Who Has the Moral High Ground Here?

Cite this Article
Thomas A. Lambert, Who Has the Moral High Ground Here?, Truth on the Market (September 16, 2006), https://truthonthemarket.com/2006/09/16/who-has-the-moral-high-ground-here/

Life in the inner city can be hard. Jobs are scarce, prices are high, and transportation is difficult, making it hard to travel significant distances to work or shop. So when major retailers announce plans to enter the inner city, hire lots of employees, turn their neighborhoods into shopping destinations (thereby encouraging the creation of more jobs and conveniences), and offer signficantly lower prices than are currently available, you’d think “moral” folks would be pretty happy.

I suppose morality is in the eye of the beholder.

The New York Times believes the moral thing to do is to impose such stringent wage regulations on these retailers — who already face higher costs (land prices, taxes, etc.) associated with doing business in the city — that they scrap their plans and head for the suburbs. Lamenting Mayor Daley’s recent veto of Chicago’s big box minimum wage ordinance, the Times contends that proponents of such ordinances “have the moral high ground.” Apparently, the Times would rather that nobody in the inner city get a Wal-Mart or Target job than that the folks who voluntarily take such jobs (presumably because they believe the jobs will make them better off) receive wages the Times, in its superior wisdom, has decided are too low.

Now, of course, the Times doesn’t want to admit that its insistence on above-market wages will drive big box (a.k.a. inexpensive) retailers from poor city neighborhoods to rich suburban ones, but the available evidence seems to the contrary.

Ignoring such evidence, the Times resorts to theories as to why local ordinances requiring above-market wages won’t drive retailers elsewhere or lead to higher prices. First, retailers won’t avoid high-cost markets because they “need market share.” Second, they won’t raise prices in high-cost markets because higher labor costs “could be absorbed by higher productivity or by a narrowing of profit margins.”

It would be a pretty dumb business move to pursue market share at the expense of profits. What these retailers want is to be as profitable as possible, not as big as possible. Thus, when they consider opening a store they ask: “Is our expected marginal (incremental) revenue from this expansion greater than our expected marginal cost?” If so, they’ll open the store; if not, they won’t. When laws requiring above-market wages cause marginal costs to rise, the likelihood that marginal revenue will exceed marginal cost diminishes — unless, of course, marginal revenue can be increased as well.

So how could these retailers increase marginal revenue? The Times hypothesizes that they might see marginal revenues rise because the expansion enhances productive efficiencies (e.g., permits the attainment of economies of scale, thereby lowering per-unit costs). Big box retailers, though, are already pretty huge. It’s unlikely that the productivity gains associated with opening a relatively small number of new stores in cities would offset the rather significant increase in labor costs at those stores. Thus, the most plausible means of increasing marginal revenue is by raising prices. That would hardly seem to benefit the poor for whom the Times expresses such concern.

Now, the Times also suggests that big box retailers could just “narrow[] … profit margins” in order to account for higher labor costs. That’s not a plausible option. Given the ease of entering retail markets and the intense competition among retailers, American retailers operate on extraordinarily narrow per store margins. A big box retailer could not cover the higher costs associated with a local wage law like the failed Chicago ordinance by shrinking margins at the affected stores — those profit margins simply aren’t big enough. Thus, retailers would have to subsidize stores in the affected markets, which would result in overall profit losses. They’re understandably unwilling to take such a tack.

The bottom line is, if laws like the failed Chicago ordinance are enacted, big, inexpensive retailers will take their businesses — and the employment opportunities and “everyday low prices” they offer — elsewhere. Of course, those of us who can afford to travel to the suburbs could still avail ourselves of these retailers’ price-savings. Just ask Alderman Joe Moore, the primary sponsor of the failed Chicago ordinance, whose own campaign purchased $30,589 worth of supplies at suburban Wal-Marts (presumably because the prices were lower than prices in Moore’s own city, which has no Wal-Mart stores). (See here.)

Wouldn’t the “moral” position be one that (1) respects people enough to let them decide for themselves which job opportunities are “good enough” for them, and (2) permits the sort of trade that would give everyone access to the low prices available to Alderman Moore?