed to bring that evolution about according to this line of thinking."

Sorry prof, but that is a really wierd observation. Most of the supporters of ID I know are blue collar or maybe a bachelors degree or divinity degree. They are not likely to be discussing economics in technical term let alone what's-his-names (start with S darn it) theories of creative destruction.

I think you are confusing business/financial conservatives with social/cultural conservatives. I have contacts in both circles and they have little in common.

If your obsevatives are different, my apologies.

On a related note, Mankiw is once again talking about offshore outsourcing, and the most interesting part of his paper is the section where he advises that economists spin their comments and use different words so people will not get upset about outsourcing (page 23 of 48). Sections of the paper come very close to a condescending sort of "people are stupid so patronize them" tone.

Prof. Mark, on the other hand, gets in the box every day and takes his shots from us commoners. My compliments.

[Mark Thoma]

I have noticed an overlap in the two groups, but I could be wrong. In any case, that sentence isn't essential to the argument so it can be safely ignored.

Thanks for the pointer to Mankiw. Is there a URL?

[Ronald Rutherford]

Too many armchair economist equate Walmart and Costco as two entities in the same market.
But the truth is both have completely different business models. Maybe instead of being in glass towers and actually saw how both are run you could see the differences.

But why has no economist looked at the marginal productivity of a unit of labor vs. capital in Costco vs. Walmart? Can you not see that the unit output of labor per dollar is lower in Walmart than Costco?

[anon/portly]

"Is it good that business improves over time through competition? Yes. Is it good that the unfit "die" (businesses fold, workers are unemployed) in the process? I wouldn't say that."

From http://www.econlib.org/library/Enc/bios/Schumpeter.html:

"Innovation by the entrepreneur, argued Schumpeter, led to gales of 'creative destruction' as innovations caused old inventories, ideas, technologies, skills, and equipment to become obsolete."

I'm confused. I thought "creative destruction" was just a slightly florid term for the long-run workings of the "invisible hand" - almost synonymous with innovation.

I can see that one wouldn't say that it's "good" that "businesses fold" and "workers are unemployed" but would anyone say that it's "bad" that poorly run businesses lose market share to well-run ones (keeping employment in the industry constant) or that it's "bad" that improvements in technology make certain skills obsolete (given an expectation that overall employment will be constant)?

Up until this comment, I would have thought it was a very theme of this blog that "creative destruction" was in fact a good thing and that the bad thing was insufficient societal management of individual risk. (Or something like that).

And I wish I knew some way to articulate a satisfactory answer to "save the rustbelt" (one of the best commenters here and at Delong IMlameO), the whole thing with GM and Detroit just seems solutionless - even with better politicians, could we do more than just patch things temporarily? I wish that it made sense to people to buy Detroit-made cars instead of Hondas or Toyotas made in The South, but I don't think it does.

[Mark Thoma]

Ha. I stepped in it with this one. Freelancing in comments is dangerous. You have the risk thing right. Let progress happen, we won't stop it and if we don't do it someone else will, and then do our best to help those who are affected through no fault of their own without undermining market incentives.

I only meant that I wasn't taking a moral position on it - the usual someone better off, someone worse off, so no way to make a judgement (I was thinking of natural selection where you can't compensate the dead loser, not a Pareto concept where we can compensate the losers fully and still have something left over, though actually doing it is another matter).

Is progress good? Reminds me of this from DeLong:Reasons to Be Thankful

Charlie Stross on why he'd rather be alive now than in the past--and, presumably, why he'd rather be alive in the future than now:Autopope! - On being born in the past : Every so often, someone asks me: "given the choice, what period of history would you prefer to have been born into?" Let's interpret this pedantically and evaluate my survival prospects, given what we know at present about my physical characteristics. (If they'd asked, "given the choice, what period of history would you prefer to have been born into, and as whom" the answer would be different.)

1. Born any time prior to 1942: I die before the age of 5. (I was peculiarly susceptible to bronchitis as an infant, and would have died around age 2-4 without the ready availability of antibiotics.)
2. Born prior to 1950: I inherited weirdly thin retinas (my maternal grandmother had macular degeneration when she died, aged in her mid-sixties). By 18 I had some retinopathy in my right eye; at 25 I sprang a severe retinal detachment in my left. Microsurgery was required, but because this happened in 1989 the operation was successful. If it had failed I'd have been down to maybe 20-30% of a full visual field by the time I was 26. As you wind the clock back before the 80s, eye surgery grows progressively more primitive. I'm fairly sure that if I'd been born before 1950, I'd have been carrying a white stick or relying on a guide dog.
3. Born prior to 1940: Even if you assume I could have survived the bronchitis in infancy, I also inherited hypertension via the maternal line, serious enough to kill if untreated. Today, I've got a wide range of medication -- ACE-II antagonists, Ca-channel blockers, and so on. Prior to 1980, however, the most widely used antihypertensives were diuretics (which I do not get on well with).

Upshot: if I had been born at any time prior to 1900, my life expectancy, assuming I survived infancy at all, would be 40-45 years -- the latter 20 of which would be rendered miserable by blindness. Between 1900 and 1940 I might have made it to 60. Only the fact that I was born as recently as 1964 has allowed me to live a comparatively normal life.

Hopefully this explains why the question "given the choice, what period of history would you prefer to have been born into" annoys me so much. There's a big difference between being interested in or nostalgic for a specific historical period and actually wishing you lived in it.

Nor are medical issues the only reasons for not wanting to live in the past. The legal rights of an English woman circa 1930 were in most respects weaker those of an Iranian woman today; if you look at the rights of women in the 1870s a comparison with Afghanistan under the Taliban is more apposite. To be a gay man in England prior to 1968 was to be a member of a legally persecuted out group. To be black in England prior to the late 1970s was likewise to be exposed to racist abuse with no legal recourse. Today we take for granted liberties hard-won by our elders; it seems to me to be almost obscene to wax over-nostalgic for the past, or to want to set the clock back.

[cm]

My goodness we came a long way from CostCo and Walmart.
Bambi vs Godzilla, atleast in these terms:
"[Costco's] social posture is excellent, and quite unique..."
and Krugman thinks that some public pressure might be effective in getting Godzilla to be more generous with it's compensation packages to employees. [The moon might be made of Costco cheese too.]
Who's going to run out of money first, the Costco shopper or the Walmart shopper? Won't we see the Costco shoppers being forced to ignore better service for lower prices?
Or has there been a change in that pervasive trend that fewer have more? That Walmart has many more customers buying less and less and Costco losing, not gaining, customers from Walmart? It could happen.

[save_the_rustbelt]

http://post.economics.harvard.edu/faculty/mankiw/papers/Outsourcing%20-%20Mankiw-Swagel%20for%20C-R%20conference%20Nov%2010%202005.pdf

That may be the longest link in history.

Interesting reading, would be interested in your thoughts (on the economic cause-and-effect or lack thereof, not on the spin strategies.)

[save_the_rustbelt]

Back to Wal-Mart.

They seem to structure a workforce at the store level which is both very young and very old. Being the experienced cynic I am, I would say this tends to minimize the chance of union organizing, and also for the older half tends to leave health care costs with Medicare.

I became disillusioned when I had to negotiate some provider fees with their workers comp department, I got the very real feeling the injured workers were to be dumped at the first convenient moment.

There is nothing inherently unethical about taking advantage of weak segments of the labor market, but I've had the feeling they had some special dispensations. Sure enough, the Inspector General of the DOL found that Wal-Mart was getting advanced notice of inspection and enforcement activity. And how does that happen?

[mona]

I must say that I do not really care what economists think about the differences between companies. They simply are not qualified or appropriateoy trained to have much to offer. Krugman has no more to offer us in this area than a popular dean.

Walmart has created HUGE value to consumers, employees, shareholders and America.

Please spar us the stupid arguments that we are worse off. We are not. Krugman and economists who wish to pass their rabid thoughts on the topic should do it with real theory not conjecture

[cm]

calmo: I would appreciate if you were not to use the name 'cm'.

[cm]

anon/portly: There is absolutely no inherent problem with businesses folding or people losing their employment, what is bad is that by virtue of that, people lose their livelihoods and have to suffer being viewed as failures. It appears we have not found a good middle ground between no incentive to work and the all-or-nothing of a good compensation package.

[ilsm]

Wal Mart can treat their people as dogs. That is their right.

Their stores are unkempt.

Their work force ill motivated and it takes too long to stand in a line of filled shopping carts to save 5 cents on a quart of oil.

I use the web to avoid the expenditure of my time, which is usually wasted more than the value I could save on lower quality stuff at WalMart.

I will not do business with them, that is my right.

[cm]

ilsm: Not to dispute your experience, but often the length of lines is a function of customers per hour and how many checkouts are (wo)manned, in any store. Not necessarily the performance of the checkout people. (Which you did not explicitly state, but it may be implied.)

Stores may also differ in the degree of empowerment of the checkout personnel. In some stores, they can resolve minor price disputes or uncheck erroneously scanned items on their own, in others they need to call the manager for everything.

[cm]

The implication of my comment is that Walmart probably scores low on both counts with their nickel & diming.

[ilsm]

cm

I do not go to Wal Mart for the reason that they treat their employees badly.

I have heard more than one story.......

There are explainable reasons beyond that which I see as well.

[donna]

there isn't "one class of workers" and "another". People work within systems, and, as Deming pointed out, can only work as well as the system they are in. If you consider Walmart workers of a "different" class, then you are simply buying into Walmart's philosophy rather than realizing it is WalMart's structure and system that is the problem.

[anne]

Donna, please continue your thoroughly interesting comment :)

[JohnDewey]

Donna, I don't understand that there is a problem with the WalMart system. Please explain.

Here's my observations:

Each morning WalMart customers stand outside the store eagerly awaiting its opening. The parking lots are never empty. Certainly the customers have no problem with WalMart.

Every new WalMart store opening is accompanied by a deluge of job applications. Obviously those applicants believe WalMart is providing a better opportunity than whatever they had.

My employer, a major airline, always makes money on its flights to the Northwest Arkansas Regional Airport. Sales representatives and business owners wait for hours in Bentonville for their 30 minutes to pitch their products to WalMart buyers. Those companies that win contracts might be challenged to the limit meeting WalMart's demands. But few are giving up the business.

So what's the problem with WalMart? That it successfully eliminated excessive labor costs built into our consumer products 30 years ago?

[anne]

"So what's the problem with WalMart? That it successfully eliminated excessive labor costs built into our consumer products 30 years ago?"

Ah, like wages and benefits, I understand :)

[cm]

JohnDewey: Not to break the lance one way or the other, but by the tone of your comment it strikes me nobody has yet seriously tried to eliminate *your* excessive labor cost.

[walmart employee]

Walmart has a saying " Walmart low wages low morals always." However they do create jobs lots of jobs. so if you like to or if you can be a kiss A-- then WALMART has a opening for you. But don't believe the statement they make about the open door policy no retailiation or a kiss ass never makes it to the top. If you've ever worked with one of the asst managers you know it's NOT HOW WELL U DO YOUR JOB OR HOW HARD YOU WORK ( ITS WHOS ASS HAVE YOU KISSED AND HOW WELL YOU KISSED IT THAT WILL GET YOU TO THE TOP OF THAT LATTER. I never ever would have believed that this was true until I started working at Walmart, and im skating thin ICE I DON'T KISS ASS OR BROWN NOSE HOWEVER YOU PERFER