Wednesday, February 01, 2006

Wal-Mart: Low Prices vs. Low Wages

Most of the fuss about Wal-Mart in the media is over their "low" wages (I'm not sure anyone even checks to see how much Wal-Mart pays when they make this claim, but that can be another post). Sometimes, though, you'll see a report or hear a remark that their prices really aren't that low. Or you'll hear claims of predation, that they lower prices to put competitors out of business, after which they raise their prices.

Well two economists, Jerry Hauser at MIT and Ephraim Leibtag at the U.S. Dept. of Agriculture, have actually bothered to check. Using the AC Nielsen houshold UPC scanner data that comes from roughly 61,500 households, they find that Wal-Mart saves its shoppers 15-25% on identical food items. (pdf file) Various controls reduce the overall sample size, but it remains absolutely huge (a technical term).

Jason Furman, a visiting scholar in NYU's graduate school for public service, did a survey of studies (another pdf) where he compares the total savings realized by Wal-Mart shoppers (estimated at $263 billion in 2004 in the study he cites (which doesn't seem right -- more on that in a bit) against an earlier study's estimate that Wal-Mart reduced total wages by $4.7 billion in 2000. Now I'm not sure I believe either number -- they're both probably too high. For food alone (food brought home and prepared, not including food from restaurants), though, Americans spent roughly $470 billion (see the data on food expenditures here). That's almost half a trillion dollars. That's a lot of food. If Wal-Mart saves customers as much as Hauser and Leibtag say, then total savings from Wal-Mart could easily be tens of billions of savings in food alone. And if the savings on much of their other products are similarly large, then Wal-Mart saves consumers far more than it drives down wages by any estimate -- probably by an order of magnitude.

So, in summary, even if everything they say about Wal-Mart's low wages is true, that effect is tiny compared to the savings Wal-Mart delivers to its customers.