My former PhD advisor, Joseph Persky, published research a few months ago showing that a new Walmart in Chicago destroyed, “approximately 300 full-time equivalent jobs in nearby neighborhoods. This loss about equals Walmart’s own employment in the area.” Persky’s work suggests that Walmart has zero net effect on retail employment because it creates just as many jobs as it displaces. However, Persky also found that Walmart has no effect on total retail sales. This is puzzling. Walmart claims to be more efficient than competitors at retailing, but if Walmart sells the same amount of stuff as the businesses that it displaces, with the same number of workers, where are the efficiencies coming from? I would expect that Walmart is more labor efficient than competitors, but if it were, then it would not need as much labor as the competition. Productivity gains usually reduce employment (holding output constant as is the case for Walmart). Farming and manufacturing have dramatically reduced jobs because of increased efficiencies. They simply don’t need as many people to produce the same output. But Walmart has not increased output, so where is the efficiency coming from? Walmart must be more efficient than the other retail businesses or it would not be able to eliminate them. There are several possibilities:
- Persky et al. under measured the true job loss. It is really hard to estimate that sort of thing. I suspect that Walmart is actually a job destroyer because of its greater productivity, but that needs more research. The same reasoning suggests that more productive teaching methods would destroy teaching jobs (holding the quantity of students constant). Walmart should be more efficient due to economies of scale which allow it to use labor more efficiently, but perhaps Walmart’s labor productivity is no better than its competition and Walmart achieves its efficiencies in some other way…
- Walmart uses less capital per dollar of output. Walmart certainly requires less bricks and mortar than a bunch of small town ‘main street’ stores. But Persky’s study looks at an urban Walmart and I doubt that Walmart uses less capital in an urban area where it is cheaper to build in a small space than to buy up numerous adjacent lots due to the holdout problem. I doubt this is how Walmart has gotten productivity gains, but another way Walmart gets high productivity out of its capital is by producing more sales per square foot of space. Increasing sales per square foot still takes a lot of labor too.
- Walmart uses its monopsony power to press down wages and supplier profits. This is often measured as increased productivity, but it is really just a transfer of resources from workers and suppliers to Walmart and its customers. Once Walmart has suppressed wages, it might even want to hire more workers to do low-productivity jobs like standing at the doors as greeters.
- Economic analysis often simplifies inputs into labor and capital, but there are different kinds of labor and Walmart may be able to use its economies of scale to reduce skilled-labor workers, but increase its low-skilled workers. At small stores, the high-skilled workers spend a lot of time sweeping or working the cash register. Walmart may have leveraged its information technology capabilities to reduce the quantity of skilled managers it hires and utilize more low-skilled workers instead. As a result, its average labor productivity could be higher than the average labor productivity of the competition even though it has the same number of workers as the competition that it displaced. Walmart’s workers are cheaper because they have a lower average skill level. If this is so, then Walmart should increase unemployment among skilled workers and decrease it among low-skilled workers.
If Persky et al. are correct and Walmart is not reducing retail employment, then I suspect that #4 is one reason for that. It fits with the stylized facts that seem true about Walmart. Walmart seems to have low labor productivity because Walmart does hire a lot of low-skilled workers who do most of the everyday mission-critical tasks as well as low-productivity jobs like working as greeters. But Walmart must have high average labor productivity to be able to sell so much so cheaply, so it must be saving money by hiring fewer high-skilled workers that I don’t notice when I go there. Those are unseen wizards who are running the show from behind the curtain as the watch over everything via their surveillance systems.
In theory, this kind of innovation could increase or decrease inequality because it benefits people at the top of the hierarchy and at the bottom while hollowing out the middle. But in practice, the retail labor market seems to have stagnating wages at the bottom, so inequality is increasing. Meanwhile information technology may be doing something similar to society as a whole because the rest of society is seeing increasing inequality too. Walmarts lower prices are cushioning the blow of stagnant wages for the median worker, but real living standards are still down for the median household from where they were in the 1990s. It doesn’t have to be this way. Higher productivity could increase everyone’s living standards. Yglesias thinks that more Walmart-type supermarkets in India would help the median Indian:
India’s government announces plans to eliminate rules prohibiting or curtailing foreign investment in the retail sector. That means most of all a possible influx of western supermart brands — WalMart from the US, Carrefour from France, Tesco from the UK — into an Indian economy that’s been grappling with skyrocketing food prices. James Fontella-Kahn explains in his FT coverage that “only about 8 percent of urban India retail spending takes place in the ‘organized’ sector” with the rest of the supply-chain in the hands of a confusing array of “tens of millions of middlemen” who constitute a powerful lobby that’s backed these protectionist rules.The hope is that western firms will not only offer customers a more attractive retail experience, but that they have more knowledge and capacity to do large-scale supply chain management. That would mean a higher share of rural produce making it to market with the introduction of modern shipping practices, and also more cooperate efforts to improve the volume of rural output.
All-in-all if it comes to pass it’s almost certainly good news for the average Indian. But note here a lesson in how globalization can drive inequality. India contains well over one billion people. So if we liquidate the interests of tens of millions of rent seeking middlemen and replace them with three or four or five executives in charge of Tesco India, Tesco Carrefour, and so forth then this should benefit the typical Indian household. But that handful executives is going to be much richer than any of the individual middlemen they put out of business. The top one percent will pull away from the 99 percent. But it would be a mistake, in this context, to obsess too much about that 99:1 divergence. The important issues are whether the typical Indian family near the median are making progress, and whether the poorest and most vulnerable Indian households are making progress. If they are, then there’s no particular need to begrude the fact that growth + economies of scale will create wild fortunes for a few people. And in India that’s more or less what’s been happening for the past twenty years and reforms like this should drive the progress further forward. The problem that specifically arises in the United States is that we’re not just getting inequality, we’re getting inequality without any big improvement in living standards throughout the bulk of the income distribution.
This trend hasn’t been beneficial for the median American, but that doesn’t meant that India won’t be able to spread the benefits to more than the top 1% richest Indians. Sweden has massive retailers like Ikea and H&M and Sweden’s retail workers are prosperous, so it is possible. And Sweden’s retailers are opening shop in India, so India can see the Swedish model of retail as well as the Walmart model.