Tennessee Ernie Economics

What were company stores?

Source: Wikipedia

In 1955 country music star Tennessee Ernie Ford hit gold with his recording of “Sixteen Tons,” a fatalistic lament about a coal miner’s experiences in Kentucky. The chorus of the song went:

You load sixteen tons, what do you get?

Another day older and deeper in debt.

St. Peter don’t you call me ‘cause I can’t go:

I owe my soul to the company store.

Company stores were owned by the mining company that sold food, clothing, and daily necessities to their employees. The store would accept non-cash vouchers issued by the company in advance of weekly cash paychecks. The prices in the company store were often higher than elsewhere, lowering the real wages that workers received. Why did they exist? Why would anyone work there if the real wage was lower then what they could earn somewhere else? And why would employers use such a roundabout system? So much could go wrong.

The answer is simple: the coal company was lowering the real wage because the nominal wage had been raised above the market rate. If the market wage is $1 per hour but the company was forced to pay $1.60 due to minimum wage laws or union activity or other factors, the company could lower the effective wage by charging a 60% premium in its stores. In a similar but opposite vein, military pay is notoriously low, but the government increases the effective wage by providing discount-priced goods at its base commissaries.

Base commissary in Norfolk, Virginia. Source: US Navy

Workers and employers know what they are doing. Employment agreements are complicated. If one factor is changed, other dimensions can be adjusted. But because many of these items aren’t easily observed and quantified, they get overlooked.

Times were hard during the depression, work was scarce, and wages were low. Lots of firms went out of business. Company stores were one way for big mines to adapt—even if it appeared that they were taking mortgages on the miners’ souls.

Douglas R. Tengdin, CFA

Chief Investment Officer

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