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THE WALMART EFFECT  
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Rogé Karma
December 24, 2024
The Atlantic
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_ New research suggests that the company makes the communities it
operates in poorer—even taking into account its famous low prices. _


, Marie Eriel Hobro for The New York Times

 

No corporation looms as large over the American economy as Walmart.
It is both the country’s biggest private employer, known for low
pay, and its biggest retailer, known for low prices. In that sense,
its dominance represents the triumph of an idea that has guided much
of American policy making over the past half century: that cheap
consumer prices are the paramount metric of economic health, more
important even than low unemployment and high wages. Indeed,
Walmart’s many defenders argue that the company is a boon to poor
and middle-class families, who save thousands of dollars every year
shopping there.

Two new research papers challenge that view. Using creative new
methods, they find that the costs Walmart imposes in the form of not
only lower earnings but also higher unemployment in the wider
community outweigh the savings it provides for shoppers. On net, they
conclude, Walmart makes the places it operates in poorer than they
would be if it had never shown up at all. Sometimes consumer prices
are an incomplete, even misleading, signal of economic well-being.

In the 1990s and early 2000s, before tech giants came to dominate the
discourse about corporate power, Walmart was a hot political topic.
Documentaries and books proliferated with such titles as _Wal-Mart:
The High Cost of Low Price_ and _How Walmart Is Destroying America
(And the World)_. The publicity got so bad that Walmart created
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“war room” in 2005 dedicated to improving its image.

When the cavalry came, it came from the elite economics profession. In
2005, Jason Furman, who would go on to chair Barack Obama’s Council
of Economic Advisers, published a paper
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“Wal-Mart: A Progressive Success Story.” In it, he argued that
although Walmart pays its workers relatively low wages, “the
magnitude of any potential harm is small in comparison” with how
much it saved them at the grocery store. This became the prevailing
view among many economists and policy makers over the next two
decades.

Fully assessing the impact of an entity as dominant as Walmart,
however, is a complicated task. The cost savings for consumers are
simple to calculate but don’t capture the company’s total effect
on a community. The arrival of a Walmart ripples through a local
economy, causing consumers to change their shopping habits, workers to
switch jobs, competitors to shift their strategies, and suppliers to
alter their output.

The two new working papers use novel methods to isolate Walmart’s
economic impact—and what they find does not look like a progressive
success story after all. The first
[[link removed]], posted in September by the social
scientists Lukas Lehner and Zachary Parolin and the economists
Clemente Pignatti and Rafael Pintro Schmitt, draws on a uniquely
detailed dataset [[link removed]] that tracks a
wide range of outcomes for more than 18,000 individuals across the
U.S. going back to 1968. These rich data allowed Parolin and his
co-authors to create the economics equivalent of a clinical trial for
medicine: They matched up two demographically comparable groups of
individuals within the dataset and observed what happened when one of
those groups was exposed to the “treatment” (the opening of the
Walmart) and the other was not.

Their conclusion: In the 10 years after a Walmart Supercenter opened
in a given community, the average household in that community
experienced a 6 percent decline in yearly income—equivalent to about
$5,000 a year in 2024 dollars—compared with households that didn’t
have a Walmart open near them. Low-income, young, and less-educated
workers suffered the largest losses.

In theory, however, those people could still be better off if the
money that they _saved_ by shopping at Walmart was greater than the
hit to their incomes. According to a 2005 study commissioned by
Walmart itself, for example, the store saves households an average of
$3,100 a year in 2024 dollars. Many economists think
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(which isn’t surprising, given who funded the study), but even if it
were accurate, Parolin and his co-authors find that the savings would
be dwarfed by the lost income. They calculate that poverty increases
by about 8 percent in places where a Walmart opens relative to places
without one even when factoring in the most optimistic cost-savings
scenarios.

But their analysis has a potential weakness: It can’t account for
the possibility that Walmarts are not evenly distributed. The company
might, for whatever reason, choose communities according to some
hard-to-detect set of factors, such as deindustrialization or
de-unionization, that predispose those places to growing poverty in
the first place. That’s where the second working paper
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posted last December, comes in. In it, the economist Justin Wiltshire
compares the economic trajectory of counties where a Walmart did open
with counties where Walmart _tried_ to open but failed because of
local resistance. In other words, if Walmart is selecting locations
based on certain hidden characteristics, these counties all should
have them. Still, Wiltshire arrives at similar results: Workers in
counties where a Walmart opened experienced a greater decline in
earnings than they made up for with cost savings, leaving them worse
off overall. Even more interesting, he finds that the losses weren’t
limited to workers in the retail industry; they affected basically
every sector from manufacturing to agriculture.

What’s going on here? Why would Walmart have such a broadly negative
effect on income and wealth? The theory is complex, and goes like
this: When Walmart comes to town, it uses its low prices to undercut
competitors and become the dominant player in a given area, forcing
local mom-and-pop grocers and regional chains to slash their costs or
go out of business altogether. As a result, the local farmers, bakers,
and manufacturers that once sold their goods to those now-vanished
retailers are gradually replaced by Walmart’s array of national and
international suppliers. (By some estimates, the company has
historically sourced
[[link removed]] 60
to 80 percent of its goods from China alone.) As a result, Wiltshire
finds, five years after Walmart enters a given county, total
employment falls by about 3 percent, with most of the decline
concentrated in “goods-producing establishments.”

Once Walmart has become the major employer in town, it ends up with
what economists call “monopsony power” over workers. Just
as _monopoly_ describes a company that can afford to charge
exorbitant prices because it lacks any real
competition, _monopsony_ describes a company that can afford to pay
low wages because workers have so few alternatives. This helps explain
why Walmart has consistently paid
[[link removed](17.5%20percent).] lower
wages than its competitors, such as Target and Costco, as well as
regional grocers such as Safeway. “So much about Walmart contradicts
the perfectly competitive market model we teach in Econ 101,”
Wiltshire told me. “It’s hard to think of a clearer example of an
employer using its power over workers to suppress wages.”

Walmart’s size also gives it power over the producers who supply it
with goods. As Stacy Mitchell, a co–executive director of the
Institute for Local Self-Reliance, recently wrote
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Atlantic_, Walmart is well known for squeezing its suppliers, who have
little choice but to comply
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fear of losing their largest customer. Selling to Walmart at such low
prices can force local suppliers to lay off workers and pay lower
wages to those who remain. They also naturally try to make up for the
shortfall by charging their other customers higher prices, setting off
a vicious cycle that allows Walmart to entrench its dominance even
further.

The most direct upshot of the new research is that Walmart isn’t the
bargain for American communities that it appears to be. (When I
reached out to Furman about the new research, he said he wasn’t sure
what to make of it and suggested I talk with labor economists.) More
broadly, the findings call into question the legal and conceptual
shift that allowed Walmart and other behemoths to get so huge in the
first place. In the late 1970s, antitrust regulators and courts
adopted the so-called consumer-welfare standard, which held that the
proper benchmark of whether a company had gotten too big or whether a
merger would undermine competition was if it would raise consumer
prices or reduce sellers’ output. In other words, the purpose of
competition law was redefined as _the most stuff possible, as cheaply
as possible_. But as the new Walmart research suggests, that formula
does not always guarantee the maximum welfare for the American
consumer.

The outgoing Biden administration, with its focus on reviving
antitrust, recognized this. Its most recent enforcement guidelines,
for example, direct
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government to take into account a merger’s effect on workers, not
just consumers, and the antitrust agencies have included such claims
in multiple lawsuits. The question is whether the incoming Trump
administration, which has sent mixed messages on corporate
consolidation, will follow the same path.

Recent history shows the political danger in threatening low consumer
prices. The public’s reaction to the inflation of the past few years
suggests that many Americans would rather be slightly poorer but have
price stability than be richer but with more inflation. That will
tempt policy makers to prioritize low prices above all else and
embrace the companies that offer them. But if Walmart’s example
reveals anything, it is that, in the long term, low prices can have
costs of their own.

_Rogé Karma [[link removed]] is a
staff writer at The Atlantic._

* Walmart
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* Local effect
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* poverty
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