Elena Irwin, Associate Professor


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  • Elena Irwin, Associate Professor

    1. 1. Wal-Mart in the Local Economy Elena Irwin, Associate Professor AED Economics
    2. 2. Wal-Mart Basics <ul><li>Largest corporation in the world </li></ul><ul><ul><li>Total sales of $285 billion in 2005 </li></ul></ul><ul><li>Largest private employer in the U.S. </li></ul><ul><ul><li>Over 1.2 million workers in the United States; approximately 3,600 stores </li></ul></ul><ul><ul><li>Just under 1% of total employment in the United States, and just under 10% of retail employment </li></ul></ul><ul><li>Substantial share of the retail business </li></ul><ul><ul><li>Accounts for 28% of Dial, 24% of Del Monte Foods, 23% of Revlon total sales </li></ul></ul><ul><ul><li>Nation’s largest grocer (19% market share); third-largest pharmacy (16% market share) </li></ul></ul><ul><ul><li>In 2002, 82% of US households made at least one purchase at Wal-Mart </li></ul></ul>
    3. 3. Wal-Mart Stores and Average Sales per Store, 1985-2004 (Basker and Van, 2005)
    4. 4. Wal-Mart Growth, 1962-2005 By Thomas Holmes, U Minnesota Website: http://www.econ.umn.edu/~holmes/research.html
    5. 5. The Economics of Wal-Mart <ul><li>Superior technology in logistics and distribution </li></ul><ul><ul><li>e.g., “Retail Link” software that connects stores, distribution centers and suppliers </li></ul></ul><ul><li>Economies of scale in retailing </li></ul><ul><ul><li>Lower unit costs by purchasing directly with manufacturer </li></ul></ul><ul><ul><li>Lower unit marketing costs </li></ul></ul><ul><li>Economies of scale in importing </li></ul><ul><ul><li>Fixed costs to purchasing from offshore manufacturer </li></ul></ul><ul><ul><li>Lower unit costs due to lower labor costs in less developed countries </li></ul></ul><ul><li>Supply chain management </li></ul><ul><ul><li>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) </li></ul></ul><ul><li>Low labor costs </li></ul><ul><ul><li>Wal-Mart pays sales clerks lower than the industry average and employs many workers on a part-time basis only </li></ul></ul>
    6. 6. The Economics of Wal-Mart Increased market size Lower unit costs Lower prices Technological innovation Increased purchases from offshore manufacturers Increased sales Low wages
    7. 7. Key Implication <ul><li>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 </li></ul>
    8. 8. Wal-Mart in the Local Community <ul><li>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? </li></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><li>Consumer savings </li></ul></ul><ul><ul><li>Increased sales revenues </li></ul></ul><ul><ul><li>New jobs </li></ul></ul><ul><ul><li>More businesses </li></ul></ul><ul><ul><li>Costs </li></ul></ul><ul><ul><li>Displaced jobs </li></ul></ul><ul><ul><li>Loss of businesses </li></ul></ul><ul><ul><li>Lower wages </li></ul></ul><ul><ul><li>Additional social costs </li></ul></ul>? ?
    9. 9. Lower Prices <ul><li>Wal-Mart SuperCenter prices are estimated to be an average 14% lower than rivals (UBS Warburg, 2002) </li></ul><ul><li>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) </li></ul><ul><li>Competition from Wal-Mart drives down overall prices in metropolitan area </li></ul><ul><ul><li>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) </li></ul></ul>
    10. 10. 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
    11. 11. Benefit Cost Savings to Consumers <ul><li>Entry and expansion of a Wal-Mart into a community has two positive effects on consumers (Hausman and Liebtag, 2005): </li></ul><ul><ul><li>Direct effect (variety effect): Lower prices at Wal-Mart, which lowers average expenditures for Wal-Mart shoppers </li></ul></ul><ul><ul><li>Indirect effect (competition effect): Lower prices at competing stores due to the entry and expansion of Wal-Mart in a community </li></ul></ul><ul><ul><ul><li> if this is true, then non-Wal-Mart shoppers benefit from entry and expansion of Wal-Mart in a community </li></ul></ul></ul>?
    12. 12. How Much Do Consumers Benefit from Lower Food Prices? <ul><li>Estimate the benefits to consumers resulting from entry and expansion of lower priced supercenters into a community </li></ul><ul><li>Take account of both the variety (direct) and competition (indirect) effects </li></ul><ul><li>Use rigorous statistical analysis and data on individual shopping behavior from 1998-2001 from six metro areas across the U.S. </li></ul><ul><li>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 </li></ul><ul><li>In practical terms, this is the savings in expenditures that consumers achieve with lower prices, holding constant the mix of goods they purchase </li></ul>Hausman and Liebtag (2005)
    13. 13. Main Findings <ul><li>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) </li></ul><ul><li>Competition (indirect) effect: lower prices at competing stores generated additional food expenditure savings of 4.8% </li></ul><ul><li>Total consumer savings from these combined effects are equivalent to 25% of the average food expenditures </li></ul><ul><li>Benefits are even greater for lower income households </li></ul>
    14. 14. Consumer Benefits by Household Income Level Source: Hausman and Liebtag, 2005
    15. 15. Main Findings <ul><li>This analysis considers food expenditures only </li></ul><ul><li>Cost savings on other consumer goods is likely for the same reasons, although it is unclear whether benefits would be of the same magnitude </li></ul>
    16. 16. Benefit Increase in Local Retail Sales <ul><li>Stone (1997): Retail trends in selected Iowa towns from early 1980s to mid-1990s </li></ul><ul><ul><li>General merchandizing sales increased by 25% ten years after Wal-Mart store opened </li></ul></ul><ul><ul><li>Total sales increased by 6% two years after opening, but declined by 4% ten years after opening </li></ul></ul><ul><ul><li>Concludes that retail market area became saturated after 10 years due to additional big box retailers locating in neighboring towns </li></ul></ul><ul><li>Stone, Artz and Myles (2002) report qualitatively similar trends for selected Wal-Mart towns in Mississippi </li></ul>?
    17. 17. Benefit vs. Cost Job Creation vs. Destruction <ul><li>Wal-Mart creates local retail jobs </li></ul><ul><li>Wal-Mart drives other local retailers out of business </li></ul><ul><li>Wal-Mart attracts consumers to an area, which increases the number and size of other local retailers </li></ul><ul><li>Wal-Mart pulls consumers from neighboring areas, which drives neighboring retailers out of business </li></ul>?
    18. 18. Does Wal-Mart Add, Displace or Diminish Retail Jobs in Local Area? <ul><li>Two recent national studies test the effect of a Wal-Mart store entry on total retail employment at county level using rigorous statistical models </li></ul><ul><ul><li>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) </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>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 </li></ul></ul>
    19. 19. What is Wal-Mart’s Impact on Small Retailers? <ul><li>Basker (2005): Statistical model of county employment and Wal-Mart entry for U.S. counties </li></ul><ul><ul><li>Five years after Wal-Mart’s entry, an average of four small retailers are displaced </li></ul></ul><ul><ul><li>Five years afterwards, the number of medium-sized retailers is estimated to decline by 0.7 retailers </li></ul></ul><ul><li>Jia (2005): Statistical model of large and small retail firms entry and exit decisions for U.S. counties </li></ul><ul><ul><li>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 </li></ul></ul>
    20. 20. How Does Wal-Mart Affect Other Local Businesses? <ul><li>Basker (2005): Statistical model of county employment and Wal-Mart entry for U.S. counties </li></ul><ul><ul><li>Number of wholesale jobs at the county level is estimated to decline by about 20 jobs </li></ul></ul><ul><ul><li>No statistical effect on the number of restaurant or automobile dealership jobs </li></ul></ul><ul><ul><li>Concludes that there is no evidence of “attraction effects” of other businesses at county level </li></ul></ul><ul><li>Stone (1997): Non-Wal-Mart retail trends 10 years after Wal-Mart for selected Iowa towns </li></ul><ul><ul><li>Restaurant sales up by 5%; building materials by 4% </li></ul></ul><ul><ul><li>Apparel sales down by 28%; specialty stores by 17% </li></ul></ul>
    21. 21. Does Wal-Mart Impact Retailers in Neighboring Communities? <ul><li>Basker (2005) </li></ul><ul><ul><li>Finds no statistical relationship (positive or negative) between a Wal-Mart opening in a county and retail or wholesale employment in neighboring counties </li></ul></ul><ul><li>Stone (1997) </li></ul><ul><ul><li>Total retail sales in neighboring non-Wal-Mart towns 15% lower ten years after Wal-Mart store opening </li></ul></ul>
    22. 22. Costs Lower Wages, Lower Job Quality <ul><li>A typical hourly wage of a Wal-Mart “associate” is $8/hour </li></ul><ul><li>Wal-Mart workers earn an average wage that is 31% less than large retail industry average (Dube and Jacobs, 2003) </li></ul><ul><li>23% fewer Wal-Mart workers are covered by employer-sponsored health insurance in comparison to the industry average in California (Dube and Jacobs, 2003) </li></ul>?
    23. 23. Costs Lower Wages, Lower Job Quality <ul><li>The implication is that workers are worse off </li></ul><ul><li>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 </li></ul><ul><ul><li>For example, previously unemployed workers are clearly better off working at Wal-mart </li></ul></ul><ul><ul><li>On the other hand, there is clear evidence that large discount retailers cause job loss among smaller retailers </li></ul></ul>?
    24. 24. Does Wal-Mart Depress Overall Retail Wages? <ul><li>Neumark et al. (2005) estimate the influence of a Wal-Mart store opening on retail earnings per person at a county level </li></ul><ul><ul><li>Results vary somewhat by model specification </li></ul></ul><ul><ul><li>Find evidence that average retail wages per person decline as a result of Wal-Mart entry by about 7.5% </li></ul></ul><ul><ul><li>Negative effect on wages is strongest in South </li></ul></ul>
    25. 25. Does Wal-Mart “Nickel and Dime” Its Workers? <ul><li>At any moment, Wal-Mart faces about 8,000 lawsuits (The Economist, 2004) </li></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>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) </li></ul></ul>
    26. 26. Costs Greater Social Stress, Community Loss <ul><li>Some studies have found a positive correlation between Wal-Mart stores and poverty/increased reliance on public assistance programs </li></ul><ul><ul><li>Wal-Mart employees in California used an estimated 38% more in public assistance than industry average (Dube and Jacobs, 2003) </li></ul></ul><ul><ul><li>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) </li></ul></ul><ul><ul><li>Positive correlation between number of Wal-Mart stores in a county in 1987 and level of poverty in 1999 (Goetz and Swaminathan, 2004) </li></ul></ul>?
    27. 27. Does Wal-Mart Increase Local Poverty? <ul><li>These findings are suggestive, but are based on strong assumptions </li></ul><ul><ul><li>Would Wal-Mart workers be employed elsewhere in the absence of a Wal-Mart store? </li></ul></ul><ul><ul><li>Do higher poverty areas attract Wal-Mart stores (vs. Wal-Mart stores causing poverty)? </li></ul></ul><ul><li>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 </li></ul>
    28. 28. Does Wal-Mart Erode the Traditional Community? <ul><li>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 </li></ul><ul><ul><li>Loss of character and sense of place </li></ul></ul><ul><ul><li>Loss of main street shopping district </li></ul></ul><ul><ul><li>Increase in sprawl and environmental damages </li></ul></ul><ul><ul><li>Erosion of middle class jobs </li></ul></ul>
    29. 29. Macro-Effects of Wal-Mart <ul><li>Many claims have been made about Wal-Mart’s positive and negative impacts on the national economy. </li></ul><ul><ul><li>“ 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) </li></ul></ul><ul><ul><li>Wal-Mart has “hastened the flight of U.S. manufacturing jobs overseas” (Goldman and Cleeland, LA Times, 2003) </li></ul></ul>
    30. 30. Benefit Less Consumer Price Inflation <ul><li>Buyer-driven commodity chains exert downward price pressure on suppliers, which keeps consumer prices lower than they otherwise would be </li></ul>? <ul><li>While this trend is broader than any one retailer, Wal-Mart may be sufficiently big to have an effect, but how much is unclear </li></ul>Source: Robin Wehbé, Global Fundamental Research
    31. 31. Cost U.S. Manufacturing Job Loss <ul><li>Migration of manufacturing jobs is due to global economic and political forces </li></ul><ul><li>Some evidence indicates that Wal-Mart imports disproportionately more than the industry average for large retailers </li></ul><ul><ul><li>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 </li></ul></ul><ul><li>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 </li></ul>?
    32. 32. In Summary, is Wal-Mart a Boon or Bane to Communities <ul><li>Large cost savings to consumers </li></ul><ul><li>Temporary increase in local tax sales revenues, but evidence suggests a “zero-sum game” in longer run </li></ul><ul><li>Modest increases in retail jobs possible, but reduction in retail and even some wholesale jobs more likely due to Wal-Mart efficiencies </li></ul><ul><li>Little to no “attraction effect” of complementary businesses, although effect may be obscured by county-level analysis </li></ul><ul><li>Likely decline in overall retail wages at county level </li></ul><ul><li>Evidence suggests additional costs to the public sector, but results are inconclusive </li></ul>?
    33. 33. Who Gains and Who Loses <ul><li>Consumers </li></ul><ul><ul><li>Widespread, substantial gains; greater for lower income households </li></ul></ul><ul><ul><li>Gains for Wal-Mart workers/consumers much smaller </li></ul></ul><ul><li>Businesses </li></ul><ul><ul><li>Potential gains for businesses that offer complementary goods, but these gains appear modest at best </li></ul></ul><ul><ul><li>Substantial losses for competing businesses with higher costs (particularly small retailers) </li></ul></ul><ul><li>Retail workers </li></ul><ul><ul><li>Losses for those who’s jobs are lost or displaced </li></ul></ul><ul><ul><li>Gains for those that were unemployed or underemployed </li></ul></ul><ul><li>Public sector (taxpayers) </li></ul><ul><ul><li>Gains from increased tax revenues may be temporary </li></ul></ul><ul><ul><li>Potential losses for communities if they have to absorb additional social costs </li></ul></ul>?
    34. 34. Some Concluding Thoughts <ul><li>Supercenters bring an unequal distribution of benefits and costs across different groups </li></ul><ul><ul><li>Benefits accrue to local consumers and non-local stakeholders </li></ul></ul><ul><ul><li>Costs are absorbed by local businesses, local workers, local taxpayers </li></ul></ul><ul><li>All costs are local, some benefits are local </li></ul>
    35. 35. Some Concluding Thoughts <ul><li>How much of these benefits and costs are specific to Wal-Mart? </li></ul><ul><ul><li>Technological innovation, global sourcing, high volume & low prices, lower wages, community change are broader trends </li></ul></ul><ul><ul><li>Wal-Mart is at the forefront of these trends and may be accelerating these trends </li></ul></ul><ul><li>Wal-Mart’s particular emphasis on labor productivity (and hence, low wages and benefits) has potentially large social costs </li></ul><ul><ul><li>To what extent is this due to harsh labor practices vs. failure of government to provide better safeguards for workers (e.g., minimum healthcare)? </li></ul></ul>
    36. 36. Some Concluding Thoughts <ul><li>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 </li></ul><ul><ul><li>Forgone benefits of lower prices (both at Wal-Mart and competing stores) </li></ul></ul><ul><ul><li>Lower income consumers are the most adversely affected by attempts to restrict supercenters </li></ul></ul><ul><ul><li>Risk of losing sales revenue and retail employment when Wal-Mart locates in a neighboring community </li></ul></ul>
    37. 37. How Can Communities Adapt? <ul><li>Plan for development </li></ul><ul><ul><li>Zoning, development standards, optimal location to benefit community </li></ul></ul><ul><li>Educate existing retailers on how to adapt to Wal-Mart and other big box discount retailers </li></ul><ul><li>Educate consumers </li></ul><ul><li>Promote long-term economic development strategies that generate higher wage jobs </li></ul><ul><ul><li>Job training, education </li></ul></ul><ul><li>Advocate for national standards to ensure higher minimum pay, better benefits for retail workers </li></ul>
    38. 38. Acknowledgements <ul><li>This presentation is based on a written report co-authored with Jill Clark, Program Specialist, AED Economics </li></ul><ul><li>Report is available on-line at: </li></ul><ul><li>http://aede.osu.edu/programs/ComRegEcon/retail.htm </li></ul><ul><li>Thanks to Greg Davis, Stan Ernst, Neil Hooker, David Kraybill, Ian Sheldon for valuable feedback </li></ul>
    39. 39. Selected References <ul><li>Basker, E. (2005). Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion. Review of Economics and Statistics, 87(1): 174-83. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
    40. 40. Department of Ag., Environmental & Development Economics Elena Irwin, Associate Professor [email_address] http://aede.osu.edu/people/Irwin.78