How Welfare Hurts Walmart By Bryan Caplan

Walmart’s critics often argue that food stamps, Medicaid, and other poverty programs subsidize its labor force. Since government pays a big part of its workers’ living expenses, Walmart doesn’t have to. Is this true?

As long as non-workers remain eligible for poverty programs, the answer is no. This is basic supply-and-demand. When the government offers free stuff to people with low incomes, the marginal benefit of work falls – and so does labor supply. When labor supply falls, hours of work go down, and wages rise. This could be very nice from the point of view of Walmart’s workers. From the point of view of Walmart’s stockholders however, it’s bad.

Not convinced? Ask yourself: “If I ran Walmart, would I favor higher unemployment benefits?” Of course not. Why not? Because higher unemployment benefits make it easier to not apply for a job at Walmart. The same goes for any government program that makes idleness less unpalatable.

Once you grasp why standard welfare programs hurt Walmart, you are ready to search for counter-examples. Is there any government program that actually increases labor supply? Indeed there is: the Earned Income Tax Credit. To benefit from this program, you have to work. The more you work, the larger your tax credit. When the EITC goes up, the marginal benefit of work rises – and so does labor supply. This doesn’t mean that Walmart is the sole beneficiary of the EITC; unless labor demand is perfectly inelastic, workers capture some of the program’s benefits too. But from Walmart’s point of view, a bigger EITC is better.

HT: Perry Metzger