Commentary

Should Wal-Mart Hike Prices?

This article appeared on Townhall.com on November 10, 2005.

“The High Cost of Low Prices” is the revealing title of a polemical documentary in which some of Wal-Mart’s disgruntled former employees (rather than current employees) and competitors (rather than customers) vent paranoid complaints and expose their ignorance. The absurdity of the title gives away the plot. Would anyone pay to see a movie about “The Low Cost of High Prices”?

Wal-Mart recently sponsored a Washington, D.C., conference about the firm’s “economic impact.” Public relations stunts that rely on groveling and capitulating invariably backfire, and this was no exception. The press unfairly dismissed favorable evidence as something bought and paid for, then promptly zeroed-in on a critical paper by David Neumark and/or two of his research associates at the Public Policy Institute of California.

What is this really all about? Anyone who works at Wal-Mart is free to quit that job and search for better pay or benefits somewhere else. Consumers are free to shop elsewhere. On the day of the Wal-Mart conference, in fact, same-store sales were reported to have grown much faster at Target and Costco.

The real complaint of Wal-Mart critics is not with middlemen we call “managers,” but with the company’s tightfisted customers and the company’s stubbornly loyal employees, who refuse to pay tribute to the United Food and Commercial Workers Unions (aka “Wake-Up Wal-Mart”).

The unions picked a technologically obsolescent target. I check myself out at Home Depot and two supermarkets, but those self-checkout machines don’t pay union dues, either. When I buy and sell on eBay, no unions are involved.

Employers don’t pay wages — consumers do. The “high cost of low prices” means what it says — that Wal-Mart offers too many bargains and does not gouge consumers nearly enough. If only Wal-Mart could be compelled to charge much higher prices — like Neiman-Marcus or Bloomingdales — then the company would never threaten those poor little “mom and pop” stores like K-Mart and Kroger. With higher prices, Wal-Mart could supposedly hire just as many Americans as it does (1.2 million), yet offer better wages and benefits.

The dollar value of a retail employee’s sales-per-hour is indeed likely to be much larger at Tiffany than Wal-Mart. Sales-per-hour are also larger at Costco, where people wait in line to buy giant TVs, diamond jewelry, expensive wine and notoriously big packages. But families with modest incomes sometimes prefer to make small, simple purchases at low prices. These are the consumers Wal-Mart critics love to hate.

As for the Neumark study, Wal-Mart Watch quotes the part that says: “The representative Wal-Mart presence (about eight years) reduces employment by 2 to 4 percent. There is some evidence that payrolls per worker also decline, by about 3.5 percent, but this conclusion is less robust.” It’s all “less robust,” actually.

Do such claims even begin to make sense? Total U.S. employment is 144 million, including those in military service. Wal-Mart accounts for 1.2 million workers, or eight-tenths of one percent of all U.S. jobs. To believe marginal relocations of such a tiny fraction of U.S. jobs from one county to another could have a measurable impact on total employment or average compensation is to believe tails can wag dogs.

The Neumark paper is about what supposedly happens in a county where a Wal-Mart is built. It is about tails wagging dogs in some places but not others. Any notion that Wal-Mart could reduce employment and/or drive down wages at the county level implies local workers are extremely immobile, even docile. Yet the Neumark quote about reduced employment applies only to an implausibly broad definition of retail employment, not total employment, and only for smaller counties that are not in the West.

Neumark and his researchers seem particularly eager to create a “convincing strategy” to adjust actual job and payroll figures (downward, of course) to account for any possibility that Wal-Mart might have built stores in places that already had rising employment or wages. With a big enough adjustment, up can look like down.

To do this, they use aptly named “dummy variables” based on a “rough” and “irregular” pattern of Wal-Mart store openings, spreading outward from the first 1962 store in Benton County, Ark. Because this rough and irregular wave swept over the whole country from 1981 to 1995, the authors “restrict most of our analysis to this period.” So, whatever evidence their strategy produced, it stopped being convincing 10 years ago. And although the authors boast of using a nationwide sample, “for the West, most of the estimates are not statistically significant, although there is no evidence of adverse effects.”

The authors group county figures into three samples, where A is total retailing, B adds specific data for general merchandising and C is total retailing without restaurants, bars, gas stations and car dealerships. “Counties in the B and C samples are larger,” but the alleged “employment decline in the retail sector” does not apply to those samples (or to any of them in the long run).

On the contrary, “the evidence generally points to increases in employment in general merchandising (for the B sample, of about the same magnitude as the decline in aggregate retail employment).” Moreover, “as it turns out, for the longer period the evidence of employment declines in aggregate retail disappears, and actually reverses for the C sample.”

Wal-Mart is part of “general merchandising,” which according to Neumark, accounts for merely a tenth of retail employment as defined by the A-sample. Unless you can believe adding a new Wal-Mart store somehow reduces employment at restaurants, bars and car dealerships, Neumark’s ephemeral dependence on the A sample is another tail-wags-the-dog illusion.

Even if you can buy the idea that Wal-Mart reduces employment only in non-Western retail establishments with which it does not compete (the A sample, but not B or C), we are nonetheless left with the troublesome reality that retailing accounts for only a small fraction of all jobs.

Neumark says, “The representative Wal-Mart presence (about eight years) reduces employment by 2 to 4 percent.” But that is, at best, referring to employment in total retailing as defined by only one of the three samples, outside the West. It most definitely does not refer to total employment. Another part of the Neumark study — one of many parts no reporter bothered to mention — says, “representative exposure to Wal-Mart stores results in an increase in employment per 1,000 persons of 3.46, or 1.4 percent.” So down is really up, after all.

Anyone who works at Wal-Mart is free to quit that job and search for better pay or benefits somewhere else. Consumers are free to shop elsewhere. Freedom is precisely what inspires such irrational angst and loathing among Wal-Mart critics.

Alan Reynolds is a nationally syndicated columnist and a senior fellow at the Cato institute.