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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
1/25/06 Elena Irwin -- Economic Update 3
Wal-Mart Stores and Average Sales per Store, 1985-2004 (Basker and Van, 2005)
1/25/06 Elena Irwin -- Economic Update 4
Wal-Mart Growth, 1962-2005
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1/25/06 Elena Irwin -- Economic Update 5
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
1/25/06 Elena Irwin -- Economic Update 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
1/25/06 Elena Irwin -- Economic Update 7
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
1/25/06 Elena Irwin -- Economic Update 8
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?? ??
1/25/06 Elena Irwin -- Economic Update 9
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)
1/25/06 Elena Irwin -- Economic Update 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
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
1/25/06 Elena Irwin -- Economic Update 11
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
??
1/25/06 Elena Irwin -- Economic Update 12
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)
1/25/06 Elena Irwin -- Economic Update 13
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
1/25/06 Elena Irwin -- Economic Update 14
Consumer Benefits by Household Income Level
Source: Hausman and Liebtag, 2005
Consumer Benefits
0%
5%
10%
15%
20%
25%
30%
35%
Income
1/25/06 Elena Irwin -- Economic Update 15
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
1/25/06 Elena Irwin -- Economic Update 16
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
??
1/25/06 Elena Irwin -- Economic Update 17
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
??
1/25/06 Elena Irwin -- Economic Update 18
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
1/25/06 Elena Irwin -- Economic Update 19
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
1/25/06 Elena Irwin -- Economic Update 20
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%
1/25/06 Elena Irwin -- Economic Update 21
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
1/25/06 Elena Irwin -- Economic Update 22
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)
??
1/25/06 Elena Irwin -- Economic Update 23
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
??
1/25/06 Elena Irwin -- Economic Update 24
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
1/25/06 Elena Irwin -- Economic Update 25
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)
1/25/06 Elena Irwin -- Economic Update 26
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)
??
1/25/06 Elena Irwin -- Economic Update 27
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
1/25/06 Elena Irwin -- Economic Update 28
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
1/25/06 Elena Irwin -- Economic Update 29
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)
1/25/06 Elena Irwin -- Economic Update 30
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
1/25/06 Elena Irwin -- Economic Update 31
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
??
1/25/06 Elena Irwin -- Economic Update 32
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
??
1/25/06 Elena Irwin -- Economic Update 33
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
??
1/25/06 Elena Irwin -- Economic Update 34
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
1/25/06 Elena Irwin -- Economic Update 35
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)?
1/25/06 Elena Irwin -- Economic Update 36
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
1/25/06 Elena Irwin -- Economic Update 37
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
1/25/06 Elena Irwin -- Economic Update 38
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
1/25/06 Elena Irwin -- Economic Update 39
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.
1/25/06 Elena Irwin -- Economic Update 40
Department of Ag., Environmental & Development Economics
Elena Irwin, Associate [email protected]
http://aede.osu.edu/people/Irwin.78