Home | Business News | Browse by Publication | J | Journal of Private Enterprise

Job turnover and wages in the retail sector: the influence of Wal-Mart.

Article Excerpt
"Wal-Mart is making enormous profits and yet it has chosen to go with low wages and diminished benefits ... The battle to engage Wal-Mart and force them to examine their corporate values and policies is absolutely vital to America today."

Senator Barack Obama, November 16, 2006

Rarely has a single corporation experienced the widespread scrutiny of its business practices and impact on local communities, businesses and workers, as has Wal-Mart. Indeed, it is difficult to overstate the tone and breadth of the current debate. That at least three United States Senators have specifically criticized Wal-Marts in the weeks leading up to their entrance in the presidential race speaks to criticality of the Wal-Mart debate.

Discussion surrounding Wal-Mart focuses heavily on the role the retailer plays in local employment dynamics, especially wages, job turnover, and job creation and destruction in the retail sector. And while there are many other facets to the Wal-Mart debate, these questions matter for policymakers concerned about local economic development and the role changing retail market structure plays on employment opportunity for local residents. While local officials may play a far more muted role in such matters as local retail location decision than they believe, understanding whether or not to expend resources supporting or opposing a Wal-Mart (or any other business) ought to be informed by at least some understanding of the potential net impact. At the heart of the question are an understanding of Wal-Mart's influence on wages for new and existing workers, and how job creation, separation and turnovers are affected by the entrance and presence of a Wal-Mart store.

In this paper I seek to better inform this debate by combining data on Wal-Mart stores with the recently release Quarterly Workforce Indicators provided by the US Census. This unique data set offers much in understanding the role Wal-Mart entrance plays in local labor force dynamics. I begin by reviewing previous studies on the local economic impact of Wal-Mart. I then review the data and offer an empirical model to test the impact of Wal-Mart entrance and presence in eight Pennsylvania counties.

Empirical Analysis of Wal-Mart

Stone's (1988) study of the impact of Wal-Mart on small towns and communities in Iowa was the first attempt to measure the impact of Wal-Mart on local communities. This study and other subsequent analysis by Stone and his co-authors present mixed evidence regarding the impact of Wal-Mart stores. Stone found that counties with Wal-Marts, and host towns generally, experience a sharp, but short term growth in retail. He also concludes that Wal-Mart stores locating outside small towns reduced retail employment and businesses within the small towns, even if the overall impact was positive. (2) Unfortunately, Stone's study suffered serious methodological limitations that fatally weaken the policy reference. Two of his important failures were largely replicated by many subsequent authors. The first is the absence of variables to control for other factors that may have led to retail decline. Iowa in particular, and many other locations studied were in the midst of significant population changes that could explain much of the retail changes Stone attributes to Wal-Mart. Second, the treatment of potential endogeneity was entirely absent in work performed through the 1990's. Thus any potential conclusion regarding Wal-Mart's impact may well suffer the bias caused by Wal-Mart's entrance decision being influenced by existing retail growth patterns. (3) Thus, the decade of the 1990's passed with little useful advancement of our understanding of Wal-Mart's impact.

In 2001, Hicks and Wilburn, in one of the first of the econometric studies, analyzed a panel of county level data in West Virginia from 1988 through 2000, testing the impact of Wal-Mart's presence on retail industry structure, wages and employment. The model included corrections for spatial autocorrelation and entrance of Wal-Mart in adjoining counties, which accounts for the pull factor considerations noted by Stone (1995). This study found that the entrance of a Wal-Mart store led to a modest increase in the number of retail establishments, a permanent retail employment increase of roughly 54 workers and no impact on retail wages.

Hicks and Wilburn (2001) evaluated endogeneity of the Wal-Mart entrance decision by testing entrance on contemporaneous and lagged growth variables. This is similar to the method used by Franklin (2001), who examined the Wal-Mart Supercenter impacts on the structure of grocery stores in metropolitan areas. Both studies concluded empirically that Wal-Mart entrance decisions are independent of regional growth conditions. Also, these researchers offered anecdotal evidence that Wal-Mart is largely unconcerned with local economic conditions when making decisions to open new locations. However, this approach has been criticized for failing to include an endogeneity test within the estimation framework (Curs, State and Visser, 2004). Also, criticism of the general nature of the results has been raised since West Virginia, the study region, is poorer and more rural than average states. (4)

Basker (2005) performed a similar analysis of a much larger sample of U.S. counties. This analysis used an instrumental variable method to control for endogeneity with the planned entrance date as an instrument. This study reports that following an initial increase in retail employment, within roughly three years this dissipates to a 55-worker increase, with a modest reduction in the number of small retail firms. Basket also found very modest impacts of Wal-Mart...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!