The Walmart Effect. New research suggests that the company makes the communities it operates in poorereven taking into account its famous low prices.
IdeasThe Walmart EffectNew research suggests that the company makes the communities it operates in poorereven taking into account its famous low prices.By Rog KarmaIllustration by Carl GodfreyDecember 24, 2024 Listen1.0x0:0010:42Produced by ElevenLabs and News Over Audio (Noa) using AI narration. Listen to more stories on the Noa app.This article was featured in the One Story to Read Today newsletter. Sign up for it here.No corporation looms as large over the American economy as Walmart. It is both the countrys biggest private employer, known for low pay, and its biggest retailer, known for low prices. In that sense, its dominance represents the triumph of an idea that has guided much of American policy making over the past half century: that cheap consumer prices are the paramount metric of economic health, more important even than low unemployment and high wages. Indeed, Walmarts many defenders argue that the company is a boon to poor and middle-class families, who save thousands of dollars every year shopping there.Two new research papers challenge that view. Using creative new methods, they find that the costs Walmart imposes in the form of not only lower earnings but also higher unemployment in the wider community outweigh the savings it provides for shoppers. On net, they conclude, Walmart makes the places it operates in poorer than they would be if it had never shown up at all. Sometimes consumer prices are an incomplete, even misleading, signal of economic well-being.In the 1990s and early 2000s, before tech giants came to dominate the discourse about corporate power, Walmart was a hot political topic. Documentaries and books proliferated with such titles as Wal-Mart: The High Cost of Low Price and How Walmart Is Destroying America (And the World). The publicity got so bad that Walmart created a war room in 2005 dedicated to improving its image.When the cavalry came, it came from the elite economics profession. In 2005, Jason Furman, who would go on to chair Barack Obamas Council of Economic Advisers, published a paper titled Wal-Mart: A Progressive Success Story. In it, he argued that although Walmart pays its workers relatively low wages, the magnitude of any potential harm is small in comparison with how much it saved them at the grocery store. This became the prevailing view among many economists and policy makers over the next two decades.Fully assessing the impact of an entity as dominant as Walmart, however, is a complicated task. The cost savings for consumers are simple to calculate but dont capture the companys total effect on a community. The arrival of a Walmart ripples through a local economy, causing consumers to change their shopping habits, workers to switch jobs, competitors to shift their strategies, and suppliers to alter their output.Annie Lowrey: How the low minimum wage helps big companiesThe two new working papers use novel methods to isolate Walmarts economic impactand what they find does not look like a progressive success story after all. The first, posted in September by the social scientists Lukas Lehner and Zachary Parolin and the economists Clemente Pignatti and Rafael Pintro Schmitt, draws on a uniquely detailed dataset that tracks a wide range of outcomes for more than 18,000 individuals across the U.S. going back to 1968. These rich data allowed Parolin and his co-authors to create the economics equivalent of a clinical trial for medicine: They matched up two demographically comparable groups of individuals within the dataset and observed what happened when one of those groups was exposed to the treatment (the opening of the Walmart) and the other was not.Their conclusion: In the 10 years after a Walmart Supercenter opened in a given community, the average household in that community experienced a 6 percent decline in yearly incomeequivalent to about $5,000 a year in 2024 dollarscompared with households that didnt have a Walmart open near them. Low-income, young, and less-educated workers suffered the largest losses.In theory, however, those people could still be better off if the money that they saved by shopping at Walmart was greater than the hit to their incomes. According to a 2005 study commissioned by Walmart itself, for example, the store saves households an average of $3,100 a year in 2024 dollars. Many economists think that estimate is generous (which isnt surprising, given who funded the study), but even if it were accurate, Parolin and his co-authors find that the savings would be dwarfed by the lost income. They calculate that poverty increases by about 8 percent in places where a Walmart opens relative to places without one even when factoring in the most optimistic cost-savings scenarios.But their analysis has a potential weakness: It cant account for the possibility that Walmarts are not evenly distributed. The company might, for whatever reason, choose communities according to some hard-to-detect set of factors, such as deindustrialization or de-unionization, that predispose those places to growing poverty in the first place. Thats where the second working paper, posted last December, comes in. In it, the economist Justin Wiltshire compares the economic trajectory of counties where a Walmart did open with counties where Walmart tried to open but failed because of local resistance. In other words, if Walmart is selecting locations based on certain hidden characteristics, these counties all should have them. Still, Wiltshire arrives at similar results: Workers in counties where a Walmart opened experienced a greater decline in earnings than they made up for with cost savings, leaving them worse off overall. Even more interesting, he finds that the losses werent limited to workers in the retail industry; they affected basically every sector from manufacturing to agriculture.Whats going on here? Why would Walmart have such a broadly negative effect on income and wealth? The theory is complex, and goes like this: When Walmart comes to town, it uses its low prices to undercut competitors and become the dominant player in a given area, forcing local mom-and-pop grocers and regional chains to slash their costs or go out of business altogether. As a result, the local farmers, bakers, and manufacturers that once sold their goods to those now-vanished retailers are gradually replaced by Walmarts array of national and international suppliers. (By some estimates, the company has historically sourced 60 to 80 percent of its goods from China alone.) As a result, Wiltshire finds, five years after Walmart enters a given county, total employment falls by about 3 percent, with most of the decline concentrated in goods-producing establishments.From the December 2011 issue: How Walmart is changing ChinaOnce Walmart has become the major employer in town, it ends up with what economists call monopsony power over workers. Just as monopoly describes a company that can afford to charge exorbitant prices because it lacks any real competition, monopsony describes a company that can afford to pay low wages because workers have so few alternatives. This helps explain why Walmart has consistently paid lower wages than its competitors, such as Target and Costco, as well as regional grocers such as Safeway. So much about Walmart contradicts the perfectly competitive market model we teach in Econ 101, Wiltshire told me. Its hard to think of a clearer example of an employer using its power over workers to suppress wages.Walmarts size also gives it power over the producers who supply it with goods. As Stacy Mitchell, a coexecutive director of the Institute for Local Self-Reliance, recently wrote in The Atlantic, Walmart is well known for squeezing its suppliers, who have little choice but to comply for fear of losing their largest customer. Selling to Walmart at such low prices can force local suppliers to lay off workers and pay lower wages to those who remain. They also naturally try to make up for the shortfall by charging their other customers higher prices, setting off a vicious cycle that allows Walmart to entrench its dominance even further.The most direct upshot of the new research is that Walmart isnt the bargain for American communities that it appears to be. (When I reached out to Furman about the new research, he said he wasnt sure what to make of it and suggested I talk with labor economists.) More broadly, the findings call into question the legal and conceptual shift that allowed Walmart and other behemoths to get so huge in the first place. In the late 1970s, antitrust regulators and courts adopted the so-called consumer-welfare standard, which held that the proper benchmark of whether a company had gotten too big or whether a merger would undermine competition was if it would raise consumer prices or reduce sellers output. In other words, the purpose of competition law was redefined as the most stuff possible, as cheaply as possible. But as the new Walmart research suggests, that formula does not always guarantee the maximum welfare for the American consumer.The outgoing Biden administration, with its focus on reviving antitrust, recognized this. Its most recent enforcement guidelines, for example, direct the government to take into account a mergers effect on workers, not just consumers, and the antitrust agencies have included such claims in multiple lawsuits. The question is whether the incoming Trump administration, which has sent mixed messages on corporate consolidation, will follow the same path.Recent history shows the political danger in threatening low consumer prices. The publics reaction to the inflation of the past few years suggests that many Americans would rather be slightly poorer but have price stability than be richer but with more inflation. That will tempt policy makers to prioritize low prices above all else and embrace the companies that offer them. But if Walmarts example reveals anything, it is that, in the long term, low prices can have costs of their own.Support for this project was provided by the William and Flora Hewlett Foundation.
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