January 10th, 2018
Effects of Wal-Mart on the U.S. Labor Industry – Effects of on Wage Levels
Among the criticisms that Wal-Mart has faced in recent decades is that it depresses the wage levels in the regions it operates. Such an effect has been advanced based on factors such Wal-Mart’s effect of reducing retail prices thus making it difficult for retailers offering higher wages to compete effectively with it. Basker (2005) for instance evaluated the effect of Wal-Mart on retail prices that follows enhanced competitive pressure on Wal-Mart’s entry into a region. The study used data of average retail prices of 10 particular goods and performed time-series analysis using ordinary least squares to identify the trend in the prices of such goods. The findings indicated that, following Wal-Mart’s entry to the market, the price of products such as aspirin and shampoo declined by substantial and statistically significant levels (Bakers, 2005). Such findings were in line with findings of previous studies (cited in Bakers, 20045, p. 28-29) that argued that retail prices in cities where Wal-Mart was located were significantly lower than prices in cities where Wal-Mart had not yet set operations.
Such depressed prices could lead to challenges for retailers in the area to maintain high wages for their workers. Neumark, Zhang and Ciccarella (2008) for instance provide evidence of such an effect in examining how Wal-Mart’s presence affects earnings. The study estimates the changes in retail earnings by ordinary least squares (OLS) and the estimates of instrumental variables (IV). OLS method is a regression model that estimates the linear relationship existing among variables under consideration. IV method is used to determine the existing relationship where OLS results are biased due to aspects such as measurement errors. Although OLS estimates in the study by Neumark, Zhang and Ciccarella (2008) indicated that Wal-Mart entry could result in marginal increases in retail payrolls, evidence from IV estimates indicated significant adverse effects of Wal-Mart’s presence on the retail payrolls (Neumark, Zhang & Ciccarella, 2008 pp. 422-424). In conclusion, the authors argued that Wal-Mart store openings resulted in the decline of retail earnings of approximately 1.5 percent equivalent to $1.4 million at the county level.
The OLS findings in a different study also support a negative effect of Wal-Mart expansion on the retail sector earnings. In this study by Arindrajit, William and Barry (2007), using OLS, a direct measure of the effect Wal-Mart on the retail sector earnings, Wal-Mart entry was associated with a 0.0089 negative effect on earnings, a figure that was significant at 1 percent level (p. 27). Such a finding was irrespective of the observation that Wal-Mart tended to enter into the areas where there were rising wages. IV estimates in this study indicated that an additional Wal-Mart store led to a statistically significant reduction in earnings of general merchandise workers. Such reductions in earnings were also found in specific sectors such as the grocery sector (Arindrajit, William & Barry, 2007). The findings of these studies buttress the aspect that Wal-Mart entry results in pressures for other retailers in the region to cut their labor costs in order to compete effectively with Wal-Mart.
Another effect of Wal-Mart on wages has been the relatively lower wages it pays to its associates compared to other retail workers in areas that it operates. Jacobs, Graham-Squire and Luce (2011), for instance note that the workers in Wal-Mart earn approximately 12.4 percent lower than other retail workers in general and 14.5 percent lower than workers in large retail establishments (p. 1). The wages of the entity have remained constantly low with most associates earning less than $10 per hour. Such low earnings occur even with evidence indicating that increasing the earnings to a level of $12 would have a minimal impact on the price increment that customers pay on the products offered at Wal-Mart (Jacob, Graham-Squire & Luce, 2011). Such indications imply the unwillingness of the entity to provide better remuneration for its employees, an aspect that affects the motivation levels hence the performance of such employees.
The low-wage phenomena at Wal-Mart can be attributed to its aggressive pursuit of a cost leadership strategy. Maintaining the lowest prices for its products in the industry has been the driving force behind Wal-Mart’s expansive growth in various regions. Such an approach is for instance evident in the entity’s mission to “save people money so they can live better” (Wal-Mart, 2011b). In pursuit of such a cost leadership position, Wal-Mart does not only apply stringent measures to reduce the costs in its operations but also pressurizes its suppliers to provide supplies at very low prices (Trefis Team, 2011). Such an approach increases the effect of Wal-Mart on wage levels beyond the industry in which it competes. For instance, suppliers would agree to Wal-Mart pressures to provide goods at low prices since Wal-Mart is a significant customer for most suppliers and the loss of such a customer could affect the business outcomes for the suppliers. Faced with such a scenario, the suppliers are forced to evaluate cost saving approaches in their processes to avoid incurring losses due to low prices at which they deliver goods to Wal-Mart. Accordingly, cost-cutting initiatives may focus on the workforce, for instance introducing part time and contract jobs that attract lower benefits to replace permanent workforce. The negative effects of Wal-Mart on wage levels may thus result from the direct effect of its operations or the indirect effect contributed by its suppliers in an aim to meet the price demanded by Wal-Mart.
Go to part three here.