Thursday, July 14, 2005

Tales From Two Economists

One of whom ought to be cause for the other banging his head against the wall. First, Berkeley's Brad DeLong betrays an abysmal ignorance of the difference between a cost and a benefit:

The High-Wage Model

CostCo. If only we could once again have a tight labor market, CostCo would be likely to eat WalMart for lunch:

.... In a country where the retail industry has been convulsed over the past decade by the rise of Wal-Mart and rival discounters, Costco’s discount warehouse club is part of the revolution. But unlike Wal-Mart, whose low-cost labour model has provoked increasingly vocal criticism, Costco has managed to remain competitive while providing its workers with the highest wages and best healthcare plans available anywhere in the US retail industry.

Of course, when we had an extremely tight labor market (in the late 1990s) Costco did no such thing to Wal-Mart. Fortunately over at Cafe Hayek, Russell Roberts provides an antidope:

Wal-Mart doesn't determine what it pays its workers or what benefits it offers any more than you can set the price of your house when you want to sell it. ....

Wal-Mart is in the same situation. They don't determine the compensation of their workers in any real sense. The compensation of their workers is set by the market for people of a particular skill level and the alternatives in the work place available to workers of that skill level. What Wal-Mart does have some control over is the level of customer service and knowledge and skill used by their workers.

In general, the warehouse stores, Wal-Mart's Sam's Club and its biggest competitor Costco, pay their workers more than the standard discount retailers such as Wal-Mart, Target and K-Mart. I assume the reason for this is that the level of skills those warehouse stores require is higher. Maybe it's because you have to be able to drive a forklift or do other stuff that's necessary in a warehouse store. But it's not because the head Sam's Club is a nicer person than the head of the regular Wal-Marts.

Correctamundo. Costco and Wal-Mart are serving two very different markets. As even a casual observer (you won't find institutional sized barrels of ketchup at Wal-Mart) could see, if he would bother himself to look.

No comments: