Living Wages and the Service Economy

One of the stories that seems to be dominating the news in recent months is the plight of low-paid workers in the service industry.  Most recently, a story about Wal-Mart workers organizing a food drive for other employees so that they could have a Thanksgiving dinner has gotten a great deal of attention.  This comes on the heels of a McDonald’s helpline advising employees on how to apply for food stamps and locate food pantries and other assistance for the poor.  McDonald’s is not alone in this regard.  It is estimated that public assistance for fast food workers costs U.S. taxpayers $7 Billion a year.  This means that the U.S. government is essentially supporting this industry.  Noted financial commentator Barry Ritholtz asks the obvious question: “Why are profitable, dividend-paying firms receiving taxpayer subsidies?”

McDonald’s and Wal-Mart are not struggling financially.  If working at McDonald’s or Wal-Mart fails to pay wages that enable people to meet some basic living standard, what does this mean?  There has been considerable criticism of these low-cost providers, with debates about whether or not they should meet some standard for wages other than what the market will bear.  This discussion is tied directly to the issue of the minimum wage.  There is no fundamental agreement as to what a minimum wage should be or what it should provide.  Should working full-time at a McDonald’s guarantee a wage sufficient to feed, clothe, and shelter one person?  A family of four?  Given that many middle class families feel the need to have two incomes to provide these things, should the standard be two full-time working people to support a family of four?  The questions are broad and hard to define.

While the policy and political issues here are complex and hard to solve, there is an obvious market mechanism that would cause wages and benefits at these firms to rise.  First and foremost, if their customers boycotted these companies due to the low wages paid to employees, we would probably see a prompt improvement in compensation.  Second, if investors sold the shares of firms which pay their workers less and invested in the firms that provided higher pay and benefits, we may observe a similar response.  Ultimately, we would see prices rise or corporate earnings fall in order to support the higher levels of employee compensation.  And, of course, both retail customers and investors would have to be prepared to pay more or receive lower dividends to support this shift.

In other words, if you don’t like Wal-Mart’s and McDonald’s pay practices and their implicit reliance on public services, don’t shop at Wal-Mart and McDonald’s and don’t own their stock.  Instead, patronize other companies which treat their employees better.  Costco, for example, pays well above industry-average compensation.

What we must recognize is that pay is so low because customers and investors have communicated that low costs and high profits are their only priority  If we are willing to pay more for our goods and services by patronizing companies that have higher wages and benefits, or if we are willing to accept a lower return on our investments by holding shares of companies that provide workers with better wages we are casting the vote that counts most.

I don’t know how I feel about attempts to legislate a living wage for a specific job in a specific sector and for working a certain number of hours, not least because this seems like an inherently poorly-posed, complex and ever changing framework.  That said, I am deeply concerned about having companies like Wal-Mart and McDonald’s implicitly relying on the taxpayers to subsidize their business models.  It is also genuinely sad that so many service industry workers are so poorly paid.  I am willing to pay more for my TV to vote for higher wages and to receive a lower rate of return by investing in the companies that provide superior employee wages.  We vote with our dollars—both as investors and consumers.

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