Economists are starting to take a closer look at the effects of Walmart on the economy, and what they are finding may surprise you.
This post originally appeared at Occupy Democrats
By Salvatore Aversa
As Walmart continues its push against the Washington DC City Council, economists are starting to look at the effects of Walmart on the economy. The bill that the D.C. Council is hoping to have Mayor Vincent Gray sign would require big box stores, those that have over 75,0000 sq. feet and profits of over $1 billion annually, to pay a livable wage of $12.50 an hour. Mayor Gray has not received the bill yet, but has stated he is leaning towards a veto. Council Chairman Phil Mendelson has since delayed sending the bill to the Mayor, hoping he can rally support that would secure a veto-proof majority.
The bill is getting criticism from the usual suspects, Walmart and Republicans. However, now some “Liberals” are getting in on the action. Slate.com business and economics Matthew Yglesias argued the bill would be “a serious misstep” because it would kill “job opportunities.” He later walked back those statements, saying “…I’d rather have better stores. I used to care about this quite a lot personally when I lived near the location of where one of the new Walmart’s is being built.”
Mr. Yglesias argument, that if Walmart stays out, so does jobs, seems to be the common theme. Walmart is claiming that it would bring employment to a city where rampant unemployment is already a problem. The D.C. unemployment level is at 8.9 percent, as of June 2013. That is 1.1 percent higher than the national average.
However, when you start to look at the numbers, Walmart hurts job growth, rather than help it. To understand why, you must look at Walmart on a local level and then a national level.
When Walmart comes in to a neighborhood, they often look at surrounding businesses. This is not unusual for a business to do. They want to understand their competition, and find out where the best place to build would be. However, because of Walmart’s size and power, they are able to create an advantage like other companies cannot compete with. When a Walmart opens in a community, mom and pop businesses are hurt the most.
Take where I went to college. Edinboro, Pennsylvania was like any other college community. There was the campus, and a small community surrounding it. Mom and pop shops ruled the town. You could buy clothes at one store, rent a movie from another, and grab a bit to eat or groceries from yet another. Sure, it was not a one-stop-shop. But the money stayed in the community. When Walmart decided to open its doors, as they do around all universities, they located it approximately 3 miles out of town, off of I-79. It was not located walking distance from the campus, but the effects were profound. Suddenly, the mom and pop stores started to close their doors. Driving through town began to look like a ghost town. The community had died. The local stores just could not compete with the convenience and prices of Walmart. For what it was worth, I still supported the local businesses. Unless it was absolutely necessary, I avoided Walmart like the plague that it was to Edinboro, PA.
This story is the same across the country. The problem is, Walmart does not create as many jobs as it destroys. A peer-reviewed study by economist David Neumark, who works at the University of California at Irvine, entitled The Effects of Wal-Mart On Local Labor Markets found just that. To be clear, Mr. Neumark is hardly what one would consider a Liberal. In 2009, he wrote an op-ed entitled Delay The Minimum-Wage Hike arguing that the minimum wage should remain low, despite increased wealthy disparity.
Earlier studies did not adequately deal with selection bias: i.e., the problem that when and where Walmart chooses to open new stores is not random, but tends to be correlated with other variables. Those confounding variables make it difficult to determine whether local employment outcomes are causally related to Walmart‘s entry, or to something else. I’ll skip the technical details, but suffice it to say Neumark and his co-authors devised a sophisticated methodology that accounts for the selection bias. Using data from over 3,000 counties, their results show that when a Walmart store opens, it kills an average 150 retail jobs at the county level, with each Walmart worker replacing about 1.4 retail workers. These results are robust under a variety of models and tests.
A 2008 peer-reviewed study out of Maryland also looked at the same subject. They found that Walmart significantly reduces retail employment, to the number of 414 jobs.
A 2009 study entitled The Impact of an Urban Wal-Mart Store on Area Businesses: An Evaluation of One Chicago Neighborhood’s Experience found that the opening of Walmart’s in Chicago result in “a wash” of job gains to job losses. “There is no evidence that Wal-Mart sparked any significant net growth in economic activity or employment in the area.”
Though these studies lay out the groundwork for how Walmart affects jobs in communities, the true destructive power of Walmart is felt when it comes to manufacturing. Walmart is a very powerful company, both in terms of revenue and size. Walmart is also the largest employer in the world. Because of their power, their business is able to make and break manufactures.
When Walmart decides to do business with a company, they have the power to run the shots. Because of Walmart’s drive for lower prices, they push their manufactures to cut costs of labor. This has forced some companies put out more products, faster while cutting labor to bare-bones. Others, like Rubbermaid, have been forced to take their business over seas. And others, like Vlasic, have been forced in to bankruptcy. This is the cost of doing business with the biggest retailer in the world. And with mom and pop stores shrinking to a smaller and smaller share of the market, many have no choice but to keep their business with Walmart.
While pro-Walmart fans continue to tout their “job creation,” they forget to mention the amount of companies that have had to close their doors. This is the story that is behind the story.
If Walmart used these cost cutting methods to provide a better life for their employees, there would be justification for their cut-throat business model. However, they continue to pay low wages. The May 2013 report The Low-Wage Drag On Our Economy: Wal-Mart’s Low Wage and Their Effect On Taxpayers and Economic Growth prepared by the Democratic staff of the U.S. House Committee on Education and the Workforce. They have determined that each Walmart store costs the Government approximately $1.7 million. This covers food stamps, health care and other government subsidies programs that employees need to use just to make it from week to week. Further, they fight any effort by local governments that would require a livable wage by $1 billion+ companies.
As has been stated previously, one company is doing just that. Costco has taken an approach to employee treatment that more corporations could take a lesson from. Costco gives their employees full benefits. Employees only have to pay 10% of their benefits cost, while Costco picks up 90%. They give their employees a bi-yearly “extra paycheck” of $2,000. When everything is added up, the lowest paid employee at Costco is paid $35,000 a year. CEO W. Craig Jelinek takes home $350,000 a year, just 10 times what the lowest paid employee makes. While $350,000 is nothing to scoff at, for a multi-billion dollar company, it puts Mr. Jelinek in the lowest 10% of CEO incomes.
Many of Walmart’s defenders say that this is how capitalism is. We started out farming. When tractors and other large machinery came about, people left farming and went to the city for better jobs, and so on. They say that Walmart is just bringing us to the next stage of our society. One writer for Forbes wrote a story entitled WalMart Destroys Jobs, Yes, But The Benefits Go To The Consumers, Not The Top.
And, in fact, this evolution has led Americans to work harder and more efficient than ever. Between the years 1973 and 2011, productivity in the United States has increased 80 percent. The problem is, companies like Walmart have created a race to the bottom for its workers. Pay has increased just 11 percent, and when adjusted for inflation, has actually dropped to the lowest level since before 1968.
The other problem is, we are not moving to that next phase of our economy. And Walmart is ensuring that the “next phase” is in China or some other country that has no labor laws.
And on Walmart’s side, is the Republican Party. While President Obama recently renewed his push to give tax breaks to companies that bring their jobs back to the United States, Republicans have said no in the past to such a plan. That is right. The Republican Party said “No” to a tax break to corporations if they bring their jobs back home, called “insourcing”. Then, they have the gall to ask President Obama “Where are the jobs?” It is easy to blame President Obama for the fact that more jobs have not been created faster. However, what the President says does not become law. It has to pass Congress before it gets his signature. The President has faced unprecedented obstruction, to even the most common sense policies. Providing tax breaks to companies that bring their jobs back home should be a no brainer. Unfortunately, in the atmosphere in Washington, even this faces Republican barriers. Which is why the idea of insourcing, something President Obama ran on in 2008, is still not law.
We operate on a world market. The manufacturing jobs that have left the United States likely will not come back. We must look forward to our next innovation. We need our next industrial revolution. We need our next gold rush. In the mean time, we also need corporations to raise the bar for what they pay their employees. Costco has proven that it is possible to treat employees well, have a low price and still be wildly successful.
Employees should be compensated based on, not only their personal performance, but also the companies performance. And wages should be tied in to productivity. The Walmart model has been catastrophic to the economy. When the middle class has money in their pockets, the spend it. That will lead to a more robust market, in which consumers and companies will thrive. In the mean time, if it takes local governments, like the DC City Council to force their hands a bit, so be it.