NEWS ANALYSIS By Aaron Bernstein
Some Uncomfortable Findings for Wal-Mart
At a gathering sponsored by the retailer, economists will present studies of the giant's economic impact -- not all with flattering results
Is Wal-Mart good or bad for the U.S. economy? A group of economists is attempting to answer that question. And the surprise is that the economists' studies, which aren't all complimentary to Wal-Mart (WMT ), are to be presented at a Nov. 4 conference sponsored by the giant retailer itself.
The gathering in Washington, D.C., is part of Wal-Mart's broader effort to reach out to critics in an attempt to repair the damage persistent attacks have been wreaking on its reputation. Critics claim the country's largest employer drags down American living standards by paying poverty-level wages and benefits. Wal-Mart argues that its low prices are a boon to consumers, especially poor ones, and help to keep overall inflation in check (see BW Online, 10/20/05, "A Stepped-Up Assault on Wal-Mart").
In an attempt to counter the critics, Wal-Mart CEO H. Lee Scott Jr. announced on Oct. 25 a set of new environmental initiatives for reducing his company's energy use and packaging waste. He also outlined a new health-insurance option aimed at increasing the share of Wal-Mart workers with medical coverage, which currently stands at just 44% (see BW, 8/25/05, "Can Wal-Mart Wear a White Hat?").
LENDING CREDIBILITY. Unfortunately for the Bentonville (Ark.) company, the academic conference may not be quite as positive as Scott's latest announcements. BusinessWeek obtained most of the studies submitted by the academics who responded to Wal-Mart's call for papers. The conclusion: Even some of those who support Scott's view nonetheless raise uncomfortable questions about Wal-Mart's business model. Other studies validate the notion that it undercuts wages and benefits.
"Wal-Mart is cutting wages, which is bad [for the economy], and is also more efficient, which is good. The question is: How much of each one?" says Massachusetts Institute of Technology economics professor Jerry Hausman, a Wal-Mart fan who thinks labor unions are bad and curses liberals who oppose the company. Wal-Mart Corporate Affairs Vice-President Robert McAdam says he hasn't read the studies and can't comment yet.
Wal-Mart came up with the idea for the conference nearly two years ago, hoping to balance the firestorm of criticism it has faced. But it knew, McAdam says, that any gathering would have no credibility if Wal-Mart was the sole sponsor and evaluator. So it asked Global Insight, a respected economic consulting firm, to put out a call for academic papers. Global Insight says it has received 11 studies and rejected two, one because it was purely theoretical and the other because it was academically unsound.
WORTH OF A T-SHIRT. In addition, Wal-Mart hired Global Insight to conduct its own study of the retailer's economic impact. Wal-Mart gave Global what it says is unprecedented access to its internal data about wages, benefits, and other employment issues. Global put a team of a dozen economists to work in January of this year. It and Wal-Mart say the study won't be ready until a few days before the conference. Still, the other papers submitted by independent academics shed new light on Wal-Mart's economic role.
Perhaps the most surprising issue they raise is whether Wal-Mart actually offers lower prices than its competitors. While this may seem a nonissue for a company that has become the world's largest retailer by bragging about its everyday low prices, it's by no means a settled question among economists. In fact, the U.S. government's official position is that Wal-Mart's prices match its rivals on average. That's the view of the statisticians at the Bureau of Labor Statistics (BLS) responsible for calculating the consumer price index (CPI).
How could that possibly be? Because the lower prices offered by Wal-Mart and other retail discounters are offset by the lower quality of the products they sell, says Patrick Jackman, a BLS economist in charge of CPI modeling. So the $5 T-shirt you pick up at Wal-Mart isn't worth any more than that, while the $10 one J.C. Penney (JCP ) sells is better made and worth twice as much.
PRICE PRESSURE. Hausman argues that this conclusion ignores reality. An econometrician who has waged a running battle with the BLS over its CPI methodology, he blasted the agency's assumption in a recent study he co-authored called, "CPI Bias from Supercenters: Does the BLS Know That Wal-Mart Exists?" To show that Wal-Mart really does offer lower prices, he looked at a national sample of 61,500 consumers' purchasing patterns from 1998 to 2001 by using supermarket scanning data from ACNielsen.
Hausman took the same approach in a new paper to be discussed on Nov. 4 (available here <http://www.businessweek.com/pdfs/2005/jerry_hausman.pdf> in .pdf format). In it, Hausman finds that Wal-Mart's food prices are 27% lower than those of rivals on average and that its presence forces supermarkets to reduce their own prices by 5% more than they otherwise would have.
Similarly, another study prepared for the conference found that Wal-Mart lowered the price of shampoo, toothpaste, and eight other consumer items by as much as 12% from 1982 to 2002. The paper, by University of Missouri economics professor Emek Basker, looked at the prices of these items in 165 cities before and after Wal-Mart entered the market. Still, these conclusions are by no means the end the debate, since both studies were so limited in scope.
Either way, the key issue remains: If Wal-Mart does offer consumers at least some level of lower prices, how does it do so? While none of the other papers come to a definitive conclusion, the consensus seems to be that it's a mix of the company's vaunted efficiency -- and the low wages and benefits it pays its 1.3 million U.S. workers.
HIRING SHRINKAGE? To get at the efficiency question, several studies look at Wal-Mart's impact on employment. The thinking is that if Wal-Mart is more efficient than rivals, it should sell more goods with fewer workers. Several papers reach opposite conclusions. A second one by Basker found that when Wal-Mart enters a new county, total employment in the area actually rises slightly, by 1% or 2% over the long term. This is surprising, since it implies that Wal-Mart may not be more efficient than the retailers from which it grabs market share.
Others find that Wal-Mart's big-box strategy and its famous supply-chain management allow it to do more with less. Basker's county-level employment analysis doesn't account for the possibility that Wal-Mart's expansion plans target faster-growing counties, argues David Neumark, a senior fellow at the Public Policy Institute of California, a think tank.
To adjust for this possible bias, Neumark and two co-authors compared the employment impact of early and more recent openings of all 3,066 Wal-Mart stores in the U.S. (In its new spirit of openness, Wal-Mart supplied them with the data.) Their conclusion was mixed. County retail employment indeed declines by 2% to 4% in the years after a Wal-Mart opens. However, overall county employment may rise slightly. So, the evidence was inconclusive on this point. (Neumark's study is available here <http://www.businessweek.com/pdfs/2005/david_neumark.pdf> in .pdf format.)
WIDER EFFECTS. Unfortunately for Wal-Mart, the findings cut both ways. Sure, its lower prices may stem from greater efficiencies, as Neumark's study implies. However, its negative impact on retail jobs undercuts a central argument it has used against critics who say Wal-Mart destroys jobs at mom-and-pop retailers it often displaces. "The evidence is, on balance, more consistent with the claims of critics of Wal-Mart, although questions remain," Neumark's paper concludes.
Worse yet, his paper goes on to find that Wal-Mart undercuts wage levels as well. Although Neumark and others couldn't measure hourly wages, they did find county-level government data on payrolls. Wal-Mart's entry, they found, cut payroll per worker by about 2.5% over the eight-year life span of the average Wal-Mart store. And it sliced payroll per person by nearly 5%.
"The story we find is that Wal-Mart hurts wages, not so much in retail, but across the whole county," says Neumark. He's no Wal-Mart basher, either, since he has spent years defending conservative economic positions.
RISKY BUSINESS. Other studies find similar negative impacts. For example, Wal-Mart is frequently accused of dumping its workers onto government health-care programs such as Medicaid, a contention it has strongly denied. In fact, it does increase state Medicaid spending by $898 per worker, according to an analysis of state Medicaid data from 1978 to 2003 by Michael Hicks, an economist at the Air Force Institute of Technology at the Wright-Patterson Air Force Base in Ohio. "However, my numbers don't compare Wal-Mart to other low-wage retailers," says Hicks, an expert in regional economics. (Hicks's study is available here <http://www.businessweek.com/pdfs/2005/michael_hicks.pdf> in .pdf format.)
Wal-Mart's decision to put itself under the academic microscope is a brave one. The Global Insight study may end up eclipsing all the others, since it will have internal data Wal-Mart has long declined to release. But given the negative conclusions from the outside studies, the entire conference is looking more like a big risk for a major corporation to take.