Is Wal-Mart Good for the American Working Class?

The Low Prices Are Good News
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June 26 2006 3:18 PM

Is Wal-Mart Good for the American Working Class?

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Barbara,

Although we've never met, I'm tempted to call you "Barb," the name you were given in your weeks as a Wal-Mart employee. I myself have never worked at Wal-Mart, and I can only remember shopping there once. In fact, I instinctively recoil at the big-box shopping centers spreading their uniformity across the American landscape. But I try hard not to let my personal and somewhat elitist shopping inclinations get in the way of an appraisal of Wal-Mart's positive role in America's economy and society. (For my full appraisal, see this paper I did for a panel at the Center for American Progress.)

Wal-Mart. Click image to expand.
Wal-Mart

Are you as surprised as I am by how quickly Wal-Mart's critics move past the issue of low prices? You will hear comments like, "Yes, Wal-Mart may have somewhat low prices, but let's talk about its impact on workers, the environment, trade with China, etc." But given just how important these low prices are to the hundreds of millions of Americans that shop there, I hope I can beg your indulgence to linger on them for a few moments.

A range of studies has found that Wal-Mart's prices are 8 percent to 39 percent below the prices of its competitors. The single most careful economic study, co-authored by the well-respected MIT economist Jerry Hausman, found that grocery sales by Wal-Mart and other big-box stores made consumers better off to the tune of 25 percent of food consumption. That doesn't mean much for those of us in the top fifth of the income distribution—we spend only about 3.5 percent of our income on food at home and, at least in my case, most of that shopping is done at high-priced supermarkets like Whole Foods. But that's a huge savings for households in the bottom quintile, which, on average, spend 26 percent of their income on food. In fact, it is equivalent to a 6.5 percent boost in household income—unless the family lives in New York City or one of the other places that have successfully kept Wal-Mart and its ilk away.

Where do these low prices come from? Paul Krugman, writing back in 1993, provides an answer: "The most significant American business success story of the late 20th century may well be Wal-Mart, which has applied extensive computerization and a home-grown version of Japan's 'just in time' inventory methods to revolutionize retailing." Many economists didn't expect the service sector to contribute much to productivity. Many non-economists still have a hard time believing it has. But Harvard economist Ken Rogoff has the numbers, and they are mind boggling:

[T]ogether with a few sister "big box" stores (Target, Best Buy, and Home Depot), Wal-Mart accounts for roughly 50% of America's much vaunted productivity growth edge over Europe during the last decade. Fifty percent! Similar advances in wholesaling supply chains account for another 25%! The notion that Americans have gotten better at everything while other rich countries have stood still is thus wildly misleading. The US productivity miracle and the emergence of Wal-Mart-style retailing are virtually synonymous.

OK, enough indulging. Maybe you're ready to grant my point that Wal-Mart's low prices are great for the 298 million Americans who don't work there. But what about the 1.3 million Americans who do work for Wal-Mart? Here the evidence is murkier, in part because Wal-Mart refuses to release the data on its wages and benefits that could clear up a number of questions. What we do know is that its wages and benefits are about average for the retail sector—which is to say, not so great. It is harder to quantify other aspects of the job, like the quality of the work, the number of breaks, the prospects for advancement. You should let me know how you think it compares.

Studies have reached conflicting conclusions about the impact of Wal-Mart on local labor markets, with some finding that it creates more jobs than it displaces and others finding that it reduces jobs and nominal wages. Personally, I don't put a huge amount of stock in any of these findings because I believe that Ben Bernanke and the Federal Reserve decide the total number of jobs nationwide. If anything, the greater competition and productivity growth associated with the growth of Wal-Mart may have played a role in allowing the Federal Reserve to tolerate the high level of job creation in the 1990s.

But I understand why progressives are so upset about low wages and inadequate benefits. I am also upset by the rise of inequality and the relatively slow economic progress that the bottom 80 percent of Americans have made over the last several decades. I just think Wal-Mart is the wrong place to put the blame or to expect the solution. But I'll postpone that discussion for another day.

Best,
Jason

Jason Furman is a senior fellow and director of the Hamilton Project at the Brookings Institution.