Big Box Balderdash

Wal-Mart’s claim of “creating jobs” has no credibility

By Paul Krugman 
First published by the New York Times, December 12, 2005

© 2005 NY Times Company

I think I’ve just seen the worst economic argument of 2005. Given what the Bush administration tried to put over on us during its unsuccessful sales pitch for Social Security privatization, that’s saying a lot.

The argument came in the course of the latest exchange between Wal-Mart and its critics. A union-supported group, Wake Up Wal-Mart, has released a TV ad accusing Wal-Mart of violating religious values, backed by a letter from religious leaders attacking the retail giant for paying low wages and offering poor benefits. The letter declares that ”Jesus would not embrace Wal-Mart’s values of greed and profits at any cost.”

You may think that this particular campaign — which has, inevitably, been dubbed ”Where would Jesus shop?” — is a bit over the top. But it’s clear why those concerned about the state of American workers focus their criticism on Wal-Mart. The company isn’t just America’s largest private employer. It’s also a symbol of the state of our economy, which delivers rising G.D.P. but stagnant or falling living standards for working Americans. For Wal-Mart is a huge and hugely profitable company that pays badly and offers minimal benefits.

Attacks on Wal-Mart have hurt its image, and perhaps even its business. The company has set up a campaign-style war room to devise responses. So how did Wal-Mart respond to this latest critique?

Wal-Mart can claim, with considerable justice, that its business practices make America as a whole richer. The fact is that Wal-Mart sells many products more cheaply than traditional stores, and that its low prices aren’t solely or even mainly the result of the low wages it pays. Wal-Mart has been able to reduce prices largely because it has brought genuine technological and organizational innovation to the retail business.

It’s harder for Wal-Mart to defend its pay and benefits policies. Still, the company could try to argue that despite its awesome size and market dominance it cannot defy the iron laws of supply and demand, which force it to pay low wages. (I disagree, but that’s a subject for another column.)

But instead of resting its case on these honest or at least defensible answers to criticism, Wal-Mart has decided to insult our intelligence by claiming to be, of all things, an engine of job creation. Judging from its press release in response to the religious values campaign, the assertion that Wal-Mart ”creates 100,000 jobs a year” is now the core of the company’s public relations strategy.

It’s true, of course, that the company is getting bigger every year. But adding 100,000 people to Wal-Mart’s work force doesn’t mean adding 100,000 jobs to the economy. On the contrary, there’s every reason to believe that as Wal-Mart expands, it destroys at least as many jobs as it creates, and drives down workers’ wages in the process.

Think about what happens when Wal-Mart opens a store in a previously untouched city or county. The new store takes sales away from stores that are already in the area; these stores lay off workers or even go out of business. Because Wal-Mart’s big-box stores employ fewer workers per dollar of sales than the smaller stores they replace, overall retail employment surely goes down, not up, when Wal-Mart comes to town. And if the jobs lost come from employers who pay more generously than Wal-Mart does, overall wages will fall when Wal-Mart moves in.

This isn’t just speculation on my part. A recent study by David Neumark of the University of California at Irvine and two associates at the Public Policy Institute of California, ”The Effects of Wal-Mart on Local Labor Markets,” uses sophisticated statistical analysis to estimate the effects on jobs and wages as Wal-Mart spread out from its original center in Arkansas.

The authors find that retail employment did, indeed, fall when Wal-Mart arrived in a new county. It’s not clear in their data whether overall employment in a county rose or fell when a Wal-Mart store opened. But it’s clear that average wages fell: ”residents of local labor markets,” the study reports, ”earn less following the opening of Wal-Mart stores.”

So Wal-Mart has chosen to defend itself with a really poor argument. If that’s the best the company can come up with, it’s going to keep losing the public relations war with its critics. Maybe it should consider an alternative strategy, such as paying higher wages.

Editors’ note: Krugman somewhat disingenuously selects just one of many studies about net employment / disemployment by big box stores. Other studies suggest a slight net gain in local employment when a big box store opens. His general point is valid, however: a primary advantage of chains (we won’t tackle market-distorting subsidies here) is they employ fewer people per dollar of sales than smaller businesses. When people cite Wal-Mart’s efficiencies, this is the greatest one.

Independent community-based businesses typically employ many other businesses. They hire or use the services of designers, cabinet shops, sign makers, accountants, insurance reps, computer consultants, attorneys, advertising agencies and others. Local retailers and distributors also carry a higher percentage of locally-made goods than the chains, creating more jobs for local producers.

In contrast, a new chain store typically puts in place a clone of other units, eliminates the need for local planning, and uses a minimum of local goods and services, centralizing those jobs at corporate headquarters. Some jobs are likely to be eliminated (or future jobs not created) in the community hosting a big box store as a result.

In addition to our own library of studies, the New Rules Project and the American Independent Business Alliance each collect many studies on the economic impacts of big box stores.