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Who’s to Blame for Low Wages? (Hint: Look in the Mirror)

By John Maxfield – Feb 1, 2014 at 3:00PM

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The increasing discontent over low wages is understandable. However, it's not companies like Wal-Mart and McDonald's that are responsible. The real culprits are consumers.

You can't have your Big Mac and eat it, too.

If you shop at Wal-Mart (WMT 0.41%), eat at McDonald's (MCD -0.44%), or buy things online from (AMZN 0.89%), then you've relinquished the moral high ground on the issue of low wages.

You are the problem -- and, for the record, so am I.

A fancy name for hypocrisy
In the practice of law, we call this judicial estoppel.

The logic behind the doctrine is simple: A person can't take a position in one case and then assert a contrary position in a subsequent case.

For instance, if you admit to being Gary's business partner in a case against a common enemy, then you're "estopped" from claiming in a later case that you and Gary were never in a partnership.

Simple enough, right?

Well, if you take this same logic and apply it to the debate about low wages, and principally at companies like Wal-Mart and McDonald's, then it's impossible to deny that consumers are complicit in the whole affair and should thereby be estopped from criticizing it.

The age of discount retailing
Whether you'll admit to liking it or not, we live in an age of discount retailing.

And whether you'll admit it or not, virtually all of us have benefited handsomely from it, saving untold billions of dollars since merchants such as Sam Walton and Sol Price, the entrepreneur behind membership warehouses, pioneered the concept in the 1950s and '60s.

When Walton became a retailer, the typical markup on merchandise among variety stores, which was the prevailing model at the time, was 45%. His relentless drive to lower prices brought that figure down to nearly 20% by the end of his reign.

Companies such as Costco (COST -0.17%) and Amazon have since assumed the mantel with renewed vigor. Costco's markup is less than half of Wal-Mart's, as evidenced by the former's 10.6% gross margin, while Amazon's is likely even less than that.

And the same is true at McDonald's. Its early prognosticator, Ray Kroc, didn't fall in love with McDonald's simply because of its food -- though he talks at great length in his autobiography about the quality of its French fries. Instead, he was attracted to its cost-efficient operation and the traffic generated by its low prices.

On his first visit to the original location in San Bernardino, Calif., a customer explained its appeal to him by saying: "You'll get the best hamburger you ever ate for 15 cents. And you don't have to wait and mess around tipping waitresses."

The source of low wages
While the rest is history, so to speak, the one thing that stayed the same at companies like Wal-Mart and McDonald's are the low wages, which my colleague Sean Williams has aptly covered in articles like this and this.

Yet the problem with blindly criticizing McDonald's or Wal-Mart is the fact that they're merely a symptom and not the cause of low pay. The cause is consumers' demand for low prices, which requires retailers to keep costs like wages to the bare minimum.

The typical retort, of course, is that a company like Costco has succeeded at doing both -- that is, offering low prices and paying respectable wages. According to fellow Fool Daniel Kline, the membership warehouse pays hourly workers an average of $20.89 an hour, which is decent scratch for the retail industry by any measure.

But this isn't a fair comparison, as Costco is a wholesaler, albeit one that markets its wares to individual consumers, which allows it to realize additional efficiencies at the cost of a markedly smaller selection.

Sure, its employees make a great living compared with their counterparts at Wal-Mart, but does everybody need a gallon of mayonnaise?

The point being, low wages are the natural consequence of discount retailing. They're a symptom, not the cause. If we don't like that, then we as consumers should go elsewhere and pay more.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of, Costco Wholesale, and McDonald's. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDonald's Stock Quote
$273.80 (-0.44%) $-1.20
Amazon Stock Quote
$94.25 (0.89%) $0.83
Walmart Inc. Stock Quote
Walmart Inc.
$153.69 (0.41%) $0.62
Costco Wholesale Stock Quote
Costco Wholesale
$532.77 (-0.17%) $0.89

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