It’s great news that Walmart is going to be raising the floor wages of all of its workers to $10 per hour. However, there are some Wall Streeters that are saying that it’s great for the labor market as a whole, because labor markets are finally putting pressure on employers to raise wages in a low unemployment environment. The problem is that there is no empirical evidence to support the idea that higher Walmart wages equals higher wages for everyone.
According to neoclassical economic arguments, the labor market is supposed to work like this: As unemployment goes down, there becomes a scarcity of workers. Employers will pay a premium for scarce workers, thus driving up wages.
It’s a theory that has never historically materialized in the macro economy, or macro labor force, especially part-time, low wage labor, such as this “recovery” has produced. Sure, it may be true for some specialized sectors (like Engineering), but low wage, part time employers have never paid a “premium” for workers even in good times. We also know it’s delusional to think that there is a scarcity of part-time or low wage workers. The theory is also ignoring the fact that there are only 4 million jobs for 9 million people looking for jobs according the Bureau of Labor Statistics. In other words, there are no scarcity of workers overall.
How divorced is the idea that raising Walmart wages will raise all boats from reality? On first glance, we see that there is just the tiniest relationship between wages (compensation) and the unemployment rate:
Even if we accepted the premise of a scarce part-time labor force, it takes a lot of labor to raise wages. How much? This is why we have regression analysis and forecasting trend lines.
Just doing a quick regression in Excel, of the relationship between wages and unemployment, the Pearson R2 is .44 between variables, and the Beta value is .1004. In statistics, we call this “graveyard dead,” because the slope of the Beta value is flat-lined. It’s so dead that it’s not even worth creating a model through SAS or SPSS.
In other words, there is no relationship in the macro economy between wages and unemployment rates, at least since 1949.
And let’s be clear: Walmart (or any firm) doesn’t do anything that isn’t in its own shareholder interest. Labor is a “liquid asset” in shareholder terms, tradable for cash in the form of higher valuations in cash and stock. Walmart’s profits hover around the GDP of Denmark ($130 Billion in 2014), while their total valuation hovers around the GDP of Austria ($209 Billion in 2014).
Walmart’s profits have only grown 1.5% from 2013 to 2014 and only 20% since the “official” end of the recession in 2009. Compare that to Amazon, whose profits have grown 79% in the same time period, and Walmart may feel the need to justify its 1.7:1 price-to-earnings ratio in relation to their competition on Wall Street.
Add to that the fact that Walmart usually sets up shop in poorer cities and towns, where employment options are limited to begin with, and the idea of a scarce part-time macro labor force (which sounds silly just writing it) putting wage pressures on Walmart sounds even more silly.
The idea that the part-time, low wage labor force as a whole will face rising wages as a result of Walmart’s decision to increase shareholder value is statistically, and empirically “graveyard dead.”