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Analysis of Wal-Mart and the effects of its low wages on overall demand

Home Free essays Analysis Analysis of Wal-Mart and the effects of its low wages on overall demand

Analysis of Wal-Mart and the Effects of its Low Wages on Overall Demand


Wal-Mart Stores Inc is a multinational discount retail chain or corporation that has discount departments and warehouse. It was started in 1962 through the effort of Sam Walton and was floated in the New York Exchange in 1972. Its headquarters are in Bentonville, Arkansas. It has diversified its operation with the aim to make profit thereby becoming the largest grocery store in the United Sates. It has about 8,500 stores in 15 countries, though some are branded with different names for easy penetration in the region. It is the owner of Sams Club retail warehouse in North America. The company has been able to generate enormous revenues. In the grocery business in the US it generated 51% of the revenue that amounts to $ 258 billion, becoming the most profitable retailer in the US (Miller, 2012).

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Wal-Marts goal is based on the achievement of high sale revenue at the prices lower than those of its competitors by means of reducing its profit margin. It was able to acquire other companies like Mohr-Value stores in Missouri and Hutcheson Shoe Company in 1978. Furthermore, it is considered the third largest public corporation in the world. The family still owns a big stake of 48%.

As a retail giant Wal-Mart is becoming one of the largest private sectors with approximately 1.2 – 1.4 million employees. Its sales are equivalent to 2% of the gross domestic product of the United States. Its success can be explained by the fact that it offers a variety of goods at affordable prices (Miller, 2012). This has made it gain favor from customers. However, it comes with a disadvantage to it workers who are paid low wages hence have lower standards of living despite the fact that they are working in the multi-billion company. Their low wage scenario has attracted criticism from labor unions, community groups, religious organizations, Wal-Mart customers and environmental groups. The fact that it is the largest retail chain in the United Sates can explain the fact that it has attracted certain favors from the government and leniency which it has exploited at the expense of public. Despite the numerous cases filed against it and regarding employment wages and benefits, it has been able to pay off some at lower fines and escaped some without any action done.

Despite having numerous branches and making great sale revenue, it was expected to be a boost in the creation of employment opportunities in the country. This resulted in social issues that have been persistent for a very long time. It has been able to thrive under the shadows of the government with no action being taken towards it.

Wal-Marts low wage scheme is felt all over the world in its branches as labor protective standards have failed in protecting the employees rights (Miller, 2012). Prepared by Business Insider, a report, which enlisted top 20 companies that have the largest low wage system, states Wal-Mart was ranked number one. Wal-Mart has been poorly remunerating its staff, offering no health care benefits and ensuring workers rights are not upheld despite the attempts to portray a different picture to the public by engaging their employees in their numerous social and community activities advertisements. The irony is that it goes against it own slogan, Our People make the difference.

In the United States, public sector employees are represented differently from the private workers. Private workers rights are represented by National Labor Relations. Conducted researches clearly indicate that Wal-Mart has been poorly remunerating its employees. There have been about 100 unfair labor practice charges against Wal-Mart, 43 of which were charged in 2012 (Miller, 2012). Despite paying its employees poorly, it increased the chief executive officers salary package from annual $ 18.1 million in 2011 to $ 20.7 million in 2012. This indicates a low and poor CEO-to-worker pay ratios. This is 796 times the payment of an employee.

Wall-Mart is known to be obsessive in the cost containment which usually includes the control over the employees benefits and salary packages (Cascio, 2006). A full time worker, on average, is paid $10.11 an hour, less than half of the workers population have health insurance cover, the workers pay 33% of their health premiums, 64% are covered by retirement benefits plans with the company contributing approximately $ 747 per employee (Cascio, 2006). All this occurs despite the fact that Wal-Marts turnover is 40% a year, which is close to the industrys average. It has been realized that about 70% of their employees quit the job after having worked for one year. This high labor turnover is a clear indicator which shows that there are wage wrangles and mistreatment present. Their wage practice has been seen in US and all over the world where it has branches.

Wal-Marts low wages are regarded as cost leadership strategy that it tries to enact. In such a way it neglects the payments to the economy, creating and reducing the efficiency, morale and productivity of their company. When employees are given very low wages, their morale is crumbled, which tends to correlate with productivity. This can easily be observed from the fact that despite Wal-Marts numerous staff, it generated $ 37 billion while its competitor Costco, which has 33% fewer employees, generated $ 43 billion (Cascio, 2006).

Even being aware of this fact, Wal-Mart has tried to redeem itself by trying to prove otherwise regarding their pay structures. They have launched public relations campaigns, have conducted several television commercials which have been featuring its employees, have interacted directly with media to respond to the negative rapport and even invited the media into its headquarters.

Wal-Mart has faced accusations not only relating to low wages of its employees, but also in regard to its effects on the smaller businesses. It has been able to offer its goods at lower price, due to its large economies of scale. Thereby, drawing customers away from the small business, it affected the community. It promises that having come to ones location, it reallocates sales, creates a difference in the already existing wage structure and mainstreams it to what it usually pays (Mielach, 2012).

According to Wal-Mart, minimal salary payments are explained by the aim to reduce costs. However, economics suggests that reduced or stingy payments and benefits do not indicate or mean long-run costs are going to be reduced. Their approach of lowering the wages of it employees plays a significant role in the way it influences aggregate demand in the economy since the number of the employees is significant. If 1.4 million workers are lowly paid, the economy will have an adverse effect in terms of demand.

Their anti-union behavior, combined with weak labor laws and lack of labor unions in the private sector, has resulted in the continuous infringement of the workers rights and wages. Statistical data, provided by the Bureau of Labor Statistic, indicates there is a very big minimum difference of wages between a unionized worker and non-unionized. The unionized worker gets a minimum pay of $ 760 median weekly while a non-unionized gets $599 (Miller, 2012). This can be observed from the general wages structure that makes a 30% difference. This is the gap that exists in the US private sector under which Wal-Mart has been able to exploit and reduce its workers wages and benefits while it makes billions of revenue with their assistance. It works for their benefit if this sector remains without labor union since they will continue to exploit its employees.

Wal-Mart goes ahead to exploit other channels of reducing their obligations in payments to their employees by ensuring that a third of their workers are part-time, hence do not qualify to obtain employees benefits, such as health care. Discussing this issue demands consideration of the unprecedented case that it has been sued for. It has been accused of discrimination in terms of the size of the wage payments got by the representatives of different sexes. A case filed in 2001, whereby it denied several women promotions and paid them less than their fellow men counterparts. Most of their workers are women who occupy about a third of the workers population. Yet only a third are represented in their managerial positions. This unequal treatment is against the United States Civil rights Act that prohibits discrimination in employment due to race, color, gender or the national origin.

Low price charges to employees have macroeconomic effects on the countrys economy, especially due to the fact that the number of the employees is quite significant, amounting to 1.4 million. Reduced wages negatively influence the real income of a worker, thus impacts their purchasing ability. This will make a person who intends to purchase certain products be faced out and not able to meet the purchasing standard. His/her commodities and services will continue deteriorating to inferior cheaper goods. These groups of employees will not be able to purchase products and save as expected. Since the economy is faced with other macroeconomic factors which are not constant like inflation rates, the workers standard of living continues to deteriorate. This, therefore, affects the aggregate demand of the economy. Generally, it is expected that when the purchasing power of individuals of such a magnitude is affected, the demand of commodities in the market will reduce significantly, effecting the supply side.

Low wages, charged to employees, make them not able to purchase health care packages. These have the effect on the economys demand since the workers are not able to gain access to better and quality healthcare services, which naturally affects a person. The aggregate demand in the health care package in the economy reduces due to low wages offered to the workers.

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Investment is determined by how much a person would have saved. Since the workers are not able to have surplus wage for savings, investments will also be affected. Investments tend to create employment opportunities which improve other peoples living standard and the economys demand. This might be considered as an indirect effect of the low wages offered by Wal-Mart. Moreover, it would be an experience identified as the chocks shave.

Low wages have a tendency of acting as a minimum wage price control which affects the volume of transactions as well as the quality of the goods and services on the market. If the quality of goods is affected, it is expected that the demand, especially from those who are concerned with quality, would decline.

Low wages in Wal-Mart have influence on the wage structure of many companies and firms in its environment. In economics, it is referred to as the ripples effect. If the wages are high, the firm around will try to match that wage rate due to relativity to avoid labor migration in search of better pay. Since Wal-Mart is generally low waged, it creates a low wage scenario in which the educated people would opt for not entering the labor market since the reservation wage is not attractive for them. This is a form of unemployment created if the individuals, due to their expectations and qualifications, are driven by the lack of the desire to enter the labor market, preferring to wait until the reservation or minimum wage increases to a point that makes them be interested. If this form of unemployment persists, there will be a reduction in the aggregate demand in the economy as individuals would not have money to purchase goods, especially the luxury commodities and services. This mostly is argued at the perspective of the skilled labor since the unskilled would be at peace with the low wages as they cannot compete effectively for better wages.

Low wages have a tendency to create inflationary pressure. Inflation is the general increase in the prices of goods and services in the economy. An increase in prices of the goods decreases the demand of that particular good. This continues by having an overall effect on even the supply side. If workers are being paid low wages and the prices of the goods in the market are high, the demand will definitely be low and people will opt for the possibility to use substitutes or inferior goods which have a lower price than that of the goods of a proper qulity.

Wages have a direct impact on the standards of living that are adopted by an individual. If the wages are high or optimal, the consumption level is directly related to income, but does not proportionally decline when income does so. Low wages will result into low standards of living. The general consumption by a household will be reduced if the wages are low. Considering that Wal-Mart has 1.4 million employees in the United States and approximately 2.2 million employees worldwide, all of who are subjected to the same wage structure, the general consumption pattern of these employees will be lower than if they had average or optimal wages. Consumption is related to the level of demand of goods. Therefore reduction in the wage affects consumption ability which affects aggregate demand in the economy.

Low wages that nearly equal unemployment benefits result in poverty. Wal-Mart constriction of its wage structures seems to depend on the jurisdiction they are operating under. For example it is expected that if they are operating in Africa, their average wage rate in Africa would be lower than that in the United States since they evaluate the wage that would be optimal in the jurisdiction they are in and offer lower than the industrys average. The policy they adopt will not solve poverty issues thereby most of its employees will still be living in the poverty. Poverty affects aggregate demand since the purchasing power is very low and cannot influence the economy much.

The influence of demand can be perceived also in the firm perspective though it is a long run ordeal. Wal-Mart requires goods and services for its operation. Production has increased over time as the number of workers increased. Therefore the number of goods and services required has also increased as the level of production changed. When the workers are continually paid low wages, their morale is absolutely going to be affected. Low morale has an adverse effect on the production of a firm. In the long run, it is expected that if workers are able to form informal labor unions and agree on certain issues, the production of the firm will reduce and so will the demand on the product it relied on in production.

Another long run and indirect perspective where low wages affect the demand would be continuous infringement of workers rights in terms of wages and benefits will result in the strikes and boycotts as well as informal (illegal) labor unions establishment. These unions may tend to lead to unrests and go-slows in the business operations thereby reducing the general demand of the goods available in the organization. The fact that they strike and boycott means that they will not be generating any products therefore business operations will be at a standstill.

In Wal-Mart, the workers are paid low wages and work for longer hours in comparison to the wage they could obtain. It is expected that a lot of workers get health issues as a result of being overworked and exploited whereas the remuneration is low and there is no health benefits. It might be unprecedented as it is expected that the workers health is affected due to the increased level of work for the company. In the long run, it can result in death. Given that the company has over 2 million workers in the world, in a long run the demand would have been reduced dramatically.

It is shown that low wages affect the community a lot as the level of its citizens well-being depends on it. It may be considered a good investment when it opts to erect its business in a country but the repercussion it results in is big, so it would lead to constant labor strikes and boycotts. The government usually lays back because the more the sales revenue and profit Wal-Mart obtains, the more the taxes it gets, regardless of the economic situation of the workers who are generating the sales. President Obama has been an influential contributor to its changes as he placed certain controls and regulations over the payment structure and minimum wages, to be exact. This has come out as a relief though the company is still able to use the loopholes available to offer low wages and fewer employees benefits by ensuring most of its staff are working as part-timers hence not entitled to these benefits.

Wal-Mart, being a major source of government revenue due to the sums of taxes it levies to the government, creates other issues that have to be addressed. These issues have a lasting impact in comparison to if the organization would be forced by the government to offer attractive and competitive wages at the expense of the tax it would obtain. It is the mandate of the government to act as a shield to its citizens.

As much as Wal-Mart has economic gains to a country, new jurisdictions relating to the minimum wages the company, which have not been exploited by the company before, should be set before it influences business in the country. This would act as a cushion against its citizens welfare and would help avoid social unrest that has been seen in the United States against this company. The government should be aware of the fact that there are macroeconomic effect that results from the low wages charges. The aggregate demand, investments, savings and consumption will be affected adversely if low wages are charged. The United States should therefore act swiftly in an effort to correct the issues that have been created by exploitation of workers by this company. Public labor union has been quoted referring the companys act as modern day slavery as the workers are expected to eat and live. Moreover, they are unskilled. Therefore shifting for Wal-Mart would be a risky activity since they cannot compete favorably on the labor market.

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