What Walmart could learn from Henry Ford
11/19/2013 4:54 PM
11/19/2013 6:39 PM
Walmart just reported shrinking sales for a third straight quarter. What’s going on? Explained William S. Simon, the CEO of Walmart, referring to the company’s customers, “Their income is going down while food costs are not. Gas and energy prices, while they’re abating, I think they’re still eating up a big piece of the customer’s budget.”
Walmart’s CEO gets it. Most of Walmart’s customers are still in the Great Recession, grappling with stagnant or declining pay. So, naturally, the company’s sales are dropping.
But what Walmart’s CEO doesn’t get is that a large portion of Walmart’s customers are lower-wage workers who are working at places like Walmart. And Walmart, not incidentally, refuses to raise its median wage — which, including its army of part-timers, is $8.80 an hour.
Walmart isn’t your average mom-and-pop operation. It’s the largest employer in America. As such, it’s the trendsetter for millions of other employers of low-wage workers. As long as Walmart keeps its wages at or near the bottom, other low-wage employers keep wages there, too. All they need do is offer $8.85 an hour to have their pick.
On the other hand, if Walmart were to boost its wages, other employers of low-wage workers would have to follow suit in order to attract the employees they need.
Walmart is so huge that a wage boost at Walmart would ripple through the entire economy, putting more money in the pockets of low-wage workers. This would help boost the entire economy — including Walmart’s own sales. (This is also an argument for a substantial hike in the minimum wage.)
Walmart could learn a thing or two from Henry Ford. Almost a century ago, on Jan. 5, 1914, Ford announced that he would be paying workers on his famously productive Model T assembly line in Highland Park, Mich., almost three times the typical factory wage at the time. The Wall Street Journal termed his action an “economic crime.” Ford thought it a cunning business move, and history proved him right.
Ford’s decision helped boost factory wages across the board — enabling so many working people to buy Model Ts that Ford’s revenues soared far ahead of his increased payrolls, and he made a fortune. Within two years his profits more than doubled.
Ford understood the basic economic bargain that lies at the heart of a modern economy: Workers are also consumers. Their earnings are continuously recycled to buy the goods and services that they and other workers produce. But if their earnings are inadequate and this basic bargain is broken, an economy produces more than its people are capable of buying.
So why can’t Walmart learn from Ford? Because, unlike Henry Ford’s vision, Walmart’s business model is static. Walmart assumes that its profits depend largely on cheap labor. And it doesn’t figure in the boomerang effect of its low wages — how they keep down the wages of employees at other firms, and therefore depress Walmart’s entire customer base.
The whole American economy is suffering from this same boomerang. A major reason the current recovery is so anemic is wages are going nowhere, because corporations are raising profits by reducing payrolls.
Even with two wage earners, the typical household continues to lose ground. Almost all the economic gains are going to a small group at the top.
No wonder Walmart’s sales are shrinking, as are the sales of nearly every other retailer catering to ordinary Americans. Walmart’s CEO gets it. Too bad neither he nor any other major employer gets the lesson Henry Ford taught American business nearly a century ago.
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