The Wal-Mart debate
A false choice between prices and wages
By Jared Bernstein and L. Josh Bivens
The Economic Policy Ins uteThe benefits and costs of Wal-Mart's expansion across the United States have been hotly debated. Critics of the retailer have do ented the extent to which Wal-Mart uses its market power to undermine its workers' compensation, squeezing suppliers and hurting local economies along the way. Supporters of Wal-Mart counter that the lower prices offered by the company more than compensate U.S. consumers for any depressing effect the company's expansion has on wages.
In a more technical Working Paper, we assess many of the competing claims about Wal-Mart's impact on prices and wages.1 We note, however, that this is a very narrow question and argue that the debate over Wal-Mart's economic impact is plagued by false dichotomies. The more important question for the future isn't whether Wal-Mart is a force for good or evil in the American economy, but whether the economic benefits provided by Wal-Mart (and other big-box retailers) can be preserved even if their labor compensation is dramatically improved. To this end, our research finds that:
* A study by the consulting firm Global Insight, which concludes that Wal-Mart's expansion has saved U.S. consumers $263 billion, is deeply flawed. The statistical analysis generating this widely quoted figure fails the most rudimentary sensitivity checks used in good economic analysis, rendering its conclusions unreliable.
* A robust set of research findings shows that Wal-Mart's entry into local labor markets reduces the pay of workers in competing stores. This effect is largest in the South, where Wal-Mart expansion has been greatest.
* Wal-Mart could raise wages and benefits significantly without raising prices, yet still earn a healthy profit. For example, while still maintaining a profit margin almost 50% greater than Costco, a key compe or, Wal-Mart could have raised the wages and benefits of each of its non-supervisory employees in 2005 by more than $2,000 without raising prices a penny.
"Everyday low prices?" Not that low
Wal-Mart recently convened a seminar to discuss academic studies that examined its impact on local (and the national) economies. Wal-Mart also commissioned a study from the consulting firm Global Insight (GI). Of all the studies done on this topic, the GI report found by far the largest positive impacts of Wal-Mart on the economy, and defenders of the company cite GI's results most often. We find, however, that GI's estimate of Wal-Mart's dampening effect on inflation is indefensibly large and is contradicted by more careful research reviewed in the EPI Working Paper, Wrestling With Wal-Mart: Tradeoffs Between Profits, Prices, and Wages. While the statistical fragility of the GI results requires long explication, there is a more fundamental problem with GI's results—they are internally inconsistent.
GI reports that Wal-Mart lowered overall prices (as measured by the overall consumer price index (CPI)) by a total of 3.1% from 1985 to 2004. They also report that Wal-Mart has lowered commodity (goods) prices by 4.2% over this period. However, in an unrelated portion of the text, GI correctly notes that "consumer prices for services are dominated by rents, imputed rents, utilities, medical services, and transportation—all areas outside of Wal-Mart's product offerings."
The GI report bases its findings on the overall CPI. Yet fully 60% of the items in the CPI are services, not commodities.2 Thus, if the impact of Wal-Mart on service inflation is zero, then the GI numbers on Wal-Mart's impact on prices are inconsistent. GI's finding that Wal-Mart's expansion led to a 4.2% decline in goods prices translates to only a 1.7% decline (not the reported 3.1%) in overall prices (4.2 * 0.4 = 1.7). In short, the two top-line findings of the GI report (Wal-Mart's effect on overall prices and goods prices) are internally inconsistent with each other.
Overall, we find that the Global Insight research methodology is fraught with problems. Some of the results it yields—such as that Wal-Mart lowers housing rents and that its greatest effect on food prices occurred before its expansion—make no sense. Our analysis argues against using any estimate of consumer savings from Wal-Mart's expansion that is derived from the Global Insight study.
Can low prices make up for low wages?
A key concern in the debate over the economic consequences of Wal-Mart's expansion is the effect this has on workers' wages. Most would grant that prices are lower at Wal-Mart than in many competing stores (although the magnitude of this price difference is often less than implied by company defenders). A critical question, however, is whether the benefits of lower prices are implicitly clawed back when Wal-Mart drives down wages not just of its own workers, but throughout the retail sector as a whole.
Dube (2005) and Neumark (2005), in papers reviewed in Wrestling With Wal-Mart, present strong evidence that Wal-Mart's expansion has driven down earnings for workers not just in competing retailers, but across stores throughout the region of Wal-Mart expansion.
There is another point to be raised here about the implicit horse-race between prices and wages that underlines the Wal-Mart debate. Essentially, the defenders of Wal-Mart argue that the price-depressing effects of Wal-Mart outrun the wage-depressing effect, leading to rising purchasing power for American workers. However, the prices that are reduced through Wal-Mart's expansion cons ute an ever-shrinking share of American families' expenditures.
Wal-Mart essentially gives people the ability to buy food, apparel, household goods, and furniture at reduced prices. As seen in Figure A, the share of expenditure in each of these categories has shrunk over time. By contrast, the expenditure shares on health care, housing, and transportation for families have gone up over time. These cannot be bought at Wal-Mart, yet they cons ute an ever-growing share of American household expenditures. In short, the benefits from the same price effect in Wal-Mart's product areas are shrinking over time. The real pressures on family income are coming from items that can't be bought at Wal-Mart. These products and services can, however, be bought with higher wages.
Figure A: Shares of consumer expenditures on goods that can be bought at Wal-Mart
The idea that encouraging Wal-Mart's expansion cons utes a progressive endeavor that will provide big benefits to poor Americans in the future is misguided; truly progressive policy should focus on the big-ticket items in most families' budget—health care, housing, and education.
Do higher wages have to mean higher prices?
Other issues make the narrow "wages vs. prices" debate described before particularly uninformative. One side of the debate assumes that the cost of higher compensation to employees at Wal-Mart is higher prices to consumers. This isn't necessarily the case—some (or all) of the costs of increased compensation could come from reduced profit margins, raising the living standards of Wal-Mart employees while preserving the benefits from low prices.
To get a feel for how much of a wage increase could be financed out of reduced profit shares, one can imagine Wal-Mart's profit margins falling back down to their 1997 levels, which would also cut half of the difference between their margins and a key Wal-Mart compe or, Costco (which posted a profit margin of 2.0% in 2005). Reducing the profit margin by this much would give Wal-Mart $2.3 billion to plough into improved worker compensation without the need to raise prices. In Wrestling With Wal-Mart, we calculate that this would translate into just under $2,100 per non-managerial employee. Simply returning to its 1997 net profit margins, Wal-Mart could give its non-supervisory workers 13% pay increases without raising prices, while maintaining higher profit margins than a main compe or.
Wal-Mart could definitely raise compensation for its workers and still have lower prices than its compe ors. Note that labor costs for its non-supervisory staff account for less than 7% of its total sales. If Wal-Mart's price advantage relative to its compe ors is even in the neighborhood of what its defenders claim, consumers would still find Wal-Mart's prices lower. To believe otherwise is to believe that Wal-Mart's price advantage comes completely from substandard worker pay and not through any cost efficiencies.
Is this any way to run an economy?
A particularly contentious issue regarding Wal-Mart's effect on the American economy involves its employees' use of publicly financed programs like Medicaid and food stamps. A recent internal Wal-Mart memo revealed, for example, that 46% of Wal-Mart workers' children are uninsured or on Medicaid. This compares to 29% for large retailers and 32% for all retailers. Critics of the company argue that this (disproportional) use of Medicaid is an implicit subsidy from taxpayers to a rich corporation. Supporters of the company counter that the lion's share of these subsidies benefit the low-wage workers at Wal-Mart, and this is exactly the point of them.
On this point, both sides are right: subsidies to low-wage workers accrue to both the company they work for and the workers themselves, with the lion's share of the subsidies going to the workers.
This, however, does not imply that it is inappropriate or economically harmful to either Wal-Mart consumers or employees to pressure the firm into increasing its compensation package, particularly with regards to health care. Part of this debate comes down to whether policy makers should be more concerned about primary or secondary income distributions. In other words, is it better to intervene directly and require employers to pay a living wage or to allow whatever compensation employers choose to pay but supplement it with government supports? The primary income distribution is that which holds before the effects of taxes and government transfer payments (i.e., Social Security payments, unemployment compensation, disability income, etc.) are factored in. The secondary distribution includes the effect of all taxes and transfers.
When it comes to offsetting the damage to the wage structure we do ent above, many policy analysts seem to believe that the sole intervention point is the secondary distribution. That is, they are quick to accept the primary distribution as an outcome that cannot and/or should not be altered. In their view, if the market is generating "too much" inequality, the government can offset this through redistributive fiscal policy. Many defenders of Wal-Mart's current business model advocate expanding the Earned Income Tax Credit (EITC) as the "correct" way to help Wal-Mart's workers.
While there is some merit in this view, this strategy makes U.S. workers and their households too reliant on the single instrument of fiscal redistribution—the expansion of transfer programs. EITC expansion, for example, is clearly a viable policy remedy for lost earnings, but there are reasons not to rely solely on this strategy.
First, it relies on tax increases. We cannot ask American workers to depend exclusively on taxpayers and politicians continually ratcheting up their willingness to offset the degradation of the wage structure induced by Wal-Mart, not to mention globalization, the loss of manufacturing employment, union power, and so on.
Second, the federal budget is already constrained by the current and, more importantly, the projected gap between future federal outlays and revenues under current policies. According to the Congressional Budget Office, under plausible assumptions, that gap is expected to grow much wider in coming decades, largely due to the pressure of health care price increases and current tax policies.3 This does not mean that potentially useful policies like expanding the EITC should be off the table, but it does mean that any spending program outside of defense and homeland security faces a very steep challenge for at least the medium term. Wal-Mart defenders who argue that workers harmed by its practices should rely on government transfers to make ends meet are essentially telling those workers to get taxes raised if they want any help, and to struggle in the meantime.
Recent budget developments indicate that no help is on its way. While Wal-Mart supporters argue that it's fine for Medicaid to pick up the health coverage of uninsured workers, the president has proposed $5 billion in cuts to Medicaid over the next five years and has proposed an additional $5 billion in cuts to other programs for low-income people in his most recent budget. Further, in February of this year, Congress passed a budget reconciliation that included a $27 billion cut in Medicaid over 10 years. In other words, the tide is pushing hard against expanding these redistributive measures, and may be for some time to come.
Conclusion
Wal-Mart does a lot right. It has expanded productivity by being more efficient and leaner than many other companies. Many of the benefits shoppers accrue from Wal-Mart's expansion could be preserved even if the retailer had to meet the expectations of its critics regarding fair worker compensation. Defenders of the company too often set up false dichotomies such as low prices vs. high wages when in reality, better compensation for workers won't negate Wal-Mart's compe ive edge.
Another bit that also should be a concern, even to free-marketers:
Monopolistic power.
If compe ion is good for the economy, what happens when there is only ONE consumer of labor in most markets?
What happens to suppliers when ONE customer dictates terms?
As Wal-mart continues to grow, how big will it get? How big will it get before it actually HARMS the free market system?
I think it is rapidly approaching that point, if not passed it already.
I watched that 3 part episode on MSNBC about WalMart, if its good or bad for (basically) the world.
It didnt come to a conclusion per say, but I did. I dont set foot in a WalMart, I dont care if beer is $5 a case. Its on general principle now.
Ditto,
and I'm as pro-capitilism as they come.
Don't like Wal-Mart.
Don't like what it does to variety of goods/services in an area - and I hate the look of endless parking lot - also hate feeling like I'm pawn of marketin/sales scenarios CONSTANTLY as I wander its aisles, realizing just how absolutely screwy the placement of items is.
5 years ago I never heard of people boycotting Wal-Mart; now your's is a common phrase to heard uttered. The great thing about capitilism is that as the body of people grows who won't enter Wal-Mart grows; stores will come in to take care of us - catering to our sensibilities; it is inevitible.
Wal-Mart is trying to get into banking as well. The ABA and bankers in general are fighting it tooth and nail. There are laws that preclude retailers from being in banking.
Think about the small communities where Wal-Mart got their start. If they started a bank in such a community, likely the bank that was there to begin with would either sell out or close up. Wal-Mart as the major retailer in the town would not only have their huge buying power and strength behind them but their compe ors (those that are left) would have to come to them for banking reasons, checking accounts, loans, etc....
While that sounds all Snidley Whiplash like and all, the main thing Wal-Mart wants is control of the payment system. Wal-Mart does not like having to pay fees to MasterCard, Visa, etc..... Like everything else, they want to set the pricing on that and they can only get to that as a banking en ity.
For what it's worth, they have asked the Feds would they object to Wal-Mart buying Discover.....
The bright spot is that most small banks were consumed by the big boys years ago; a handfull of holdouts notwithstanding.
That is still going on today. Texas is a very hot market for out of state banks and they are paying 4 to 5 times book in some cases to get a target they want.
There are still small banks that are the only resource for places like Menard or Crystal City. Those are markets that the Citibanks and Chase's could care less about being in.
I would have thought that about Kerrville & Bandera, but that didn't stop them.
It's the WWII generation who started all of the small banks after the war (by and large) - if those bankers had heirs that wanted to be in the business they stayed in it; otherwise they sold out. (again, generalities).
Hopefully they have topped off and are heading south soon......
JULY 28, 2006
Europe
By Kate Norton
wal-mart's German Retreat
The U.S. price-cutting retailer made a series of bad moves and has now sold its stores to the compe ion. Was a lesson learned?
Want to know how not to do business in Germany? Just ask Wal-Mart. After nine years of trying to make a go of it, the Bentonville (Ark.)-based retailer said July 28 that it will sell its 85 stores to German rival Metro.
Wal-Mart (WMT) will pay dearly for its about-face, which comes amid declining market share at its Asda stores in Britain and follows its retreat from South Korea two months ago. The company is taking a $1 billion hit to quit the market, while a source familiar with the deal said Metro paid as much as $100 million less for the Wal-Mart stores than the value of the real estate, unsold merchandise, and other physical assets.
The retreat is hardly surprising given Wal-Mart's numerous missteps in Germany. Perhaps its most glaring was misjudging the German consumer and business culture. For instance, German Wal-Marts adopted the U.S. custom of bagging groceries, which many German consumers find distasteful because they tend not to like strangers handling their food.
OUTNUMBERED. It also imported its U.S.-style company ethic, which includes strongly discouraging interoffice romances. Many employees found the code intrusive. The company also had repeated clashes with unions. "Wal-Mart was not very humble when they went in," says Bryan Roberts, an analyst at Planet Retail, an industry research firm. "They wanted to impose their own culture."
Just as important was Wal-Mart's apparent underestimation of the compe ion and its miscalculation of the market. Wal-Mart may be the king of low prices in the U.S., but it was often undercut in Germany by local rivals such as Aldi and Lidl. One reason for that may have been that Wal-Mart never had enough stores in Germany to effectively compete. Aldi has some 4,000 stores, giving it a big advantage in logistics and advertising.
CHANGE OF PLANS. Wal-Mart also spent many years renovating the few stores it did have and adjusting its business model to Germany, though the company declined to say how much it spent. In the end, to work efficiently, Wal-Mart would have had to invest massively to acquire more sites.
In the end, it chose to pull out. Wal-Mart, which has 2,700 stores in 14 countries outside the U.S., and global sales of $312 billion last year, says it now plans to concentrate on markets such as Latin America, Asia, and new markets where it can get a higher return.
Has the retailer learned from the German fiasco? Analysts expect to see it taking a more arm's length approach to management of international operations in the future and to be increasingly open to working with local partners. That should help Wal-Mart better tailor its stores to local tastes and avoid stocking goods that are common in the U.S., but with little appeal to shoppers outside the U.S.
Wal-Mart's not about to beat a retreat on its global ambitions. But its success means it has got to be more careful about how it addresses cultural differences—across the board.
Why does everyone hate on Wal-Mart? They are simply capitalizing on American's excessive needs to have everything at a low price.
I don't think the original article hates on Walmart, it just says that Walmart needs to learn to balance profits, wages for employees, and low prices. Nothing wrong with that, I think everyone would rather that employees who are working hard should earn a living-wage rather than having to collect all sorts of benefits from the government.
Not saying the article was hating on Wally World but you often hear people say "Walmart is bad..they kill compe ion...put Mom & Pop stores out of business." Its human nature, people want to buy stuff and they want it at the lowest possible cost.
As far as wages go, sure, people should get paid a living-wage but providing health benefits to the Craig the stocker and Marge the People Greeter isn't going to happen. Walmart is a monster company but the employees (sans management) in no way should receive health benefits. The shear cost of providing health care to everyone in the company would surely drive up cost of goods sold and thats gonna piss of all the millions and millions of people that shop there.
When does a big company become to big…??? = Wal mart
It is becoming a virtual monopoly and it dictates to it’s suppliers (all of them), and turns many rural buisiness communities into ghost towns……
Unions??? Not a big union guy but they close stores in
Canada because the employees wanted a union..........
And yet allow a union in fuxing communist China WTF???
I hardly ever shopped there and have not shopped there in seven or eight years nor will I ever shop there again..... I owned stock in WMT and sold it long ago.......
In my community a wal-mart superstore was denied as it has been denied in many communities.........
If you want further information you should contact hillary clinton. She was on the walmart board............
Walmart is a means to an end. It's going to be the thing to finally push Americans to revolution. It could have happened in the early 1900's if not for concessions in labor rights and wages. Then the socialist programs after the great depression also eased the pressure.
That's the best way to control it, but it's why unbridled capitalism doesn't work. Many Americans would buy beer from NAMBLA if it were $5 a case.
Yup. Capitalism needs refs the same way professional sports do.
Without rules and penalties, you don't get anything remotely resembling fair.
I agree 100% with Random Guy and Obstructed..... Walmart is far far out of control and it scares me where this is heading.
there needs to be caps and controls in place. No one group - be it political party or company or non-profit - should have that kind of power.
I havn't stepped foot in Wal-mart for 4 months. My aim is to never go there again.
"refs"
"there needs to be caps and controls in place"
Whatever happened to infinite trust in the market and businesses to fix all problems without government intervention?
ins itional and market self-regulation doesn't work? no ! (It NEVER works.)
Do you think a Repub controlled WH and Congress with Repug-packed SC will ever introduce rules regulaitng business or enforce rules against ins utions that protecting individuals? or enforce aggressively the rules and regulations that are in place?
Do you think an Ashcroft or Gonzalez would have ever taken MS to anti-trust court?
Remember how that politicized judge Kottar-Kotelly handed her wrist-slap anti-trust judgement against MS on 1 NOV 2002, the Friday before the Congressional mid-terms, giving business and business-protective Repugs good news for the last weekend of campaigning. Co-incidence? very probably not.
I hate prefacing posts, but in this case I have to.
I dont agree or disagree with a communities rights to either allow or disallow any company from setting up shop in their area. To me, its a slippery slope. I cant blame people for not wanting a sex-toy shop in their small community, but that sets a precedent in some small way. Now, if the community doesnt like Hollywood movies, they could outlaw that as well. Too weird for me, but either way...
Here in Michigan, there is a racial divide like I have never seen anywhere else or even heard of. From Telegraph to Chalmers, and 8 mile to West Outer Drive is an African-American Zone called Detroit. Literally, you can stand on any of the streets I just named and see a visual difference between one side of the road and the other. Its really....eerie.
Either way, City of Detroit: 80% black 20% misc....Suburban Detroit: 80% White 20% misc. It is a well-known fact that certain communities around Detroit do not take kindly to black people moving in. Its a fact, and their tactics work.
So, this racial tension that has existed since before I was ever born found an outlet in...none other than WalMart. Let me explain...
Southfield, MI. Whitest white-bread town you can think of. The city directly borders Detroit. WalMart, in all its economical genius, follows the money. Sorry, but in Michigan, nothing gets built in Detroit for a reason. WalMart wants to open a new SuperStore in Southfield. Sounds good right?
Nope. Not good at all. Not because WalMart is a borderline global monopoly, not because it will close down "mom & pop" shops in the area....no, no, no....because it will bring unwanted minorities into the predominantly white community.
Of course, that isnt what is actually said out loud, but its what they meant. This new WalMart would be in bus distance from Detroit, couple that with the fact that Detroit does not have a WalMart on the west side, the lowest prices anywhere, the black community would come in droves to shop there.
White people in Southfield didnt want anything to do with that. They cited reasons like crime rate, hooligans, etc. Already long story short, this whole fiasco became very big news in the area because it reflected the SouthEast Michigan tone that has existed since the Great White Flight of the early 1970s (all white people left Detroit...it has been a hole since).
Most businesses never even have to deal with this sort of hotbutton issue, yet WalMart was ambivalent to whooooole scenario.
In the end, I believe the WalMart was built. Money talks, bull walks...even for politicians in an election year.
Little article I just googled
Interesting site I guess, lots of agenda, but some of the health care facts are interesting
You end up paying that cost anyway, in numerous ways. Might as well be upfront about it and add it to the price of stuff. Maybe then we might get some REAL health care reform.
Not trying to derail the topic, but maybe the general public should research why a bottle of antibiotics costs $180 even though its made in batches of no less than 3 million.
Everyone gets stuck on how much healthcare costs, never asking why it costs so damn much. Experimental medication I am sure is expensive. Proven medication should not cost as much as it does.
Looking at what costs so much is pathetic. Medication is outrageous, but it isnt the main cost. Its the doctor visit. Since doctors dont charge you directly, they dont feel bad upping the cost.
Granted, insurance for a doctor is.....to put it mildly..... ing ridiculous, its this sort fo practice that artificially inflates the cost.
Why is everyone picking on Wal-Mart? My daughter works at Target (part-time) and she only makes $7.00 an hour. I work at HEB part-time and, even though I make $9.00 an hour, there's no way I could afford insurance.
I've worked for other companies where I've earned between $12 and $13 an hour and I still would not have been able to afford insurance for the whole family. Most family coverage is at least $500 a month. How much would Wal-Mart have to pay in wages in order for all their employees to be able to afford health care?
It's not the wages - it's the cost of healthcare! Health savings plans are so much better - just have coverage for catastrophic illness, but pay for office visits and other expenses out of the health savings account. Most people are pretty healthy and only visit the doctor a couple of times a year. Why pay thousand of dollars a year when your actual healthcare costs are only a few hundred?!
If a company came out and stated that their feduciary responsibility to the shareholders was secondary to their responsibilities to their customers, their employees and their community it would be interesting to see what happened to their stock.
That is Costco's philosophy, and their stock price suffers as a result.
Their stock is up 20 bucks a share in the last three years. Isn't that pretty good?
There are currently 1 users browsing this thread. (0 members and 1 guests)
Posting Permissions
Reply With Quote
