Since opening its first store in 1962 in Rogers, Arkansas, Wal-Mart has grown to be the world’s largest company. It reported a net income of $10 billion on net worldwide sales of over $285 billion for the fiscal year ending January 31, 2005 (Wal-Mart Stores 2005a). In 2002, Wal-Mart sales accounted for an astonishing 2.3 percent of U.S. GNP (Sperling 2003). It is also the world’s largest private employer, with over 1.3 million employees in the United States. Wal-Mart has a dominating presence the U.S. retail sector: in 2002; fully 82 percent of U.S. households made at least one purchase at Wal-Mart (Bianco and Zellner 2003). It is already the largest food retailer in the nation, as well as the third largest pharmacy (Dube and Jacobs 2004), and continues to expand at a rapid rate (Upbin 2004), with plans for an additional 200-250 new stores in the 2006 fiscal year.
Wal-Mart has achieved this commanding position thanks in part to its pioneering low price/high volume business model (Ghemawat, Mark and Bradley 2004). Wal-Mart’s strategy for achieving low prices includes aggressively implementing supply chain efficiencies (Gill and Abend 1997, Johnson 2002), and seeking lower prices from its suppliers (Useem, Schlosser and Kim 2003).
However, there is a growing concern that part of Wal-Mart’s success is underpinned by a compensation practice that keeps wages low. Anticipated or actual economic pressure from Wal-Mart has been used as a rationale by competing retailers to seek wage and benefit cuts, as evidenced by the 2003 contract negotiations between Southern California grocery chains and their unions (Goldman and Cleeland 2003; Pearlstein 2003).
In light of these and other concerns, it is useful to take stock of what we know about WalMart’s wage policies and how they affect workers. As we see it, there are four key questions:
- Does Wal-Mart really differ from other players in the industry in terms of its compensation standard?
- Does Wal-Mart put pressure on wages and benefits of other players in the industry, and what happens to compensation when Wal-Mart enters a market?
- Are there economic rationales for trying to change Wal-Mart’s practices?
- Would the price reductions brought by Wal-Mart be in jeopardy if Wal-Mart were to raise labor standards?
In this paper, we address each of these four questions. We conclude that the weight of evidence suggests that Wal-Mart has lower wages than other retailers, and that average earnings fall when Wal-Mart enters a market. Wal-Mart entry does not lead to net new jobs, and overall it reduces total take-home pay for retail workers. Wal-Mart’s health benefits are somewhat worse than those of other large retailers, but no worse (and perhaps better) than those offered by small retailers. All in all, we find that Wal-Mart reduces overall compensation for retail workers, which partially explains their ability to provide reduced prices. As a practical matter, if Wal-Mart’s price advantages are anywhere near as large as had been argued, it should be possible for the retailer to improve working conditions by a reasonable amount without jeopardizing much of the gain enjoyed by consumers due to the Wal-Mart’s presence. To push labor standards beyond what is provided currently by most large retailers, policies should apply to not just Wal-Mart but the industry segment as a whole.