Elena Irwin, Associate Professor

Wal-Mart in the Local Economy

Elena Irwin, Associate Professor

AED Economics

1/25/06 Elena Irwin -- Economic Update 2

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

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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

Product

Price Ratio of Supermarkets/ Supercenters

Apples 1.55

Apple Juice 1.59

Bananas 1.38

Bread 1.11

Butter/Margarine 1.10

Cereal 1.17

Chicken Breast 1.41

Coffee 1.37

Cookies 1.22

Eggs 1.31

Ground Beef 1.37

Ham 1.97

Ice Cream 1.32

Lettuce 2.12

Milk 1.21

Potatoes 1.41

Soda 0.89

Tomatoes 1.36

Bottled Water 1.06

Yogurt 1.41

Average 1.30


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

Consumer Benefits

0%

5%

10%

15%

20%

25%

30%

35%

Income


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


BenefitIncrease 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. CostJob 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)


CostsGreater 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)


BenefitLess 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


CostU.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 aBoon 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



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)?



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 [email protected]

http://aede.osu.edu/people/Irwin.78