Tuesday, February 21, 2006

Wal-Mart in France?

The author of Naked Economics wrote a column comparing the French economy with the American economy. Charles Wheelan describes some of the controls on labor the French government uses to protect workers; minimum wage is high, there is universal healthcare, and it is difficult to fire employees. The author then uses Wal-Mart as an example of America’s free-market capitalism, where firms are free to pay for labor only what it is worth. The two different systems create different incentives for firms. The argument is that French firms are less willing to hire new employees because they would have to pay them more than they are worth to the company. These differences are said to account for France’s high unemployment compared to America (and high unemployment was at least one cause of the French riots).

While I agree with the main idea of the article, I don’t think Wal-Mart is the right example of free-markets in America. Economists in many articles defend Wal-Mart by claiming it is only paying for labor the price it is worth to the company. But they often ignore an important distinction. While no company that wants to survive will pay more for labor than it is worth, they will have no problem paying less for labor than it is worth. My argument has always been that Wal-Mart uses its control over the labor market to artificially drive labor prices down. While I mostly support our free-market economic system, in certain situations there needs to be pressure applied to firms that are taking advantage of their power over labor in the quest for enormous profits. We can still protect a system that encourages firms to hire new employees while also limiting the ways in which companies can take advantage of their power to the extreme that Wal-Mart does.