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Call it the “Wal-Mart Syndrome”.
Entire industries — such as low-end retailers like Wal-Mart Stores Inc. (NYSE: WMT) and fast food chains like McDonald’s Inc. (NYSE: MCD) – pump up their profits by paying employees extremely low wages.
But thousands of Americans who need to support a household on such low wages – either the federally mandated minimum wage of $7.25 or just a bit above it – can only do so with public assistance.
In other words, with the help of welfare.
“When low wages leave Wal-Mart workers unable to afford the necessities of life, taxpayers pick up the tab,” said a report released last month by the Democratic staff of the U.S. House Committee on Education and the Workforce.
That report estimated that a single 300-employee Wal-Mart Supercenter store in Wisconsin cost taxpayers at least $904,542 a year in public assistance payments.
And Wal-Mart employs 1.4 million people nationwide.
And according to a study by the National Employment Project last year, 26% of the private sector jobs in the U.S. – 29.6 million jobs — pay less than $10 per hour.
A few back-of-the-napkin calculations put the national taxpayer cost of the Wal-Mart Syndrome well into the tens of billions of dollars.
The True Cost of the Wal-Mart Syndrome
The Congressional staff report based their $904,542 figure on an average of $3,015 of state and federal benefits per employee.
Keep in mind though, that’s just an average. Some people will receive more benefits than others (particularly if they have children), and surely many receive none.
But using $3,015 per year as the average per employee is not that outlandish a figure. Depending on which state they live in, people making $10 an hour or less are usually eligible for benefits worth $10,000 a year, $20,000 a year or more.
In addition the Congressional report did not count everyone eligible to receive benefits in its estimate, but used actual Wisconsin Medicaid participation numbers. (Counting everyone eligible resulted in an average of $5,815 in annual benefits, for a total cost of $1.745 billion just for the one Wal-Mart.)
But if we take that somewhat conservative figure of $3,015 and multiply it by the number of Americans making $10 an hour or less, we get an aggregate cost to U.S. taxpayers of $89.2 billion a year.
And that’s probably a low ball number when you consider that state and federal assistance programs together cost nearly $1 trillion each year.
Trapped in the Wal-Mart Syndrome
One way to fix the Wal-Mart Syndrome is to dramatically increase the minimum wage, though it’s an imperfect solution at best.
The higher wages would save taxpayer dollars by pushing many workers beyond eligibility for most public assistance, but the extra money would be a mixed blessing.
Some folks might actually end up worse off from the loss of benefits.
“In many cases, economists have calculated, welfare recipients who enter the work force or receive pay raises lose a dollar or more of benefits for each additional dollar they earn. The system makes fools of those who work hard,” Michael Franc wrote in an article for the Heritage Foundation last year.
What’s more, with higher labor costs cutting deeply into corporate profits, many corporations would respond with steep price increases.
And guess who would get hurt the most by price increases at low-end retailers and fast food restaurants?
More ominously, recent trends in the U.S. labor market suggest the Wal-Mart Syndrome is a growing problem.
A study last year by the National Employment Law Project found that three out of five jobs created since the start of the Great Recession have been low-wage jobs.
Making matters worse is that wages have not risen quickly enough to offset the declining purchasing power of the dollar. For example, for today’s minimum wage to match the purchasing power of the minimum wage in 1968, it would need to be raised to $10.56 an hour.
And ironically, the more the government tries to help by providing more public assistance, the more it makes both the corporations and the workers dependent on de facto taxpayer subsidies.
The Wal-Mart Syndrome has become a trap for all involved, but it’s a costly trap that will only get more expensive in the years ahead – not just in terms of taxpayer dollars, but in human terms as well.
Perhaps no one has put it better than economist James Tobin did way back in 1965: “It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.”
Related Articles and News:
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- Money Morning:
Wasteful Government Spending: Duplicate Programs Squander Billions
- Heritage Foundation:
Keep That Pay Raise, I Can’t Afford It
- Think Progress:
STUDY: One In Four Private Sector Workers Earn Less Than $10 An Hour
- Democratic staff of the U.S. House Committee on Education and the Workforce:
The Low-Wage Drag on Our Economy
- Yahoo Finance:
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