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Wednesday, August 03, 2005

Prices, Real Wages, Wal-Mart & GE

Interesting Op-Ed in today's NYT by Pankaj Ghemawat and Ken A. Mark, called "The Price Is Right".

The authors argue that, contrary to the bad press it receives, Wal-Mart has actually greatly benefited low-income communities, especially rural ones. The argument is straightforward: yes, the authors implicitly conced, WM may (they say "supposedly") have the effect of
securing subsidies, destroying jobs in competing stores, driving employees toward public welfare systems and creating urban sprawl.
G-M cite price price reductions of 8% in rural areas and 5% in urban ones and argue that the gains that WM produces far outweigh these costs: their calculation is that
Wal-Mart saves its consumers something like $16 billion a year. And because Wal-Mart's presence forces the store's competitors to charge lower prices as well, this $16 billion figure understates the company's real impact by at least half.
They also cite a McKinsey Global Institute study, writing that
Robert Solow, a Nobel laureate in economics and an adviser on the study, noted that the most important factor in the growth of productivity was Wal-Mart. And because the study measured productivity per man hour rather than per payroll dollar, low hourly wages cannot explain the increase.
Lastly, G-M argue that even seemingly modest wage increases -- they use $2 per hour -- would "wipe out" WM's profits unless WM raised its prices, which they predict it would. G-M's conclusion is that
the debate around Wal-Mart isn't really about a Marxist conflict between capital and labor. Instead, it is a conflict pitting consumers and efficiency-oriented intermediaries like Wal-Mart against a combination of labor unions, traditional retailers and community groups.
There's a lot to talk about here.

I'm not a knee-jerk opponent of Wal-Marts, but I also think one should avoid wearing rosy glasses when thinking about these issues.

  1. The most basic point that seems to get lost in these debates is that, unlike most employers, and unlike most retailers, WM is big enough to have potentially general equilibrium effects on both consumer prices and wages. For nontechnical readers, what I'm talking about is the fact that in a competitive economy, most firms are small enough that their price-setting decisions have small or zero effects on the level of prices -- when you have lots of competitors, you tend to be able to charge only "what the market will bear". WM has become big enough that it can probably move prices, up or down, to a greater extent. In other words, WM has some ability to determine what the market will bear for its competitors.

    Now, economists measure standard of living roughly as how much stuff (goods and/or services) households are able to afford. Few people seriously doubt that WM's presence reduces prices of the goods it sells in the markets where it operates. At the same time, WM's wages are widely believed to be low, and reduced labor costs are thought to be a key to its profitability and ability to keep prices so low (as G-M's claim about wiping out profits clearly underscores).

    A common -- if simplifying -- way to think about real wages is as the ratio of the hourly wage to some price index. (Think of a useful price index as an average of what all the different things you buy will cost, once we've accounted for the share of your budget for which each thing accounts.)

    Now, if WM lowers both the price index and the wage, then its impact on standards of living is ambiguous. It could be positive, even for low-wage workers, if goods prices are reduced more than wages are (note that you need to include the impact of WM on other firms' benefit packages, too). On the other hand, it will be negative if wages fall more than prices when WM moves in. This strikes me as a very interesting economic question to resolve -- one that someone could probably get a whole labor economics dissertation out of it if the data are available (which they may or may not be).

    The frustrating thing in debates I've heard about WM is that people tend to say "WM lowers prices" and then others tend to say "WM lowers wages", as if these statements are somehow mutually exclusive. There's no way to assess WM's impacts on worker-consumers without addressing both questions.

    If you don't believe my point, then consider this part from G-M's article:
    Wal-Mart's customers tend to be the Americans who need the most help. Our research shows that Wal-Mart operates two-and-a-half times as much selling space per inhabitant in the poorest third of states as in the richest third. And within that poorest third of states, 80 percent of Wal-Mart's square footage is in the 25 percent of ZIP codes with the greatest number of poor households. Without the much-maligned Wal-Mart, the rural poor, in particular, would pay several percentage points more for the food and other merchandise that after housing is their largest household expense.
    Yes. And they might also receive several percentage points more in wages.

    Serious discussions of the impact of an economic phenomenon cannot concern only the costs, nor only the benefits.


  2. G-M's article says little about the social costs of losing downtowns, mom-and-pop stores, etc. I don't know how to measure these costs, and I don't even know if WM really destroys traditional outlets (though I'd be surprised if it doesn't): perhaps those stores would go under even without WM's entrance. But G-M don't even bother to discuss the possibility that "way of life" could be valuable to people. This isn't an easy issue, but it's hardly irrelevant, either.


  3. I wonder about G-M's statement that "because the study measured productivity per man hour rather than per payroll dollar, low hourly wages cannot explain the increase." It really depends on whether the measure here is gross productivity or net productivity. Gross-of-labor-costs productivity equals the value of total output divided by the total number of hours worked. Net productivity equals the value of total output minus the hourly wage bill, divided by the total number of hours worked. You can increase net productivity by reducing the wage bill, holding output constant. Which means that G-M's claim about productivity per "man hour" holds only if we are using gross productivity. Each measure of productivity has a role (gross-of-labor-costs prod tells us how much stuff we can make, however it is that our society divides it up, while net-of-labor-costs productivity tells us how profitable -- and thus how globally competitive -- private businesses in the US can be).
It's too bad that G-M do such a poor job of making their argument. I would have welcomed a serious attempt to address this issue.

Update: For all you non-economists, "GE" in the title of this post refers to general equilibrium, not the manufacturer....

9 Comments:

Blogger cornhuskerblogger said...

quality of life indeed seems a massive intangible for the authors to exclude. and, from a decidedly non-economist who truly views Math as a chartermember of the axis of evil, if price and wage trends both point down that seems equitable - to a point - from the lowwage earners point of view.

yes, they make slightly less but, lo, things cost slightly less too.

yet what of the catastrophic ripples that are sure to churn up this picture? if someone gets really sick, if some kind of trauma were to strike a community, what do the economic realities unleashed by WM allow for? after all, if daily wages and daily necessities are going down, that's no reason to expect other costs like healthcare, insurance, gasoline, are trending similarly.

I think the rural/urban dichotomy is interesting too. urbanites, by definition, have more consumer and employment choices readily at hand. Perhaps WM has further constrained the options of the rural folk?

just thoughts...

8/03/2005 1:36 PM  
Anonymous bu$h ate my baby said...

Jonah,

On point 2, if people value "way of life" wouldn't the free-market answer be to vote with ones feet? I know plenty of people, including my wife, who won't shop at Wal-Mart on principle. Though I always feel that it's people who want a free ride who probably object the most -- New Yorkers who want to be able to drive out to Vermont and see resplendent small towns not sullied by crass Wal-Marts.

A related question is, is it really mom and pops versus Wal-Marts? Weren't most mom and pops destroyed decades ago by malls, then supermalls? Wal-Mart versus mom and pop certainly has a better David v. Goliath ring than Wal-Mart versus Circuit City, but which is more apt? If you are talking truly rural, then no, probably not Circuit City. It's really an open question in my mind.

8/03/2005 2:48 PM  
Anonymous Anonymous said...

Another difference between "mom & pop" and Wall-Mart: The profits of the former go to mom & pop, while the profits of the latter go to Bentonville, the Walton heirs, and the stockholders. If mom & pop reduce wages while keeping all else constant, they reap the rewards, and will likely spend at least some locally. If Wal-Mart does likewise, essentially all of the money leaves the community.

This is a complex issue. One can find many more differences. Construction of a new Wal-Mart may emply local workers. A dead mom & pop store may depress a downtown. Wal-Mart's purchasing power can force efficiency at their suppliers, or drive some suppliers out of business.

My personal choice: I'll shop elsewhere.

8/03/2005 3:51 PM  
Blogger Jonah B. Gelbach said...

peter

on your first question: sure, vote aaway. but don't be surprised if your votes don't count. wm is BIG. individual people are not. the force of competitive theory -- and "if people vote with their feet then efficient things will happen is as grounded as a statement can be in competititve theory -- is much narrower in scope when there is serious market power involved.

on your second question: i'm sure that malls have had a neg impact on mom and pops. but you aren't actually arguing that there are no mom and pops left at all in cities or suburbs, are you? if you are, let me introduce you to my friend the yellow pages -- you guys might get along.

regarding whether there is a dif between walmart and cc from the perspective of momandpop: there is a big difference, esp when we are talking about walmart supercenters. cc doesn't sell sundries, it doesn't sell most hardware, etc. walmarts do. they succeed most likely b/c of economies of scope (selling multiple products), whereas cc and its ilk have much less scope.

so it's not *just* walmart vs. cc -- it's that, too.

as for rural areas, believe it or not some of us blue-staters care about labor-market and way-of-life outcomes for people wherever they live. even if conservatives (possibly not including you) like to suggest otherwise.

8/03/2005 4:45 PM  
Blogger Jonah B. Gelbach said...

peter --

one other point on your vote-with-your-feet question: regarding my post, who cares if you're right?

the g-m op-ed made a simple empirical claim: wal-mart is good for the poor, and by extension, everyone else. i suggested reasons to doubt that claim, at least as made by those authors.

the question of whether people should vote with their feet really concerns only the way-of-life issue, and even there it's irrelevant to the point i was making: that the nyt authors simply ignored some potentially important and large costs of wm's effects on local markets.

8/03/2005 4:51 PM  
Blogger strategery4 said...

On the way-of-life issue, isn't the limitation of relying solely on the market that there's a problem-of-the-commons here? Assuming folks want their "downtown"/Main Street to stay quaint -- i.e., everybody (or a clear majority) may want those stores to be viable -- but when they themselves go to shop they go to WalMart. If that's the case, the solution is probably for the town to subsidize the mom & pops in some way (through their democratically elected representatives).

On the lower prices versus lower wages issue, though, is there evidence that WalMart actually acts like a monopsonist? I mean, these are not exactly company towns where everybody works in the steel mill and has those job-specific skills. I have a much easier time seeing how WalMart puts downward pressure on prices than on wages.

8/05/2005 11:32 AM  
Blogger Jonah B. Gelbach said...

On the way-of-life issue, isn't the limitation of relying solely on the market that there's a problem-of-the-commons here?

Exactly.

On the lower prices versus lower wages issue, though, is there evidence that WalMart actually acts like a monopsonist?

Not that I know of. But given how big WalMart is (I think they employ sth like 1% of the entire US labor force, and that includes lots of people not in their labor market), I wouldn't be surprised if they did have some monopsony power. They don't need much to have a big effect. For example, suppose avg wages of people who work at WalMart are $10. Then 8% is just 80 cents/hour (and again, WM doesn't provide much in the way of benefits).

In any case, if WM doesn't have monopsony power, then given its size, it ought to increase employment and wages when it enters. I've never heard anyone -- even WM or its supporters -- suggest that WM raises wages.

This is partly why I think this would make a good research topic: clear testable hypotheses. (Actually, that would probably compel George W Bush to insist that we teach an alternate "theory" that wage profiles are intelligently designed.)

8/05/2005 12:03 PM  
Anonymous Anonymous said...

WALMART FACISTS

8/11/2005 1:12 PM  
Blogger Jonah B. Gelbach said...

does anyone know what a "facist" is?

8/11/2005 1:14 PM  

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