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?
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If the wage to be offered by the big-box retailers is deemed too low (by those in favor of a big-box minimum wage, why is not the same wage, when offered in the same neighborhood but by some other employer (i.e., not a big-box retailer), not deemed too low? I fail to understand how the same wage in the same neighborhood is sufficient for the employee if the employee works at an employer other than a “big-box” retailer but not if the employee works at the “big-box” retailer. I would like to ask (honestly, not rhetorically) the big-box wage requirement proponents just that question. (Though I imagine the big-box wage requirement OPponents will have their own cynical responses).
I think the NYT is way off base on this one. Their standard of the moral high ground must not include helping the people of the communities within the city. It is obvious that big-box retailers will be discouraged from establishing stores within the city limits not only because of the higher variable costs of operating in cities, but by the fact that there is a city council that is committed to trying to increase the costs of doing business for these companies.
So what does that mean for the low-skilled inhabitants in the inner city areas? That means fewer jobs, relatively higher prices on goods, and a less competitive retail environment.
There are fewer jobs by discouraging large employers such as Wal-Mart. There are higher prices on goods, because if the big-box retailers do not establish themselves, the inhabitants will not realize the benefits of lower priced goods at those stores, as well as those stores with whom they would compete. By enacting such provisions in an inner city area, the city is therefore raising the barriers to entry in that market and creating a less competitive retail environment.
Sometimes I wonder what the moral high ground of the NYT is, or if they even have one.
If Big Box retailers “need” to open up in major urban areas, why has it taken them 30+ years to even consider it?
“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.”
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To me, this empirical assertion approaches the crux of the argument. Although I don’t see an incentive to change product pricing as a result of the wage law, so that the argument about narrow product pricing margins seems irrelevant, there is a question about whether the store still would be profitable at an imposed higher wage rate. It would be interesting to see if anyone has data addressing the plausibility of the argument that the proposed wage increase would cause the expansion to become undesirable. The stores themselves have an obvious strategic motivation to say that the expansion will not happen in the presence of the law, so unsupported statements from them to that effect are not necessarily very convincing evidence.
But are the ‘low prices’ that are heckuva lot cheaper on the price tag really cheaper for those shoppers when many (though i don’t know the speciics of the chicago store) big box retailers receive tax incentives/breaks in the communities where they reside and externalize the cost of healthcare from the retailer itslef to the community by increased strain on clinics and ER’s
Thanks for the comment, Chris. I suppose it’s possible that suburbanites will be the ones to take the big box jobs, but that seems unlikely. Wal-Mart reports that when it opened its store in Evergreen Park, Illinois, which is just over the border from Chicago, it received a whopping 25,000 applications for 325 positions. Ninety percent of those applications came from Chicago residents. Wal-Mart stores typically attract 3,000 – 4,000 applicants for every 350 – 400 positions. It thus seems that lots of city folks perceive these jobs to be worth pursuing. See here. (Admittedly, union officials dispute these numbers.)
Moreover, you (and other big box critics) focus only on jobs, ignoring the impact of low prices. The fact is, these big box stores are a heckuva lot cheaper than the retailers currently in the city limits. Shouldn’t city residents be able to take advantage of those low prices?
People that live in these inner city neighborhoods will not be able to work at the mega-marts because their earned income will not equal their cost of living. If no minimum wage is set, people will commute from the suburbs to work at such locales, leaving the locals searching for higher paying jobs displaced by the big box.
I bet that the inner city workers would decide that the jobs “good enough for themâ€? were the jobs displaced by the big box, and I struggle to find where morality works into these issues. Perhaps one may ask – Is it just to provide jobs that may meet market standards, but will provide no one living nearby the means of obtaining a livelihood?