Elena Irwin, Associate Professor
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Elena Irwin, Associate Professor Elena Irwin, Associate Professor Presentation Transcript

  • Wal-Mart in the Local Economy Elena Irwin, Associate Professor AED Economics
  • Wal-Mart Basics
    • Largest corporation in the world
      • Total sales of $285 billion in 2005
    • Largest private employer in the U.S.
      • Over 1.2 million workers in the United States; approximately 3,600 stores
      • Just under 1% of total employment in the United States, and just under 10% of retail employment
    • Substantial share of the retail business
      • Accounts for 28% of Dial, 24% of Del Monte Foods, 23% of Revlon total sales
      • Nation’s largest grocer (19% market share); third-largest pharmacy (16% market share)
      • In 2002, 82% of US households made at least one purchase at Wal-Mart
  • Wal-Mart Stores and Average Sales per Store, 1985-2004 (Basker and Van, 2005)
  • Wal-Mart Growth, 1962-2005 By Thomas Holmes, U Minnesota Website: http://www.econ.umn.edu/~holmes/research.html
  • The Economics of Wal-Mart
    • Superior technology in logistics and distribution
      • e.g., “Retail Link” software that connects stores, distribution centers and suppliers
    • Economies of scale in retailing
      • Lower unit costs by purchasing directly with manufacturer
      • Lower unit marketing costs
    • Economies of scale in importing
      • Fixed costs to purchasing from offshore manufacturer
      • Lower unit costs due to lower labor costs in less developed countries
    • Supply chain management
      • Wal-Mart’s size allows it to aggressively manage its supply chain (e.g., dictate delivery schedules, influence product specifications and prices of goods from manufacturers)
    • Low labor costs
      • Wal-Mart pays sales clerks lower than the industry average and employs many workers on a part-time basis only
  • The Economics of Wal-Mart Increased market size Lower unit costs Lower prices Technological innovation Increased purchases from offshore manufacturers Increased sales Low wages
  • Key Implication
    • Wal-Mart’s low prices are the result of Wal-Mart’s size, market power, global sourcing, and low wages/low benefits for store employees
  • Wal-Mart in the Local Community
    • What are the benefits and costs of the entry or expansion of a Wal-Mart store in a local community and how are they distributed across different groups?
      • Benefits
      • Consumer savings
      • Increased sales revenues
      • New jobs
      • More businesses
      • Costs
      • Displaced jobs
      • Loss of businesses
      • Lower wages
      • Additional social costs
    ? ?
  • Lower Prices
    • Wal-Mart SuperCenter prices are estimated to be an average 14% lower than rivals (UBS Warburg, 2002)
    • Wal-Mart’s food prices are estimated to be anywhere from 8-27% lower than large supermarket chains for an identical market basket across different U.S. metropolitan areas (UBS Investment Research, 2003)
    • Competition from Wal-Mart drives down overall prices in metropolitan area
      • Basker, 2005: Following Wal-Mart opening, finds a decline of 1.5-3% in many drugstore item prices and long-run declines of 8-13% (using data from 165 U.S. cities)
  • Source: Hausman and Liebtag, 2005 Supercenters include Wal-Mart and other discount food retailers and mass merchandisers Supermarkets includes Krogers, Safeway and other traditional grocerers Average price ratios (1998-2001) in six U.S. metro areas
  • Benefit Cost Savings to Consumers
    • Entry and expansion of a Wal-Mart into a community has two positive effects on consumers (Hausman and Liebtag, 2005):
      • Direct effect (variety effect): Lower prices at Wal-Mart, which lowers average expenditures for Wal-Mart shoppers
      • Indirect effect (competition effect): Lower prices at competing stores due to the entry and expansion of Wal-Mart in a community
        •  if this is true, then non-Wal-Mart shoppers benefit from entry and expansion of Wal-Mart in a community
  • How Much Do Consumers Benefit from Lower Food Prices?
    • Estimate the benefits to consumers resulting from entry and expansion of lower priced supercenters into a community
    • Take account of both the variety (direct) and competition (indirect) effects
    • Use rigorous statistical analysis and data on individual shopping behavior from 1998-2001 from six metro areas across the U.S.
    • Consumer benefits are estimated as the “compensating variation” in income that results from lower prices; this is defined as the maximum amount of money the consumer is willing to pay for having the option of lower prices
    • In practical terms, this is the savings in expenditures that consumers achieve with lower prices, holding constant the mix of goods they purchase
    Hausman and Liebtag (2005)
  • Main Findings
    • Average variety (direct) effect: availability of lower priced food items generates food expenditure savings of 20.2% (i.e. a savings of 20.2% of the average food expenditures)
    • Competition (indirect) effect: lower prices at competing stores generated additional food expenditure savings of 4.8%
    • Total consumer savings from these combined effects are equivalent to 25% of the average food expenditures
    • Benefits are even greater for lower income households
  • Consumer Benefits by Household Income Level Source: Hausman and Liebtag, 2005
  • Main Findings
    • This analysis considers food expenditures only
    • Cost savings on other consumer goods is likely for the same reasons, although it is unclear whether benefits would be of the same magnitude
  • Benefit Increase in Local Retail Sales
    • Stone (1997): Retail trends in selected Iowa towns from early 1980s to mid-1990s
      • General merchandizing sales increased by 25% ten years after Wal-Mart store opened
      • Total sales increased by 6% two years after opening, but declined by 4% ten years after opening
      • Concludes that retail market area became saturated after 10 years due to additional big box retailers locating in neighboring towns
    • Stone, Artz and Myles (2002) report qualitatively similar trends for selected Wal-Mart towns in Mississippi
  • Benefit vs. Cost Job Creation vs. Destruction
    • Wal-Mart creates local retail jobs
    • Wal-Mart drives other local retailers out of business
    • Wal-Mart attracts consumers to an area, which increases the number and size of other local retailers
    • Wal-Mart pulls consumers from neighboring areas, which drives neighboring retailers out of business
  • Does Wal-Mart Add, Displace or Diminish Retail Jobs in Local Area?
    • Two recent national studies test the effect of a Wal-Mart store entry on total retail employment at county level using rigorous statistical models
      • Basker (2005): Immediate effect of Wal-Mart entry is an increase of 100 retail jobs; after 5 years, this number drops to average of 50 jobs (1% of total retail employment on average in county)
      • Neumark et al. (2005): Wal-Mart entry reduces retail employment at county level by about 180-270 workers (3.6-5.4% of total retail on average); this translates into each Wal-Mart workers displacing about 1.5 to 1.75 other retail workers
      • Difference in results due to a difference in statistical methods used to identify the hypothesized causal relationship between Wal-Mart entry and county retail employment
  • What is Wal-Mart’s Impact on Small Retailers?
    • Basker (2005): Statistical model of county employment and Wal-Mart entry for U.S. counties
      • Five years after Wal-Mart’s entry, an average of four small retailers are displaced
      • Five years afterwards, the number of medium-sized retailers is estimated to decline by 0.7 retailers
    • Jia (2005): Statistical model of large and small retail firms entry and exit decisions for U.S. counties
      • Wal-Mart’s expansion from late 1980’s to late 1990’s accounted for 50-70% of the observed decrease in small general merchandise retailers
  • How Does Wal-Mart Affect Other Local Businesses?
    • Basker (2005): Statistical model of county employment and Wal-Mart entry for U.S. counties
      • Number of wholesale jobs at the county level is estimated to decline by about 20 jobs
      • No statistical effect on the number of restaurant or automobile dealership jobs
      • Concludes that there is no evidence of “attraction effects” of other businesses at county level
    • Stone (1997): Non-Wal-Mart retail trends 10 years after Wal-Mart for selected Iowa towns
      • Restaurant sales up by 5%; building materials by 4%
      • Apparel sales down by 28%; specialty stores by 17%
  • Does Wal-Mart Impact Retailers in Neighboring Communities?
    • Basker (2005)
      • Finds no statistical relationship (positive or negative) between a Wal-Mart opening in a county and retail or wholesale employment in neighboring counties
    • Stone (1997)
      • Total retail sales in neighboring non-Wal-Mart towns 15% lower ten years after Wal-Mart store opening
  • Costs Lower Wages, Lower Job Quality
    • A typical hourly wage of a Wal-Mart “associate” is $8/hour
    • Wal-Mart workers earn an average wage that is 31% less than large retail industry average (Dube and Jacobs, 2003)
    • 23% fewer Wal-Mart workers are covered by employer-sponsored health insurance in comparison to the industry average in California (Dube and Jacobs, 2003)
  • Costs Lower Wages, Lower Job Quality
    • The implication is that workers are worse off
    • But whether or not this translates into a loss for local retail workers depends on whether and where workers would be employed in the absence of the Wal-Mart store
      • For example, previously unemployed workers are clearly better off working at Wal-mart
      • On the other hand, there is clear evidence that large discount retailers cause job loss among smaller retailers
  • Does Wal-Mart Depress Overall Retail Wages?
    • Neumark et al. (2005) estimate the influence of a Wal-Mart store opening on retail earnings per person at a county level
      • Results vary somewhat by model specification
      • Find evidence that average retail wages per person decline as a result of Wal-Mart entry by about 7.5%
      • Negative effect on wages is strongest in South
  • Does Wal-Mart “Nickel and Dime” Its Workers?
    • At any moment, Wal-Mart faces about 8,000 lawsuits (The Economist, 2004)
      • Includes 33 putative class-action lawsuits alleging violations of the Fair Labor Standards Act, including forced “off the clock” work and failing to provide work breaks
      • One class-action lawsuit that alleges systematic discrimination against female employees in pay and promotion; brought on the behalf of 1.6 million female employees (past and present)
  • Costs Greater Social Stress, Community Loss
    • Some studies have found a positive correlation between Wal-Mart stores and poverty/increased reliance on public assistance programs
      • Wal-Mart employees in California used an estimated 38% more in public assistance than industry average (Dube and Jacobs, 2003)
      • Average Wal-Mart employee costs federal taxpayers an extra $2,103 ( Democratic Staff, Comm. on Education and the Workforce, U.S. House of Representatives, Rep. G. Miller, D-CA)
      • Positive correlation between number of Wal-Mart stores in a county in 1987 and level of poverty in 1999 (Goetz and Swaminathan, 2004)
  • Does Wal-Mart Increase Local Poverty?
    • These findings are suggestive, but are based on strong assumptions
      • Would Wal-Mart workers be employed elsewhere in the absence of a Wal-Mart store?
      • Do higher poverty areas attract Wal-Mart stores (vs. Wal-Mart stores causing poverty)?
    • This is not to say that these additional costs don’t exist, but rather that a causal link between Wal-Mart and poverty has not been rigorously demonstrated
  • Does Wal-Mart Erode the Traditional Community?
    • There are other community costs that have been associated with Wal-Mart stores, but no convincing evidence that these impacts are specific to Wal-Mart vs. most new retail development
      • Loss of character and sense of place
      • Loss of main street shopping district
      • Increase in sprawl and environmental damages
      • Erosion of middle class jobs
  • Macro-Effects of Wal-Mart
    • Many claims have been made about Wal-Mart’s positive and negative impacts on the national economy.
      • “ The expansion of Wal-Mart from 1985 to 2004 can be associated with…a 3.1% decline in overall consumer prices as measured by the Consumer Price Index” (Global Insight Inc., 2005)
      • Wal-Mart has “hastened the flight of U.S. manufacturing jobs overseas” (Goldman and Cleeland, LA Times, 2003)
  • Benefit Less Consumer Price Inflation
    • Buyer-driven commodity chains exert downward price pressure on suppliers, which keeps consumer prices lower than they otherwise would be
    • While this trend is broader than any one retailer, Wal-Mart may be sufficiently big to have an effect, but how much is unclear
    Source: Robin Wehbé, Global Fundamental Research
  • Cost U.S. Manufacturing Job Loss
    • Migration of manufacturing jobs is due to global economic and political forces
    • Some evidence indicates that Wal-Mart imports disproportionately more than the industry average for large retailers
      • Basker and Van (2005) provide evidence that the import share of apparel sales at Wal-Mart stores is substantially higher than the average apparel retailer
    • This may accelerate manufacturing job loss at national level, but the loss of manufacturing jobs from the U.S. is a long term trend and is happening irrespective of Wal-Mart
  • In Summary, is Wal-Mart a Boon or Bane to Communities
    • Large cost savings to consumers
    • Temporary increase in local tax sales revenues, but evidence suggests a “zero-sum game” in longer run
    • Modest increases in retail jobs possible, but reduction in retail and even some wholesale jobs more likely due to Wal-Mart efficiencies
    • Little to no “attraction effect” of complementary businesses, although effect may be obscured by county-level analysis
    • Likely decline in overall retail wages at county level
    • Evidence suggests additional costs to the public sector, but results are inconclusive
  • Who Gains and Who Loses
    • Consumers
      • Widespread, substantial gains; greater for lower income households
      • Gains for Wal-Mart workers/consumers much smaller
    • Businesses
      • Potential gains for businesses that offer complementary goods, but these gains appear modest at best
      • Substantial losses for competing businesses with higher costs (particularly small retailers)
    • Retail workers
      • Losses for those who’s jobs are lost or displaced
      • Gains for those that were unemployed or underemployed
    • Public sector (taxpayers)
      • Gains from increased tax revenues may be temporary
      • Potential losses for communities if they have to absorb additional social costs
  • Some Concluding Thoughts
    • Supercenters bring an unequal distribution of benefits and costs across different groups
      • Benefits accrue to local consumers and non-local stakeholders
      • Costs are absorbed by local businesses, local workers, local taxpayers
    • All costs are local, some benefits are local
  • Some Concluding Thoughts
    • How much of these benefits and costs are specific to Wal-Mart?
      • Technological innovation, global sourcing, high volume & low prices, lower wages, community change are broader trends
      • Wal-Mart is at the forefront of these trends and may be accelerating these trends
    • Wal-Mart’s particular emphasis on labor productivity (and hence, low wages and benefits) has potentially large social costs
      • To what extent is this due to harsh labor practices vs. failure of government to provide better safeguards for workers (e.g., minimum healthcare)?
  • Some Concluding Thoughts
    • While the costs of a Wal-Mart entry into a local community may be substantial, the costs of excluding Wal-Mart are potentially much higher
      • Forgone benefits of lower prices (both at Wal-Mart and competing stores)
      • Lower income consumers are the most adversely affected by attempts to restrict supercenters
      • Risk of losing sales revenue and retail employment when Wal-Mart locates in a neighboring community
  • How Can Communities Adapt?
    • Plan for development
      • Zoning, development standards, optimal location to benefit community
    • Educate existing retailers on how to adapt to Wal-Mart and other big box discount retailers
    • Educate consumers
    • Promote long-term economic development strategies that generate higher wage jobs
      • Job training, education
    • Advocate for national standards to ensure higher minimum pay, better benefits for retail workers
  • Acknowledgements
    • This presentation is based on a written report co-authored with Jill Clark, Program Specialist, AED Economics
    • Report is available on-line at:
    • http://aede.osu.edu/programs/ComRegEcon/retail.htm
    • Thanks to Greg Davis, Stan Ernst, Neil Hooker, David Kraybill, Ian Sheldon for valuable feedback
  • Selected References
    • Basker, E. (2005). Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion. Review of Economics and Statistics, 87(1): 174-83.
    • Basker, E. and P.H. Van (2005). Putting a Smiley Face on the Dragon: Wal-Mart as Catalyst to U.S.-China Trade. Paper presented at the Allied Social Sciences Association meeting, Boston, MA, January 6-8, 2006.
    • Boarnet, M. and R. Crane. 1999. The Impact of Big Box Grocers on Southern California: Jobs, Wages, and Municipal Finances. Report prepared for the Orange County Business Council.
    • Dube, A. and K. Jacobs. 2004. Hidden Costs of Wal-Mart Jobs: Use of Safety-Net Programs by Wal-Mart Employees in California. University of California Berkeley Labor Center.
    • Goetz, S. and H. Swaminathan. 2004. Wal-Mart and County-wide Poverty. AERS Staff Paper No. 371. Department of Agricultural Economics and Rural Sociology, Pennsylvania State University.
    • Hausman, J. and E. Leibtag (2005). Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart. Paper presented at the Allied Social Sciences Association meeting, Boston, MA, January 6-8, 2006.
    • Neumark, D., J. Zhang and S. Ciccarella (2005). The Effect of Wal-Mart on Local Labor Markets. Paper presented at the Allied Social Sciences Association meeting, Boston, MA, January 6-8, 2006.
    • Stone, K. 1997. Impact of the Wal-Mart Phenomenon on Rural Communities, Increasing Understanding of Public Problems and Policies , Farm Foundation, Oak Brook, IL, pp. 189-200.
  • Department of Ag., Environmental & Development Economics Elena Irwin, Associate Professor [email_address] http://aede.osu.edu/people/Irwin.78