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Monday, December 12, 2005

Paul Krugman: Wal-Mart's Excuse

Paul Krugman looks at Wal-Mart's attempts to improve its public image by claiming it is an engine of job growth and finds the arguments worthy of one of those end of year "worst of" lists:

Big Box Balderdash, by Paul Krugman, NY Times:  I think I've just seen the worst economic argument of 2005. ... 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. ... 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 ... 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 ... 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. ...[T]he assertion that Wal-Mart "creates 100,000 jobs a year" is now the core of the company's public relations strategy. ...

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 ... 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... And if the jobs lost come from employers who pay more generously than Wal-Mart does, overall wages will fall...

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 ... whether overall employment ... rose or fell ... 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.

Agreed. Here's a link to the study (NBER, Open link). Update: Full column here.

Previous (12/9) column: Paul Krugman: The Promiser in Chief
Next (12/16) column: Paul Krugman: Drugs, Devices, and Doctors

    Posted by on Monday, December 12, 2005 at 12:11 AM in Economics, Unemployment | Permalink  TrackBack (1)  Comments (17)

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    » Julian Sanchez and Paul Krugman Think About Wal-Mart from Brad DeLong's Website

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    Tracked on Monday, December 19, 2005 at 12:21 PM


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