Monday, January 10, 2011

Wal-Mart and the Economy

I have been discussing some aspects of Wal-Mart that I view as negatives. We should be clear about the fact that Wal-Mart is not the only company that uses these methods; they have become standard throughout the retail industry. But Wal-Mart, due to its size, has an influence that other organizations cannot match. That should mean that, because of its size, it has an obligation to act in a socially responsible manner. I do not believe it has. Let us, for the moment, move away from the concept of social responsibility and focus on a more precise issue: Has Wal-Mart been good for the economy? And remember we are now using Wal-Mart as the representative of not only itself but also its imitators.

Wal-Mart pioneered some business practices that greatly increased the efficiency of large retail operations. No one argues that they did not contribute to a decrease in price for numerous goods. However, many of the business efficiencies came early in Wal-Mart’s lifetime. Its continual drive for ever lower prices means it has to wring costs out of its vendors. That can also be a good thing up to a point.

If one assumes they are smart enough to optimize their own production process, then vendors can lower costs by producing an inferior product, cutting jobs, lowering wages, or moving production to a lower cost market. Some combination of all four is usually the result. Note that every gain Wal-Mart makes is at someone else’s expense. So every time Wal-Mart delivers a lower cost on an item the buyer benefits, but somewhere someone has suffered a consequence. The question is: does the positive of lower prices outweigh the negatives of fewer jobs, lower wages and inferior products.

One can divide the question of impact into a local and a national perspective. Very few studies are available to reference. The local issues have already been addressed in an earlier post so they will be summarized briefly.

When Wal-Mart enters a community it creates a few hundred low paying jobs. At the same time it eliminates almost an equal number of jobs at other businesses. Studies indicate that Wal-Mart’s business comes mainly at the expense of other retailers. One might expect that the result is a general decrease in income as one exchanges the existing jobs for the low paying ones provided by Wal-Mart. One might also expect increased local costs to cover the food stamps and Medicaid that must be provided for Wal-Mart employees. One study indicated that the presence of a Wal-Mart store in a county was likely to increase the poverty level in that county relative to one that did not have a store. I would call that a net negative.

One might also argue that the poorest would benefit the most from Wal-Mart’s low prices and that would be a good thing even if the location as a whole did not benefit. That argument is weakened by the fact that only 15-20% of a family’s expenses are related to items that can be purchased at Wal-Mart. Things like housing, healthcare and education seem to be much more important. It is hard to argue that Wal-Mart and its methods have contributed to lower costs in those areas. If one really wanted to help poor people, the best way would be to increase their income.

One could argue that what doesn’t work locally, will not work nationally, but it is more informative to take another approach. Let’s begin a discussion of the national economy by considering this chart of productivity versus median family income over time.

Note that productivity tracks median family income until about the mid-70s. At that point competition from foreign firms had become significant and automation was beginning to drive down the need for skilled manufacturing jobs. The jobs that would be created in the future would be lower paid and lower skilled. One should also note that this period also corresponded to the Wal-Martization of the retail economy which would have also contributed to driving down wages. There is another inflection point in the curve around the late-90s. This corresponded to the explosion of Chinese imports. By this time Wal-Mart had begun dealing directly with Chinese factories to produce their merchandise. About 75% of what was sold was obtained from China in this way. Wal-Mart was not alone in following this path, but they were the major player. Meanwhile, domestic manufacturing jobs were in freefall. Is it any wonder that incomes actually began to fall?

It was at this point that it became clear that there was something terribly wrong with the economy. One has to create about 125,000 jobs per month or 1.5 million jobs per year to keep up with population growth. Over the eight years 2000-2008 the economy produced less than 4 million. That means we fell behind about 8 million jobs over that period. This was not just a period of slow growth. Something was fundamentally wrong

What happened? Robert Reich would explain this by saying that the real income of the majority of citizens had not increased enough to sustain the economy. You can’t spend what you don’t have. Clearly, if you drive wages down far enough the economy will collapse due to lack of purchasing power.

Some people will argue that decreasing wages will ultimately create more jobs as labor becomes cheaper. That assumes that there exists a classical labor market, but there is no such thing. Employers need a certain number of people and they will pay as little as they can get away with to acquire them. As long as there is a steady supply of the unemployed, wages will stay low, or fall, and contribute little to new job creation.

The only answer would seem to be to raise wages, the minimum wage in particular. Raising the minimum wage over a several year period to something perhaps 50% higher than currently planned would have the effect of raising all the boats, but the lower ones would get raised further. Prices would go up, but for the poor, not as much as income. Everyone else should be able to deal with it. Employers would have to be long-term clever instead of short-term clever in order to remain competitive in international markets. Some jobs will disappear, but overall spending will increase in balance. A number of nations have decided to enforce high employee costs on their industries and they seem to do just fine. Germany and the Scandinavian countries come to mind.

The conclusion: the notion that you can create some good by continually driving wages down in order to drive down costs is just plain wrong.

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