Washington DC Gets An F in Math

One of the biggest things that inspired me to create this blog was the flurry of articles on the recently passed “Living Wage” bill by Washington DC. The bill targeted large retailers, most notably Wal-Mart, to force them to pay a minimum wage of $12.50 per hour, roughly 50% over the national minimum wage.

All during the debate, and even after its passage, heaps of scorn and abuse were piled upon Wal-Mart. I shall not repeat them as by and large they are not family friendly, but the overall theme was Wal-Mart abuses its employees by paying them substandard wages. What these commenter’s fail to understand is wages are established much like the rest of the economy: supply and demand.

Wal-Mart has a supply of jobs they are offering to the community. They have calculated how much they can afford to pay each employee and still be profitable. The community has a population of people who wish to work. This is the demand for the supply of jobs Wal-Mart has. If Wal-Mart sets the salaries for those jobs too low, less people will be willing to accept those jobs, and demand decreases. In that situation Wal-Mart has no choice but to increase the amount they are willing to pay in order to increase demand for those positions. If the amount they are willing to pay still does not increase demand sufficiently, they will be forced to raise prices until they can maintain a certain profit level and pay employees sufficient wages to meet their supply of jobs.

Left alone, this contrast of supply and demand works itself out to an equilibrium. Wal-Mart sets a wage that it can still make a reasonable profit at, and employees take jobs at pay rates they find acceptable. Economists refer to this as a “natural” balance of supply and demand. But when government gets involved and alters that natural balance there are inevitably unseen consequences.

On the surface a higher wage sounds great. We can show a store full of happy, smiling Wal-Mart employees with their new wages. But what about what we cannot see?

In a Huffington Post article (http://www.huffingtonpost.com/2013/07/18/walmart-worker-wages_n_3611531.html) it states that Wal-Mart has decided not to build three new stores in the DC area. They go on to say the increase in pay will only cost shoppers an additional 46 cents per trip, or $12.50 per year. But does it really? What is the real unseen cost to the consumer?

Let’s do some simple math. (Well simple unless you are on the DC Council, this was apparently beyond their grasp.)

According to Statistic Brain (http://www.statisticbrain.com/wal-mart-company-statistics/) Wal-Mart has 2,000,000 employees in 4,253 stores. Doing the division we get an averages of 470 people per store. Multiply that times the three stores Wal-Mart has decided not to build, and Washington DC has just lost 1,410 jobs. Yes, there’s 1,410 people who are not happy smiling Wal-Mart employees, but could have been. 1,410 people who are not paying income tax. 1,410 people who don’t have money to spend, to put back in the economy.

But wait, there’s more.

Statistics Brain lists the total amount spent at Wal-Mart every hour of every day at $36,000,000. Multiply this by 24 hours in a day, then times 365 days in a year, you get $315,360,000,000. Now divide by the number of stores, 4,253, and you get $74,150,012 spent at each store annually. Tax Rates.com (http://www.taxrates.com/state-rates/washington-dc/) lists the sales tax of Washington DC at 6%. 6% of $74,150,012 yields $4,449,001 per store in tax revenue to Washington DC. At three stores, Washington DC has just lost $13,347,002 in sales tax revenue per year.

Of course it goes on. There’s the lost construction jobs and land sales that won’t occur because these store’s aren’t built. And have you ever seen a Wal-Mart that didn’t have a strip mall or out parcels with stores and restaurants close by? And what about other large retailers such as Target and Best Buy, who now won’t build in DC, but are wisely keeping quiet about it? Those are business that won’t be built, and thus will not employee far in excess of the 1,410 already mentioned.

I also have to ask the question, what business is it of the Washington DC government what a private citizen’s pay is? If a company offers a job at a certain pay rate, and an individual accepts the job at that pay rate, that agreement should be private between employer and employee. The government should not be able to interfere with that arrangement.

On the surface it looks good, trying to help out “poor downtrodden” employees. But that same intervention could work in reverse. Let’s suppose a new council comes to power. This council decides they need to attract more companies to the area. One way might be to lower the average wage of people in the community. This would lower the cost of a business to operate, and therefore make the area attractive to businesses. Thus, using the same authority it claims to raise wages in this case, the council could mandate all wages be lowered by 50%. Suddenly government intervention in wages doesn’t seem like such a good idea.

Let me be clear on one point, this article is not about defending Wal-Mart. In fact, I wish they would spend more on their employees! I’d be more than willing to pay a bit more on each trip if it meant getting happier and more motivated service.

My complaint is with the government intervention of what should be a natural process. Clearly the politicians in DC only had one thing on their minds, making the public believe government cared about them, cared about them so much they were willing to give them Wal-Marts money.

But as with all government interventions, there are negative impacts that were not clearly thought through. The loss of at least 1,410 potential jobs. The loss of over 13 million in tax revenue. The loss of additional business, jobs, and tax revenues are all “unseen” by the public because they aren’t physical, not right in front of you.

Let me assure you though, these consequences are quite real, and costing the taxpayers of Washington DC dearly.

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