Comments on economics, mystery fiction, drama, and art.

Thursday, July 27, 2006

Wal-Mart, Big-Box Stores, and Locally-Mandated Wages

Chicago's City Council has voted (link subject to decay) to require Wal-Mart and other big-box retailers (stores of 90,000 square feet or more, with more than $1 billion in company-wide sales) to pay a minimum of $9.25 per hour, with a minimum of $1.50 in benefits, beginning next July, with further increases linked to the rate of inflation. Naturally, Wal-Mart doesn't think much of this idea.

What are the likely results?

If a location in Chicago would have provided large returns to a company, the company is likely to pursue it anyway. What's at risk here are those stores, in those locations, which would have been only marginally profitable, and might become unprofitable. Unfortunately, in a competitive retail market, that might mean a lot of stores.

Wal-Mart has already announced its intention of ringing Chicago with supercenters just outside the city limites. The new city wage ordinance is likely to reinforce that policy.

What are the costs to the residents of Chicago? Employment is likely to be reduced, particularly for people whose skills do not qualify them for other jobs. Chicago Federation of Labor PResident is quoted in the Tribune story as saying "The choice between no job and a low-paying job is a choice between bad and worse;" it would be interesting to find out how people who will not find jobs will feel about that. The reality is, of course, that the number of potential jobs at Wal-Marts (and other stores) that will not be created is only part of the story. If those stores came into existence, some--perhaps many--existing stores will close, taking with them some--perhaps many--existing jobs. My own guess is that fewer new jobs would be created (directly) than would likely be destroyed. Wal-Mart and other big-box retailers operate more efficiently than do smaller stores, and so probably generate fewer jobs per dollar of sales. (The offset to that might be higher levels of sales in Chicago, as people in neighborhoods now servde by big-box stores sjop closer to home.)

What about the effects on local government? The City of Chicago has a large local sales tax--3.75%--so lost retail sales in Chicago mean lower sales tax revenues. This could be quite a revenue hit.

My own sense is that big box stores are, on balance, good for the economy, good for consumers, and probably, although not necessarily, good for the people who work there (there alternatives are probably worse). Looks like a bad law to me.


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