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Business Week Online, November 7, 2005
NEWS ANALYSIS
It certainly was an odd setting. A host of Wal-Mart (WMT ) executives
listening impassively, as a slew of academics put up slides of arcane
equations and debated the "endogenous" nature of the company's
store openings. Still, the Nov. 4 conference at a hotel in Washington,
D.C., was addressing a question that has become a flashpoint in recent
years: Is the world's largest retailer good or bad for the U.S. economy?
Several hundred academics -- plus plenty of journalists -- turned
out for the event, sponsored by Wal-Mart itself as a means of combating
growing criticism by labor groups and other organizations concerned
about the mega-retailer's impact on local economies (see BW Online,
10/20/05, "A Stepped-Up Assault on Wal-Mart").
UNRESOLVED ISSUES. The dozen studies discussed at the meeting didn't
settle the "good or bad" issue by any means, but they did
shed light on how to think about it. Several concluded that the Bentonville
(Ark.) behemoth benefits consumers by keeping prices in check across
the U.S. economy as a whole. Other studies, however, found that Wal-Mart
also lowers workers' wages and benefits.
The academics' findings suggest that, to make a judgment about the
retailer's role, economists must find a way to net out the overall
impact on both prices and wages. The same thing is at stake in the
larger issue of Wal-Martization of the economy. In other words, do
Americans gain more than they lose when companies strive to hold down
prices by lowering costs -- including labor ones? (see BW Online,
10/6/03, "Is Wal-Mart Too Powerful?").
"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 whose paper found significant
consumer gains from the retailer's lower prices.
INDIRECT APPROACH. Wal-Mart tried to turn the conference into a public-relations
boon by focusing on a yearlong study it commissioned from Global Insight,
a respected economic-forecasting firm. The retailer gave Global unprecedented
access to reams of internal statistics on store employment, sales,
wages, and a lot of other data. The result, Global concluded: Wal-Mart
saved consumers a total of $263 billion last year, or a whopping $2,329
per household. It also found no evidence that Wal-Mart undercuts wages.
"Wal-Mart has been positive for the U.S. economy, largely because
of its efficiency gains," said Chris Hollings, the Global economist
who led the 18-person team that did the analysis (see BW Online, 9/22/05,
"Can Wal-Mart Wear a White Hat?").
Unfortunately for Wal-Mart, the debate won't end there, even among
the academics. For example, Global's study didn't address the issue
of whether Wal-Mart's prices really are lower than rivals. Instead,
it tackled the problem indirectly, by looking at how prices changed
locally over the past two decades after a Wal-Mart store opening.
It then tried to factor out the other major variables that influence
prices.
PUSHING DOWN PRICES. Some economists, however, don't buy the premise
-- including at least one employed by the U.S. government. Wal-Mart
and other discounters' lower prices are offset by the lower quality
of their products, says Patrick Jackman, an economist at the Bureau
of Labor Statistics who is in the unit that calculates the Consumer
Price Index.
Other papers submitted to the Wal-Mart conference agreed with Global
Insight's perspective. To show that Wal-Mart really does offer lower
prices, Hausman looked at a national sample of 61,500 consumers' purchasing
patterns between 1998 and 2001, using supermarket scanning data from
ACNielsen. He found that Wal-Mart's food prices are 27% lower than
rivals on average, and that its presence forces supermarkets to reduce
their own prices to 5% less than they otherwise would have been.
Similarly, another study found that Wal-Mart lowered the price of
shampoo, toothpaste, and eight other consumer items by as much as
12% between 1982 and 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, the conclusion
by no means ends the debate, since both studies were so limited in
scope.
FIRESTORM EXTINGUISHED? Another new study, which wasn't submitted
to the conference, determined that Wal-Mart lowered average earnings
of retail workers in urban areas by nearly 1% between 1992 and 2000.
"Total earnings of retail workers nationwide was reduced by $4.7
billion due to Wal-Mart's presence" in 2000, according to the
paper by University of California, Berkeley, economics professor Arindrajit
Dube and two colleagues.
Wal-Mart came up with the idea for the conference nearly two years
ago, hoping to balance the firestorm of criticism it has faced and
stanch the damage to its reputation. At that level, the beleaguered
company may have succeeded.
The question is, will Wal-Mart's new openness bring positive views
about its role in the economy -- or just confirm all the negative
ones?
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