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Jul 27

Walmart, Unions, and Un-Fair Labor Practices

[The other day I was mildly annoyed by an email I got from Care2 asking me to sign a petition against Wal-Mart. Coincidentally, I recently had a conversation with a good buddy of mine about Wal-Mart, unions, and related topics. WhenI got the Care2 email, I forwarded it it to him and asked if he’d write an entry for my blog. He agreed. This fellow, who we’ll call Lightwave, earned an MBA in 2001 and an MS in MIS in 2002. – Funky]

I’ve heard a lot of talk lately of how awful labor practices at Walmart are unfair to works. I recently read about Walmart’s "ruthless" tactics where Walmart closed a store rather than negotiate with unionized workers. Indeed, there seems to be a lot of talk about how Walmart and other publicly traded organizations are treating non-unionized labor. I’d like to discuss this, but first, let’s get on the same page about some basics of publicly traded organizations.

Publicly Traded Organizations, Investments, Stocks, and Profit

Walmart makes $10 Billion per year in profit, they can afford to share! This is the first typical cry in any plea against big business. They make so much money that they obviously must be taking advantage of someone. Those who make this assertion, however, won’t tell you the secret behind these huge numbers. That to make such a profit individual investors had to put $210 billion into Walmart (current market capitalization as of today) to begin getting that $10 billion a year. That’s right; the little old lady that lives next door to you who put $99.07 into Walmart to buy two shares is seeing the part of the company she owns. Most people would call her an investor, but really she’s a part owner of the company, so that’s what I’ll call her.

So here she’s seeing a whopping 4% return on her in vestment, right? ($210B / $10B) Well, not exactly. What she actually gets is about a 1.13% dividend. On top of that, she’s taking on the risk that the company’s value might go down, or out of business, meaning she looses her investment. Sounds like she should go with an insured savings account at the bank where she gets a better interest rate and she’s insured against loosing her investment if the bank goes belly up.

Well, that’s not entirely accurate either. The other factor we’ve left out is that the value of Walmart’s stock might go up (capital appreciation). Then when she eventually sells the stock, she’ll get an additional return on her investment. Let’s see how she’s done if she’s kept her money in Walmart over the last year. The value of Walmart’s stock has gone down almost $5 per share. That means this owner of Walmart, owning just a tiny fraction of the company, has lost about $9 for her $99.07 investment. Apparently Walmart can’t afford to share.

But Walmart made $10 Billion in profit, where did it all go? Well, some of it went back to investors, in the form of that dividend we saw. The rest, one way or another, gets reinvested in the company (buying back stock, paying of debt, building new stores, etc.), to maintain or build the business, protecting as much of the money our owner put in as possible.

So we’ve seen that apparently Walmart doesn’t seem to have huge gobs of money to be spreading around to its 1.5 million employees. Indeed, simply increasing the average wage of associates from $9.98 to $11.98 per hour would cost an estimated 6.8 Billion Dollars! Perhaps it would be better to provide healthcare for the 54% of Walmart associates that don’t have it. That would only cost an estimated 4.2 Billion Dollars. Of course either of these moves would mean our owner apparently gets no dividend, and looses even more of her investment. Remind me again why we would invest our money in a company loosing us money? No investors means no company. (I could go into how this comes about through hostile takeovers and other means, but I’ll refrain).

Walmart’s Labor Practices

Working Off the Clock

There have been substantiated allegations that Walmart works its employees off the clock. Here, employees were working during breaks or other unpaid time. Certainly the law prohibits this. How horrible a practice is this? Well, in my experience working in both small and large retail organizations, every single one had employees working off the clock. This problem is truly rampant for organizations throughout the U.S where there are pressures to keep labor cost down. While many would claim this as an unfair labor practice, I suggest it would be more valuable to attack the systemic problem throughout the U.S. rather than attempting to hold a single company to a higher standard simply because of its status as a large target.

Child Labor and Work Break Violations

Internal Walmart audits have shown that minor employees at Walmart have missed required breaks, mealtimes, or worked too late into the evening. Is this a smoking gun for how cunning Walmart is at pushing its people too far? My personal experience in similar organizations has demonstrated to me that this practice is common throughout. Again, shall we hold the large organization to a higher standard? Or should we enforce the standard fairly and evenly? Remember that whole concept of justice?

Illegal Use of Undocumented Workers

Another complaint against Walmart stems from a 2003 raid of 61 Walmart stores where 250 janitors were found to be illegal immigrants (that’s 4 per store). Walmart didn’t actually hire these workers; they were hired through local contractors for janitorial work. With an average of about 2,500 actual employees (not contractors) per store, some would have us believe that Walmart should have been able to identify these 4 workers as illegal immigrants and have dealt with the issue. I wonder how many other companies check the authenticity of citizenship papers for all their contractors’ employees. Let me give you a hint, none that I’ve ever worked for.

Sending Jobs Overseas

So now Walmart is the culprit for sending jobs overseas. Those that would make this claim don’t want you to know that Walmart hasn’t sent its employees overseas though. Rather, Walmart buys many of the products it sells from overseas. This, they say, is the reason manufacturing jobs are leaving the U.S. The real reason, though, is that most Americans are rational economic beings. They want products at lower prices, and these manufacturers can make them. It doesn’t matter if these manufacturers exploit their laborers, or anything else we don’t like about them. As long as they produce a decent product at a competitive rate, American consumers want to buy their product. Economics 101 teaches us that if Walmart doesn’t deliver, some one else will. Truly, if everyone started only buying the American made products at Walmart, would the store keep buying goods from overseas? Globalization is an economic reality. There’s a reason why you don’t see "Buy American" commercials on prime time TV anymore.

Unionization

Let me start by saying that I believe unions to often serve an important purpose in labor-management relations. The issue, however, is that unions often go far beyond the scope of ensuring fair treatment of workers. The undeniable fact is that labor unions are very powerful entities. Certainly corporations have imposed many policies disliked by their employees, often driving their employees to unionize. Unions have also imposed many requirements disliked by the corporations their members serve. Unions can strike. Corporations can close up business and go elsewhere. The largest disparity comes from the often cited lack of accountability of union actions. Today, a corporation threatening violence against union workers would be dealt swift justice. However, union violence against those who cross picket lines, replacement workers, and other often has little repercussions on the union organization. So the playing field would seem to be only somewhat even.

Most of the other issues surrounding unionization are philosophical in nature, and must be decided by the individual. Should a business be able to summarily dismiss an employee they believe is bad for the business? Should an employer be permitted to dismiss an employee for no reason whatsoever? (Hint: The law in the U.S. says yes, pursuant to At-Will employment.) Should an employee have an entitlement to a second chance? Should an employee be so protected by a union that he sees no need to perform up to his capability? Should a group of employees get paid more because they have the power to shut a business down? Should an employer pay them less because they don’t have such power? Or is it enough to say that economics rules apply: if the price paid to employees for work doesn’t meet the supply of workers willing to work for that price, the employer will have to pay more anyway?

Indeed, unions often act as a labor monopoly. If one organization controls your entire supply of a needed resource, it is indeed a monopoly by any definition. Then would not a union organization controlling your entire supply of labor not constitute such a monopoly? Let us then look back to economics to tell us what such a monopoly causes.

When a monopoly occurs, prices are artificially set higher than in a true market situation. Supply is artificially restricted, requiring those who require the resource to pay more. The monopoly also will use its status to create barriers to entry for others who would offer an alternate supply. Indeed, Microsoft allegedly follows the model as a weak monopoly. Its prices are artificially higher than one might be willing to pay if there was a viable alternate operating system product. Microsoft allegedly worked with manufactures to ensure that other operating systems would not gain a foothold in new PCs. Is this not the same as tactics used by organized labor? Do they not restrict the labor supply preventing employers from hiring non-union labor? Do they not require employers to pay more than the supply of labor would otherwise be willing to accept? Do they not create barriers to the replacement of unionized labor by non-union workers (picketing, threats, violence, etc.)?

So how does all this relate to Walmart? Walmart knows that its competitive advantage is centered around providing products at low prices. To that end, costs must be maintained at their lowest possible level to keep prices at their lowest level. The largest cost for Walmart, not including cost of goods sold (COGS), is labor. As such, Walmart rightly sees low labor costs as critical to providing customers what they want: low cost goods. Artificially high labor costs imposed by unions disrupt that model. Without understands that most people are rational economic beings. Without low prices, they have little to offer. It’s no surprise that Walmart closes its doors once employees form a union and demand higher wages. We have only to look at how steel workers priced themselves out of competitiveness in the 70s and 80s to understand this.

Conclusion

As a registered Democrat, one of the last things that I want to do is defend Corporate America. However, the disinformation that I often see in the form of half-truths and studies sponsored by far left groups (the right wing groups do it too!) bother me. You’ve seen these studies…the ones from groups with names like "People for All Things Good and Decent in the World." I believe workers should be treated fairly and should be protected from exploitation. I also believe, however, that someday if I ever open a little hobby shop or candy store, I should be free to choose who I’m going to pay my hard earned money to work for me. I also believe that if I ever do open up my own little shop, I should be entitled to pay a market rate for the work done in my shop, rather than an artificially high rate. I ask for these freedoms, because as an American, I believe freedom to be a little more important than anyone’s sense of entitlement.

[In the interest of full disclosure, I should mention that I worked as a Wal-Mart associate during the summer of 1998. – Funky]


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