McCloskey on groceries

At the Cafe Hayek blog Don Boudreaux writes

... is from page 62 of the manuscript of Deirdre McCloskey‘s forthcoming volume, The Treasured Bourgeoisie: How Markets and Improvement Became Virtuous, 1600-1848, and Then Suspect (original emphasis):

The four heirs of Sam Walton (Alice, Jim, Christy, and S. Robson) were worth a combined total of $107.3 billion (which puts them half-again above Bill Gates), earn from retailing in which profit margins are low (in groceries, which they now lead, extremely low). Wal-Mart must be doing something right (no, dears: not by underpaying its staff, which the lively forces of entry and exit in the labor market prevent it from doing even if it wanted to; but by pioneering control of inventory and by pioneering mass but negotiated buying, for the benefit of its shoppers, with a small margin left overt for Alice, Jim, Christy, and S. Robson).

I wonder if one of those things Wal-Mart does right is bargaining hard with its suppliers and how much consumer surplus does it generate for its consumers via its lower prices caused, at least in part, by its tough bargaining?

Life at Wal-Mart

Eric Crampton point me to a posting at Boing Boing where Charles Platt blogs on Life at Wal-Mart. Platt went from being a senior writer at Wired magazine to an entry-level position at Wal-Mart. Are things at Wal-Mart really as bad as some people say? Platt writes

It started when I read Nickel and Dimed, in which Atlantic contributor Barbara Ehrenreich denounces the exploitation of minimum-wage workers in America. Somehow her book didn’t ring true to me, and I wondered to what extent a preconceived agenda might have biased her reporting. Hence my application for a job at the nearest Wal-Mart.

He goes on

The job was as dull as I expected, but I was stunned to discover how benign the workplace turned out to be. My supervisor was friendly, decent, and treated me as an equal. Wal-Mart allowed a liberal dress code. The company explained precisely what it expected from its employees, and adhered to this policy in every detail. I was unfailingly reminded to take paid rest breaks, and was also encouraged to take fully paid time, whenever I felt like it, to study topics such as job safety and customer relations via a series of well-produced interactive courses on computers in a room at the back of the store. Each successfully completed course added an increment to my hourly wage, a policy which Barbara Ehrenreich somehow forgot to mention in her book.

My standard equipment included a handheld bar-code scanner which revealed the in-store stock and nearest warehouse stock of every item on the shelves, and its profit margin. At the branch where I worked, all the lowest-level employees were allowed this information and were encouraged to make individual decisions about inventory. One of the secrets to Wal-Mart’s success is that it delegates many judgment calls to the sales-floor level, where employees know first-hand what sells, what doesn’t, and (most important) what customers are asking for.

Several of my co-workers had relocated from other areas, where they had worked at other Wal-Marts. They wanted more of the same. Everyone agreed that Wal-Mart was preferable to the local Target, where the hourly pay was lower and workers were said to be treated with less respect (an opinion which I was unable to verify). Most of all, my coworkers wanted to avoid those “mom-and-pop” stores beloved by social commentators where, I was told, employees had to deal with quixotic management policies, while lacking the opportunities for promotion that exist in a large corporation.

Of course, I was not well paid, but Wal-Mart is hardly unique in paying a low hourly rate to entry-level retail staff. The answer to this problem seems elusive to Barbara Ehrenreich, yet is obvious to any teenager who enrolls in a vocational institute. In a labor market, employees are valued partly according to their abilities. To earn a higher hourly rate, you need to acquire some relevant skills.

So life at Wal-Mart may not be as bad as some would have us believe.

Wal-Mart and small business (updated)

Many commentators have argued that mega discount store Wal-Mart is death to small "mom-and-pop" businesses. President Clinton's former secretary of labour, Robert B. Reich, wrote in a 2005 New York Times op-ed that Wal-Mart turns "main streets into ghost towns by sucking business away from small retailers."

An interesting and obvious question is, How true is this? To answer this question consider the graph below

The graph is from an article (Has Wal-Mart Buried Mom and Pop?) by Andrea M. Dean and Russell S. Sobel in the latest issue (Vol. 31, No. 1, Spring 2008) of Regulation. With regard to this graph Dean and Sobel write

Interestingly, the slope of the regression line in Figure 4b is actually positive and significantly different from zero, which suggests that states with more Wal-Mart stores actually have significantly higher levels of five-to-nine-employee establishments.

Dean and Sobel conclude

Our research suggests that the popular belief that Wal-Mart has a significant negative effect on the size of the mom-and-pop business sector of the United States economy is statistically unfounded. After examining a plethora of different measures of small business activity and growth, examining both time series and cross-section data, and employing different geographic levels of data and different econometric techniques, it can be firmly concluded that Wal-Mart has had no significant impact on the overall size and growth of U.S. small business activity.

(HT: Carpe Diem)

Update: The visible hand in economics asks Could Wal-mart help small business?

The gains from trade for the poor

Christian Broda writes at VoxEU.org on China and Wal-Mart: Champions of equality. He opens his article by noting that the public debate, especially in the USA, has taken for granted that inequality has risen as a result of globalisation. And then asks, "But has it really?" He argues that in fact it hasn't.

Broda points out that

How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.

Inflation affects the rich and poor to different degrees, and these inflation differentials change our view of the evolution of inequality in the US. Broda writes

Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged. And the reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!

The important point here is that relative to wealthier families, the poorer families in the USA, and most other countries, spend a larger share of their income on goods whose prices are directly affected by trade – obvious examples being clothing and food. What we see is that the wealthier you are the more you spend on services. Such services are less subject to competition from abroad. From the data we see that since 1994 the price of goods in the US has risen much less than the price of services. Broda writes,

This trend can partly be explained by China. In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most. Take canned seafood or cotton shirts, for instance. Exports of China to the rest of the world in these categories have increased dramatically over this decade. Inflation in these sectors has been negative over the last decade, while in other sectors with no Chinese presence inflation has been over 20 percent. Moreover, as China produces goods of relatively low quality, sectors with strong Chinese presence are disproportionately consumed by the poor.

Broda goes on to note that the effects of the expansion of superstores like Wal-Mart has been good for the poor. He explains,

The expansion of superstores – like Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops at much lower prices. Today the poor do roughly twice as much of their buying of non-durable goods in these stores than the rich. So poor consumers have been the biggest beneficiaries of Wal-Mart coming to town.

Broda ends his column by making the important point that,

We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion over trade is diverted towards the problems facing specific producers, be they farmers in France or textile workers in the U.S., we miss the central point. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford. Without better public understanding of these facts, governments will not only keep supporting policies aimed against China and Wal-Mart but may receive the uninformed support of many consumers who are benefitting from trade. (Emphasis added)