Title: The Wal-Mart Revolution: How Big-Box Stores Benefits Consumers, Workers, and the Economy
Author: Richard Vedder and Wendell Cox
Scope: 3 stars
Readability: 4 stars
My personal rating: 4 stars
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Topic of Book
The authors overview the history of the American retail sector with particular focus on the effect of Wal-Mart on the overall economy and local communities.
If you would like to learn more about companies and their effect on progress, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.
Wal-Mart is controversial. It should not be. It is one of the most effective anti-poverty organizations in American society.
- Wal-Mart’s critics, by and large, are simply wrong.
- Wal-Mart has been one of the most transformative and controversial companies in the history of the retail sector.
- Wal-Mart continued the tradition of innovation in the sector by Woolworth and Sears.
- Most communities have more favorable labor market environment after the store opens than before, and better than comparable non-Wal-Mart communities.
- The era of Wal-Mart dominance has had lower average unemployment than the decade before its rapid growth (the 1970s).
- Wal-Mart did not cause decline of downtowns; they were declining long before the company was founded.
- When Wal-Mart moves into an area:
- Unemployment rate typically falls.
- New jobs created are heavily concentrated in the retail sector.
- Prices drop nearly 25%
- Job turnover declines 40%
- The benefits disproportionately help low-income people
- For the entire economy, Wal-Mart has lowered prices by 3.1 percent.
- 1987-2004 productivity in the big box retail sector rose 7.6%, more than three times the national average.
Important Quotes from Book
Getting goods from producers to their ultimate consumer is the job of wholesale and retail trade, the latter of which is the focus of this book.
Retail trade has been in a state of constant change for centuries. Beginning with small general and specialty stores located in the towns of colonial America and itinerant peddlers on the American frontier, retail trade was both a cause and a consequence of more general rapid economic growth in the nineteenth and twentieth centuries. General stores morphed into specialty shops or, ultimately, became department stores. With territorial expansion and the evolution of a postal system came mail-order catalogues. The chain variety and grocery stores of the early twentieth century were still important in 1950—names like Woolworth’s, Sears, Roebuck, and A&P. Then came the discount houses—large stores with parking and self-service, relatively low prices, and a great many choices. Kmart emerged as the industry leader in the mid-1960s, although other regional chains emerged as well, including, in Arkansas, Sam Walton’s Wal-Mart.
Sam Walton was the most important retail entrepreneur of the twentieth century… The company he founded was obsessed with cutting costs and bringing low prices to its customers, and it found new ways to do so, most importantly through its widely praised computerized inventory control system. A classic middle-class American, Sam Walton became America’s richest man before his death in 1992. Yet Sam Walton did not operate in a vacuum.
Did Wal-Mart and its imitators have generally positive or negative economic effects on the population? Our answer is unambiguous: Wal-Mart has been good for America, and, increasingly, for the rest of the world as well.
As we will show, studies have found that on average Wal-Mart has lowered prices by several percentage points, providing billions of dollars of benefits to its customers. Wal-Mart has also provided job opportunities for thousands of workers. The preponderance of the evidence supports the view that the company creates more jobs than it destroys. Most communities with a new Wal-Mart have a more favorable labor market environment after the store opens than before—and better than in comparable non-Wal- Mart communities. The era of Wal-Mart dominance has had lower average unemployment rates than in, say, the 1970s, the last decade before the company ascended to major national importance.
The notion that Wal-Mart treats its employees badly seems without foundation as well. Average pay levels, while not high (around $10 an hour for hourly workers) are not sharply out of line with standards for the retail trade industry.
Wal-Mart’s critics, by and large, are simply wrong
Many Wal-Mart critics are not objective observers who use evenhanded analysis to show shortcomings of the company. They are a passionate group of activists who often have developed genuine hatred toward America’s largest company (measured by sales), displaying their hatred in strong, arguably intemperate language.
The national anti–Wal-Mart movement is led by a disparate group of organizations, most of which have a pronounced left-of-center political orientation.
A criticism of Wal-Mart and other big-box discount stores is that they are disturbing the way of life in American towns and cities and destroying traditional retailing. Students of the history of retailing know that very few of these complaints have not already been heard in an earlier era in a slightly different context, directed against the dominant retailers of those times.
Thus, the typical American in 1820 took a year to produce what it takes about sixteen days for his counterpart to produce today. Finally, transportation costs were high in nineteenth-century America, and cheap methods of land transportation were nonexistent.
For all these reasons, retail trade was in its embryonic stages before 1800. The most important form of urban retailing was the public market, held as little as once a week or as often as every weekday, where customers purchased food items from farmers. As towns grew, along with the distance between farmers and customers, regular grocery stores sometimes operated. For the vast majority of the population living in rural areas, peddlers sold items carried with them on horseback or, later, on wagons. Farmers would buy from them things that were hard to make on the farm, such as needles and thread, spices, or clocks. In time, there were actually chains of peddlers (a forerunner of things to come), each traveling salesperson having his own territory.
After communities reached a certain size (often fewer than 1,000 persons), general stores opened, selling a variety of items. Western storekeepers made trips perhaps twice a year to the East to buy goods from wholesalers or manufacturers.4 With the growth of towns beyond some threshold— perhaps 2,500 persons—it became possible to open specialty stores selling only dry goods, such as yarn and cloth and early factory-made clothes, hardware, and farm implements. As towns grew larger still, even more specialty shops opened, such as drugstores, men’s clothing stores, and jewelers.
Beginning about the time of the Civil War, department stores began to emerge in the growing large cities. Some of the names are familiar today—Macy’s in New York, Marshall Field in Chicago (recently converted to the Macy name, to the irritation of many Chicagoans), and Wanamaker’s in Philadelphia are three examples.6 The department store combined the choices available in specialty shops with the convenience of the one-stop shopping found in general stores (which generally declined in importance after towns grew beyond about 2,500 in population). Other innovations, such as the development of elevators and advances in architectural techniques that allowed for larger, taller buildings, along with improvements in ventilation and the advent of electricity, were also important in the evolution of the modern, big department store.
In the rural areas following the Civil War, peddlers were increasingly supplanted by mail-order houses. They were led by Montgomery Ward and followed by Sears, Roebuck and Company, a firm that ultimately became the nation’s leading retailer until dethroned by Wal-Mart in just the past generation. In the early days, Ward’s and Sears operated exclusively by catalogue and serviced orders from massive warehouses in Chicago or other locations. This was a precursor to both the Wal-Mart distribution system and the even more recent Internet sales operations of such companies as Amazon—not to mention Sears itself.
A very important development in the post–Civil War period was the emergence of chain stores. In groceries, the pioneer was the Great Atlantic and Pacific Tea Company, better known as the A&P.
Perhaps the greatest retailer of the era, however, was Frank Woolworth, who organized the nation’s leading variety-store chain, beginning in 1879.
Woolworth’s, its leading competitor, S. S. Kresge (which later morphed into the Kmart Corporation), and others (such as W. T. Grant and Ben Franklin stores) were the progenitors of the variety-store concept that was an important feature of small-town America as late as 1970, and which helped spawn the modern discount store that is the focus of this book. Woolworth’s offered a wide variety of small goods that people needed at very low prices.
While the chain stores evolved in the late nineteenth and early twentieth centuries, their period of most aggressive growth was the 1920s. Pioneering chains like A&P in groceries and Woolworth’s in variety stores grew substantially during this period, but the biggest growth came from smaller stores like Kroger and Safeway in groceries, Kresge in variety stores, J. C. Penney in apparel, and Walgreen’s in drug stores.
The Sears catalogue became a salvation to people in rural areas and small towns, and the retail outlets, located often in medium-sized and even larger cities, offered the urban shopper a convenient alternative to the more pricy department stores. Even as late as the early 1980s, Sears was the nation’s leading retailer in volume, until surpassed first by Kmart and then Wal-Mart
Employment in retail trade quadrupled between 1900 and 1965, implying a compounded annual growth of over 2 percent a year… Employment grew in the period 1900–1965 from 10.2 to 13.6 percent of the labor force, with the relative growth a bit faster in the first three decades than after 1929.
If there were a triumvirate of pioneers in the industry, it would probably comprise Marty Chase, Sol Price, and Harry Cunningham.
A Ukrainian immigrant, Martin Chase might have a claim to opening
the first discount store… Price began an operation known as Fed Mart in 1954 in California, and ran it successfully for twenty years, selling out to a German company in 1975. In 1976, Price and his son Robert started Price Club, the first warehouse-style discount firm, which merged into Costco a few years later and remains, somewhat ahead of Sam’s Club, the largest warehouse-style retailer in America.
The third of the triad of early pioneers was Harry Cunningham…
Kmart continued to grow even after Cunningham retired in 1972, reaching $13 billion in sales by 1980, and briefly surpassing Sears, Roebuck to become America’s largest retailer.
No person has done more to revolutionize modern American retailing than Sam Walton, and no company is nearly as important in contemporary retail history as Wal-Mart.
Two things are striking about the data in addition to the remarkable growth. First, as indicated, Wal-Mart’s profits grew with sales— but there is no indication that the company “exploited” customers by extracting ever-greater profit margins as it gained certain economies of large-scale operation. Second, the company grew through slow years (a recession in 1970, a bigger recession in 1974) as well as good ones, seeming invulnerable to economic downturns.
The third major change in the original business model also occurred at this time: the introduction of Wal-Mart Supercenters. Supercenters were even larger than traditional Wal-Mart discount stores, adding groceries to general merchandise. This bold move eventually made Wal-Mart the largest grocery operation in the country, larger than such mainstay chains as Kroger, Safeway, and Albertsons.
In the last decade (1995–2005), the company continued to grow, becoming the largest corporation in the world in terms of sales.
Additionally, the company has largely saturated the American market. The average American household today spends about two thousand dollars annually in Wal-Mart stores.
The innovations in retailing have, on balance, created new jobs. By effectively raising real incomes of Americans by offering goods at lower prices, the discount stores have enhanced the demand for a variety of goods and services. In the era of rapid proliferation of discount stores, the growth of retail trade employment has been relatively robust. And as the American economy has become more “discount-store intensive,” the overall unemployment rate has tended to fall somewhat— hardly consistent with a massive net loss of jobs to foreign workers. Moreover, workers in the newer discount stores do not seem to be underpaid relative to other, comparable workers.
Looking more closely at specific sectors, we find that the percentage growth of retail trade was greater than for any other sector of the economy, including financial services, professional and business services, manufacturing, construction, and so forth.2 It is no wonder that retail trade was a bright spot in an otherwise dismal employment picture.
Under a reasonable set of assumptions, the number of Wal-Mart domestic employees grew by over 160,000—but the number of non-Wal-Mart employees working in general merchandise stores also grew, although by only slightly over 30,000. Job creation at Wal-Mart was in no way matched by job destruction at competitive stores.
The evidence is quite striking. As Wal-Mart became a larger presence in American life, the unemployment rate fell. The typical rate in the modern era of giant Wal-Mart presence is about two full percentage points smaller than in the early years, when the company had only a regional presence. The evidence supports the view that Wal-Mart, if anything, is job-enhancing, and its presence reduces unemployment.
In all seventeen instances, the expected relationship between Wal-Mart’s presence (as measured by domestic sales as a percentage of gross domestic product) and the job opportunity variable was obtained. In thirteen of the seventeen, the findings were statistically significant at the 1 percent level, the highest standard conventionally used to evaluate hypotheses. In a large majority of statistical estimations, then, the hypothesis, “Wal-Mart increases job opportunities” was solidly confirmed.
The results suggest that well over a one-percentage-point fall in the aggregate unemployment rate can be associated with the large growth in Wal-Mart relative to the national economy over time. Alternatively, well over one new worker was added for each one hundred persons over the age of sixteen as a consequence of the growth of Wal-Mart. While that result might seem rather strong, the fact is that over 1 percent of American workers are employed at Wal-Mart today, suggesting the result is quite plausible if Wal-Mart has done relatively little “crowding out” of other workers.
The lifetime earnings of many Wal-Mart employees are enhanced through promotions, and many of the relatively highly paid management workers begin as rank and file employees earning hourly wages.
In fourteen (56 percent) of the cases, the pace of employment growth in the Wal-Mart counties increased relative to the control group. Moreover, in four of the other eleven cases, the experience following the store opening was probably at least as positive as it was negative.
On balance, the evidence supports the view that, as a rule, Wal-Mart adds to job opportunities in communities that it enters.
Non-retail-trade employment grew by 1.57 percent in the relevant counties, more than in the nation as a whole (possibly suggestive of some positive spillover effects from the new Wal-Mart, and/or possibly reflecting the fact that Wal-Mart located its stores in counties with perceived promise), but employment in retail trade rose by a robust 5.09 percent, more than three times as much. About 30 percent of total employment growth in the twentyfive counties was attributable to retail-trade employment growth—a huge proportion, considering that only about 12 percent of employees worked in retail trade nationwide. On the basis of this, we would conclude that the evidence supports the conclusion that Wal-Mart is a net creator of jobs.
In fact, in a solid majority of communities, retail trade wages and benefits rose. Adding together the twenty-five counties as if they were one economic unit, we found that average annual compensation in retail trade rose an impressive 7.93 percent, going from $16,937.82 to $18,282.57 (see figure 7-4)—this at a time when the Consumer Price Index rose 3.94 percent. In short, real annual wages (broadly defined to include fringe benefits) rose 3.84 percent, or nearly 2 percent annually. There is no support for the hypothesis that Wal-Mart depresses wages in retail trade.
If we were to summarize in a single sentence the preponderance of scholarly work on the economic impact of Wal-Mart, it would be that Wal-Mart’s impact is more positive than negative, and that the negative consequences of its expansion touted by its critics are, at the minimum, overstated, and sometimes downright wrong.
The distinguished MIT economist Jerry Hausman, along with Ephraim Leibtag, found even greater price effects—approaching 25 percent in the aggregate—and they emphasize that these price advantages create very significant amounts of surplus to consumers, running literally into the hundreds of billions of dollars in the period of Wal-Mart’s existence. This is particularly true for the lower-income consumers who frequent Wal-Mart Supercenters.
For the entire economy, they estimated that Wal-Mart has lowered consumer prices (as measured by the Consumer Price Index for All Urban Consumers) by 3.1 percent.
Wal-Mart’s positive contributions to consumer welfare are reflected in favorable public attitudes toward Wal-Mart. The Pew Research Center polled over 1,500 adults in late 2005, and reported that 81 percent of respondents found Wal-Mart a good place to shop.10 Moreover, lower-income groups found the store an especially good place to shop, even more so than relatively affluent customers. Even 73 percent of union members agreed.
Global Insight estimates that Wal-Mart on net was responsible for 210,000 new jobs by 2004, lowering the unemployment rate by 0.14 percent from what it otherwise would have been.
At the local level, Global Insight estimates that the overall short-run impact of Wal-Mart in a typical community is to create 137 jobs. This suggests some loss of non-Wal-Mart jobs (since the typical store employs somewhere between 150 and 350 persons), but not enough to offset the new employment.
He observes a dramatic (over 40 percent) decline in job turnover in retail trade after Wal-Mart enters markets—which completely contradicts the claims of critics that Wal-Mart is an unfair, hostile employer.
While driving very hard bargains with suppliers is part of the story, more important is the fact that Wal-Mart (and now other discounters) are dealing directly with manufacturers, eschewing to a large extent the wholesale operators that traditionally have been the source of supplies in retail trade.
The net result? Wal-Mart is a plus for American society. The huge gains in consumer welfare, measured by Hausman and Leibtag to be in the billions of dollars annually, are unquestionably greater than the other, relatively small net economic costs (which the evidence suggests are probably close to zero and more likely negative) that Wal-Mart imposes on society. In our judgment, it is hard to conclude that Wal-Mart has not been good for America.
According to Pew Research Center survey data, people from low-income households are far more inclined to shop regularly at Wal-Mart than those from families with above-average incomes. Indeed, there is a striking correlation: As income rises, the proportion of regular Wal-Mart shoppers falls. Wal-Mart caters to, and successfully attracts, customers of modest means.
Wal-Mart’s critics may tout the virtues of Costco but they are ignoring an important difference between the companies: Wal-Mart makes a greater effort to cater to the most cost-conscious consumers—the less affluent. Costco may be a fine alternative for more affluent consumers, but people tend to shop near their homes. Wal-Mart serves less affluent neighborhoods far better than Costco.
The benefits of Wal-Mart almost certainly disproportionately accrue to the lower-income members of the population. Thus, any policy move that reduces Wal-Mart’s incentives or ability to operate will hurt the poor more than the rich. That means that preventing Wal-Mart from operating in a community is the equivalent of imposing a highly regressive tax on the population—a tax that is disproportionately paid by the poor.
The long-term rise in labor productivity in the United States is the single most important factor in America’s exceptional affluence.
It is roughly true that labor productivity in the United States rose 2 percent
a year from 1870 to 1945, by about 3 percent a year from 1945 to around 1970, by a bit over 1 percent a year from 1970 to the early 1990s, and well above 2 percent a year in the last decade or so. The long-term average since 1870 is about 2 percent growth.
The rise in productivity at Wal-Mart in the 1990s (and, no doubt, earlier and later) reflected two major trends. First, Wal-Mart’s relentless pursuit of efficiency had big payoffs, especially as the company refined and extended its famous distribution and inventory control systems. Second, the mix of types of stores changed, with supercenters and, to a lesser extent, Sam’s Club stores growing vastly in importance compared to the smaller, original Wal-Marts. Presumably, output per worker was higher in the larger, higher-volume stores.
During the 1960s, the discount house, typified by Kmart but including many smaller regional names, including Wal-Mart, revolutionized retailing by supplanting the older variety stores and traditional department stores in general merchandising. Productivity per worker is estimated to have risen sharply—over 2 percent a year. By 1970, the discount store was wellestablished, and over the next two decades, productivity growth was modest, averaging perhaps one-half of 1 percent annually. In the 1990s, as the Wal-Mart revolution became more apparent, productivity growth again rose, with value-added output per worker in all of retail trade rising by about 1.2 percent a year, more than double the rate prevailing in the preceding two decades.
General merchandise operations other than department stores (such as warehouse clubs and superstores), productivity growth was an astonishing 7.6 percent a year for the seventeen-year period 1987–2004. Put differently, the typical employee working in these stores in By looking at data 2004 added nearly 3.5 times as much output to the economy for each hour worked as did her or his counterpart seventeen years earlier.
That translates into over $600 billion in annual output, or over $2,000 for every man, woman, and child in the United States.
For any single innovation to change GDP by 5 percent is quite remarkable. Robert Fogel, for example, estimates the aggregate “social savings” of the railroad—arguably the greatest innovation of the nineteenth century—at about 5 percent of GDP in 1890.9 While other innovations—the personal computer, for instance—might well exceed the positive economic effect of the Wal-Mart revolution, it certainly remains one of the greatest positive forces for material welfare in American economic history.
Wal-Mart and its imitators have constituted one of our nation’s most successful, if least discussed, antipoverty innovations, as well as a powerful force for economic growth.
Perhaps the best hope of significant economic progress among developing world nations is expanded international trade. This cannot occur if expensive barriers are erected.
- “The Company” by Micklethwait and Woolridge
- “Big Is Beautiful: Debunking the Myth of Small Business” by Atkinson and Lind
- “Good Capitalism, Bad Capitalism” by Baumol, Litan and Schramm
If you would like to learn more about companies and their effect on progress, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.