Should Wal-Mart reduce wages?

Alan Reynolds
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Posted: Feb 23, 2006 12:05 AM

Maryland recently voted to force firms with more than 10,000 employees to devote 8 percent of their payroll expenses to health insurance, or pay the state the difference. Since the law applied to only one company, it became known as the "Wal-Mart bill."

 Similar bills popped up in 33 states, with the proposed health insurance mandate escalating to 9 percent of payroll in Oregon and Florida, 10 percent in Kentucky and 11 percent in Colorado. The first of such bills have already been rejected in New Hampshire, Indiana, Washington, West Virginia and Vermont.

 The arguments are weak. A Denver Post editorial complains that, "Wal-Mart pays less than 1 percent of its $265 billion annual sales for health care." But Wal-Mart's profits in 2004 were just 3.6 percent of its sales, so 1 percent of sales amounts to 28 percent of earnings. Others complain that 5 percent of Wal-Mart employees are on Medicaid, but that is comparable to other large retailers and the national average of 4 percent. Seattle Times columnist Bruce Ramsey notes that Washington's Medicaid plan "enrolls children from families of four with incomes up to $48,000 a year." No private plan can compete with a tax-financed scheme that costs nothing and pays all medical bills.

 The lobbying effort behind these bills comes from competing grocery store chains such as Giant, Safeway and Kroger, and from labor unions that carry their baggage. When Kentucky legislators discovered their Wal-Mart bill would also apply to Kroger, they quickly exempted Kroger by making the bill apply only to firms employing more than 25,000.

 Legislators who take orders (and favors) from Wal-Mart's rivals hope their meddling will raise Wal-Mart's labor costs and thus render the company less competitive. But this is a delusion. The whole burden will be borne by workers and by those forced into less-desirable work (or none).

 Maryland's mandate does not compel Wal-Mart to spend a dollar more on employee compensation. All it demands is that Wal-Mart pays no more than 92 percent of compensation as wages (or non-health benefits). Compelling Wal-Mart employees to accept a larger fraction of their pay in the form of health insurance rather than cash is a particularly bad deal for housewives and students, who are usually covered under Dad's family plan. It is also a bad deal for seniors covered by Medicare.

 The law injures actual and potential Wal-Mart employees in Maryland, particularly housewives, students and seniors seeking relatively easy part-time work. Mothers want to be home to cook dinner when the kids get out of school. Students who have low-priced health insurance through college are not even allowed to work full-time.

 A recent paper by Jason Furman (John Kerry's economic policy advisor) found 81 percent of Wal-Mart employees are eligible for health insurance, compared with 61 percent for retailing in general. He also noted that "Wal-Mart is relatively unusual in that it offers health insurance both to full- and part-time employees. By comparison ... only 17 percent of firms offer health benefits to part-time workers."

 Although Wal-Mart pays 70 percent of the cost of health insurance, the company cannot possibly induce working homemakers and students to pay the other 30 percent, because most of them already have health insurance -- usually through the husband/father. And most of them work part-time.

 Brigitte Madrian of the Wharton School surveyed "The U.S. Health Care System and Labor Markets" in a new paper for the National Bureau of Economic Research. She notes that "some individuals have cheaper insurance from another source (for example, the government or a family member), and they may place a very low value on having employer-provided health insurance." These individuals are clearly injured by any Wal-Mart bill that forces employers to switch the mix of compensation from wages to health benefits that are worthless for those already insured.

 Madrian found that "married women with health insurance through their husbands ... are much more likely to be employed in part-time jobs that typically do not provide health insurance." Much more likely, that is, if they can find part-time jobs. But because health insurance is "a fixed cost of employment," she adds, studies show this "give firms an incentive to economize on the cost of providing health insurance in two ways. The first is by hiring fewer employers but at longer weekly hours. ... The second is by hiring fewer but more productive employees."

 Requiring big employers to devote a larger share of paychecks to the fixed cost of health insurance must give them an incentive to substitute full-time workers for part-time workers. That is bad news for those seeking part-time work. Mandating that a higher share of payroll be devoted to health insurance also gives employers an incentive to shun future job applicants with labor market disadvantages -- such as teenagers, elderly seniors, those with little schooling, those in poor health and those with an imperfect command of the English language. That is bad news for those at the bottom of the ladder of opportunity.

 The "Wal-Mart bills" are calculated cruelty disguised as kindness. They should be renamed as what they are -- wage- and job-reduction bills.