Friday, July 18, 2014

Should We Be Targeting Wal-Mart?

Wal-Mart is one of those topics that breed a special form of contempt in American politics. Wal-Mart is symbolic the kind of evil corporatism that only cares about the "bottom line" at the expense of its employees, as well as "Main Street America." Watch a documentary like "Wal-Mart: The High Cost of Low Price," and you'll get an idea of what I mean. An opinion piece in the New York Times a month ago that called for Wal-Mart to raise the wages of its low-skilled workers reignited the Wal-Mart debate. This brings us to the question du jour: Do Wal-Mart's low prices outweigh the costs or are we dealing with "unfettered capitalism" at its worst?

One of the fears is that Wal-Mart is going to use its economies of scale to destroy mom-and-pop business, and as a result, the world will be overrun by Wal-Marts. In spite of its large profits (although its profit margins are smaller in comparison) and its relative longevity, we have not been invaded by Wal-Mart. Even so, has Wal-Mart been a hindrance or a help?

Offhand, I can tell you there are some things I don't like about Wal-Mart. I don't like the fact that they receive about $7B in tax breaks or government subsidies per annum. I'm also not a fan that Wal-Mart doesn't oppose a federal minimum wage increase or is in favor of the employer mandate for Obamacare not because it's better for workers, but because minimum wage is an additional cost of labor that would screw over their competitors. I am also annoyed that Wal-Mart does not have transparency in the wages it pays its low-skilled workers because it would put an end to the question of whether the wages of the "typical Wal-Mart worker" is higher or lower than they should be. A study conducted by an economist, who is by no means Left-leaning, shows that Wal-Mart reduces county-level retail employment by 1.4 percent (Neumark et al., 2007). My counterargument to this study would be that the study does not take into consideration the employment effects on a macro level, but that's just me. Even so, I wonder about the net effects on employment, which when accounting for creative destruction, seem to be negligible (Dean and Sobel, 2008). There was also a study showing that Wal-Marts can dampen crime reduction (Wolfe and Pyrooz, 2013). And let's not forget that Wal-Mart has lower levels of customer satisfaction than other retail stores.

That being said, I can still recognize the benefits of Wal-Mart. One of the most concise studies ever done on Wal-Mart, a study that has been cited by the Chairman of President Obama's Council of Economic Advisors as a success, shows that consumers benefit from Wal-Mart's prices, especially on food prices (Hausman and Leibtag, 2005). Considering that food expenses make up 35 percent of pre-tax income for the lowest quintile, I hardly think that a Wal-Mart induced reduction in food costs of 20-25 percent is insignificant.

The wages of Wal-Mart workers is a point of contention because they are seen as exploitative, which is those on the Left ask whether Wal-Mart can raise its wages while still keeping it competitive edge. Part of the debate is determining whether having a low-wage job at Wal-Mart is better than having no job at all. We also have to realize that Wal-Marts tend to be in lower-income, lower-wage areas than other stores, which means that any comparison of wages has to be done with other individuals in the same geographical area and the comparable job skill sets (i.e., you need a valid comparison group).The Federal Reserve Bank of Minneapolis did so a few years back and found that when considering total compensation [that included benefits], Wal-Mart workers fared slightly better. Wal-Mart does not do anything atypically egregious in the retail industry. If Wal-Mart is really that terrible, then people shouldn't want to work there. As an example, the Wal-Mart that opened up in DC last year shows otherwise. 23,000 individuals applied for 800 positions, which is an acceptance rate of less than 4 percent. The Wal-Mart jobs must be appealing enough because apparently, it's harder to get a job at Wal-Mart than it is to get accepted to an Ivy League university.

Blocking Wal-Mart to enter the market is a different form of government favoritism, but still exists as a form of government intervention. What's more is that a Harvard economist recently found that these barriers of entry to the market also harm mom-and-pop shops (Sadun, 2014). Individuals should decide if they want the lower prices and greater economic efficiency of Wal-Mart or the convenience, specialty items, and the more personable customer service experience that comes with independent retailers. If Americans wanted to support Main Street America, they wouldn't shop at Wal-Marts. The truth is that we live in an age with discount stores and online shopping. Whether you agree with some or all of Wal-Mart's practices or not, it should be the individual that decides the medium through which they have the best customer experience possible.

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