Wal-Mart Effect

Wal-Mart Effect

Wal-Mart employs tons of people, gives millions of dollars to charity, and sells stuff at cut-rate prices. But do its costs to a community outweigh these benefits?


Is Wal-Mart really a bargain? I'm Bob Hirshon and this is Science Update.

Wal-Mart's low prices may come with a hidden cost, according to a study in Social Science Quarterly. Looking across the 1990's, Penn State University economist Stephan Goetz and his colleagues compared poverty rates in U.S. counties with new or existing Wal-Mart stores, to similar counties with no Wal-Mart. During this period, the national poverty rate fell.

Stephan Goetz:

What we found was that in communities with Wal-Mart stores, the drop was smaller. So in that sense, the presence of a Wal-Mart store impeded progress on the poverty front.

It had a similar effect on per capita food stamp use. The study can’t prove that Wal-Mart caused these effects, but it adds to the debate over whether Wal-Marts are good for local communities. I'm Bob Hirshon for AAAS, the Science Society.

Making Sense of the Research

“Big-box” stores like Wal-Mart, Target, Best Buy, and many more have revolutionized the retail industry. Compared to locally owned “mom and pop” businesses and even other national chains, big-boxers stand out by having enormous floor space, huge selection, and generally low prices. The most successful chains have become more profitable the larger they get. That's because larger companies can save money by buying their products in massive quantities at steep discounts; hiring full-time, in-house consultants like lawyers and architects instead of paying much higher rates for outside contractors; and centralizing their corporate headquarters in one location rather than setting up a separate office around each new store.

Of the big boxers, Wal-Mart leads the pack. In fact, it's the largest retailer in the world and the second largest corporation, period (behind ExxonMobil). Last year, the company sold over $300 billion worth of merchandise and made more than $11 billion in profits. The company now operates 6,500 stores in 15 countries, and employs a staggering 1.8 million people worldwide. That's more than the entire population of the state of Nebraska!

But stores like Wal-Mart are controversial. Although they offer low prices, hire lots of people, and donate to local charities, some people believe that this comes at the expense of local, better-paying jobs and locally owned businesses. That's one reason Goetz decided to do this study. He says he focused on Wal-Mart not because he has anything specifically against the company, but because it was the easiest to study given its number of stores and publicly available data.

As you heard, Goetz looked at county-by-county poverty rates across the economic boom years of the 1990's (specifically, 1987-1998). During this period, the nationwide family poverty rate fell by 2.4 percentage points, from 13.1 percent of American families to 10.7 percent. However, in counties that added one or more Wal-Mart stores during that time period, that drop in the poverty rate was diminished by 0.2 percentage points per store (in other words, about 8 percent of the nationwide decrease). That's a small but statistically significant difference. Counties that started the study period with Wal-Mart stores already in place also experienced smaller decreases in poverty than those that remained Wal-Mart-free.

To be sure that counties that started with or added Wal-Marts weren't just worse off to begin with, Goetz controlled his data for starting poverty rates; he also found evidence that Wal-Mart actually avoids opening stores in very poor counties. Furthermore, he found that the presence or addition of a Wal-Mart store was associated with higher rates of food stamp use, another indicator of family poverty.

Wal-Mart did not return phone calls for comment on this Science Update story. It's important to note that the study doesn't prove that Wal-Mart and Wal-Mart alone actually caused these economic changes. It's possible, for example, that the presence of big-box stores in general is responsible, and that Wal-Mart is just a good indicator of how many big-box stores a county has. It's also possible that some other, undiscovered factor is responsible, and that Wal-Mart stores just happen to be more common in counties where that factor exists. Finally, it's always possible that the statistical methods of any study could be flawed. That said, Goetz and his colleagues did take steps to anticipate and control for many of these objections, and still found a so-called “Wal-Mart Effect.”

How might big-box stores contribute to poverty? Goetz suggests several possibilities. First, although big-box stores like Wal-Mart employ many people, they also can drive out local businesses that also employed people. The number of jobs Wal-Mart brings to a county may not make up for the jobs lost, and furthermore, the jobs may generally not pay as well. Goetz also notes that because Wal-Mart runs all of its corporate operations from a headquarters in Arkansas, it doesn't use local professional services, like lawyers and accountants, that a small business in the area would use. If enough of these small, local businesses shut their doors, the professionals that served them may decide to relocate to another city that has more work. Goetz says this “brain drain” also appears to deprive counties of local leaders, who volunteer or run for offices that affect the county's overall quality of life.

Still, even if these hypotheses are true, it's hard to give a final verdict on the effect of big-box stores on our standard of living. It's arguable, for example, that discount outlets like Wal-Mart allow lower-income families to buy luxuries like DVD players, computers, and new furniture that they might not have afforded otherwise. And they don't even have to shop at Wal-Mart to benefit, since many other stores have drastically lowered their prices over the years in order to compete with the big boxes. Is this enough to make up for potential drops in wages and overall employment? Do the charitable efforts of big-box stores—like funding scholarships, improving public spaces, and supporting medical research—outweigh any negative effects they might have on a community? As the big boxes only get bigger and more profitable, it's a debate that's sure to keep going.

Now try and answer these questions:

  1. Based on the results of Goetz's study, what is the "Wal-Mart Effect"?
  2. What steps did Goetz take to control his data? Are there other steps that you think he should have taken?
  3. Do you think that big-box stores are a positive or negative influence on the American economy? Did this study change your view? Why or why not?
  4. What other studies would you propose to study the effect of big-box retailers on a community?

You may want to check out the August 4, 2006 Science Update Podcast to hear further information about this Science Update and the other programs for that week. This podcast's topics include: an evolutionary reason for morning sickness, fibers that act as eyes, a South American culture that puts the past ahead, Wal-Mart's economic impact, and new insights from Darwin's Finches.

For Educators

The Marketplace radio feature On the Road: Cuba, Missouri focuses on globalization from a local perspective. This report visits Cuba, Missouri, the population center of the United States. Users can access audio clips that explore how smalltown Middle America is part of the world's economic fabric. Among the features is a story on the efforts of a nearby town to attract a giant Wal-Mart distribution center.

Also from Marketplace, Wal-Mart's Unsettling Benefits Memo focuses on a 27-page memo written by Wal-Mart's executive vice president for benefits. Printed in the October 26, 2005 edition of The New York Times, the memo lays out the discounter's plan to seize the high ground in the employee benefits war.

In the New York Times Learning Network lesson Bang for Your Buck, students will explore reasons for making a particular purchase and examine one strategy Wal-Mart stores use to keep prices low.

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