Wal-Mart “Gets It”

Don’t count on big business to support the free market“. (In Brief, 7/1/2009, Foundation for Economic Education, Editor’s comment.) That’s one observation about Wal-Mart’s announcement of support for the Obama-inspired plan to force employers to provide health insurance coverage for employees. There have been others, such as allegations of “Chicago-style backroom deals with unions” relative to the “card check” program where it is suggested that the magnanimous gesture by Wal-Mart might have bought off the unions on the long standing efforts to get the giant retailer unionized. That Wal-Mart does supply health coverage to employees after a certain period of employment now seems to diminish that theory however. All over the country business executives are gaping in disbelief at this otherwise savvy company’s strange “corporatist style” move. Some say that its smaller competitors will be hamstrung by employer-mandated health care and that gives the giant an even bigger advantage going forward.

Well duh, let’s just overlook the public relations and political aspect for a minute and also forget about the speculation above. If employers are forced by government to provide the health insurance benefit, who pays for it? It is not Wal-Mart nor any other employer forced to provide the benefit. The current employees, those to be laid off and all future employees will pay. It can’t be anything else. Think about it. Wal-Mart’s business model—just like that of any other business—operates in such a way that total payroll accounts for a certain, relatively stable percentage of operating expenses. If you add a significant cost like providing the health insurance benefit for all employees, this percentage cannot go up without affecting profits. The business needs to continue serving its shareholders, so that option is not attractive. Selling prices can be raised, possibly, but that works against the low-price strategy of Wal-Mart specifically, and presents a problem for competitors by the same token. So, what else? In order to keep total payroll in its usual relationship to other operating expenses, employees must either accept lower wages for the same level of productivity or some of them must be fired to bring the total down. Prospects for the thousands, who currently apply to Wal-Mart whenever there are openings, will look even bleaker for finding a coveted job with this great employer. In addition, any employees who would rather have higher wages and find their own insurance, if they wanted it, will now be compelled to accept unwanted coverage.

Finally, Wal-Mart no doubt recognizes that providing insurance is cheaper than paying the Social Security taxes on higher wages. And, being a forward-looking company, Wal-Mart can see that socialized medicine is in the cards with the Obama plan and it will be no worse off when that happens.

©Copyright 2009 Edward Podritske

One thought on “Wal-Mart “Gets It”

  1. While I can agree with the vast majority of your comment, I’d like to raise one issue with you, that Wal-Mart’s employees and not Wal-Mart will pay for health benefits. While there are no absolutes in economics,
    let me point out some reasons why you are likely incorrect in your assertion.

    (“…no absolutes in economics,…” you say. Really, have you considered the primacy of production?-Podritske)

    Firstly, the vast majority of Wal-Mart workers are so little above the minimum wage that the difference doesn’t cover the cost of health care so their compensation cannot be reduced enough to pay for it. Next, given a particular sales volume, Wal-Mart already staffs at the lowest possible level consistent with its minimalist notions of ‘customer service’ and that staffing level could not be reduced by enough to cover health benefits costs. And lastly, reducing compensation levels, even for Wal-Mart, is probably not a viable option given the likelihood and costs of turnover.

    (If that is all true, then Wal-Mart will necessarily have to raise prices in order to meet its obligation to shareholders. Real profits are required also to attract capital. I doubt very much whether any scenario can be sketched whereby employees will not suffer for a forced “benefit”. Do not forget the “unseen” as Bastiat explained very well. There will be greater pressure on productivity in any event, so that means more productivity per employee or reductions in service.-Podritske)

    No, the more likely reason for their willingness to change course on this subject is a different kind of self interest. Mandatory health coverage is going to happen. Oh it might not happen this year but it will happen and so the intelligent course to embrace the inevitable.

    (Nothing man-made is inevitable.-Podritske)

    By gaining a seat at the table and focusing on the attributes of the program they can reduce the per employee cost in a number of ways: limiting the minimum coverage, reducing overal costs of insurance by including everyone in the program, reducing overall costs through cost containment mechanisms and reducing ineffeciences due to lost time which goes down as coverage goes up.

    Wal-Mart, GM and several other large scale employers have actually been quietly working with broader employee groups for several years as their per employee costs (for those covered employees) have risen at double the inflation rate for over a decade.

    (And why do you think the costs have risen so dramatically?-Podritske)

    Intelligent capitalists of all stripes recognize that adding 50,000,000 insureds to the program will add to the premium pool, increase overal adminstrative profits and reduce per person costs. All the in-fighting is the various wolves fighting over how big a piece of the carcass they will get.

    (Interesting view of rational self-interest you have there, but I think it is wrong.-Podritske)

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