I stumbled upon a fantastic paper the other day from Jason Furman, who served as Chair of the Council of Economic Advisers under Barack Obama (H/T Matt Ygleisas at Vox).
In 'Wal-Mart: A Progressive Success Story' Furman defended Wal-Mart against its left-wing critics arguing that supermarket chain didn't benefit from corporate welfare and raised real wages.
It's a fun paper and it's arguments stretch beyond Wal-Mart. They could easily apply to gig economy firms who have expanded low-paid work and lowered prices at the same time. As well as recent debates around whether tax credits are a form of corporate welfare (they're not).
Here are some of the best bits.
"The most careful economic estimate of the benefits of lower prices and the increased variety of retail establishments is in a paper by MIT economist Jerry Hausman and Ephraim Leibtag (neither researcher received support from Wal-Mart). They estimated that the direct benefit of lower prices at superstores, mass merchandisers and club stores (including but not limited to Wal-Mart) made consumers better off by the equivalent of 20.2 percent of food spending. In addition, the indirect benefit of lower prices at competing supermarkets was worth another 4.8 percent of income. In total, the existence of big box stores makes consumers better off by the equivalent of 25 percent of annual food spending. That is the equivalent of an additional $782 per household in 2003.
"Because moderate-income families spend a higher percentage of their incomes on food than upper-income families, these benefits are distributed very progressively."
"The one study that was published in a peer-reviewed economics journal found that “Wal-Mart entry [in a county] increases retail employment by 100 jobs in the year of entry. Half of this gain disappears over the next five years as other retail establishments exit and contract, leaving a long-run statistically significant net gain of 50 jobs.” The paper also found a small negative impact on jobs at wholesalers “due to Wal-Mart’s vertical integration” and no statistically significant effect on other industries.
"Neumark et al. and another paper by Dube, Barry Eidlin and Bill Lester also studied the impact of Wal-Mart entry on nominal wages. ... All these declines are less than 1 percentage point. The paper also finds that grocery workers’ wages go down in both urban and rural areas and other workers see no significant change in wages. In total, Dube et al. estimate a $4.7 billion annual reduction in retail earnings.
"Neither paper estimated the impact of Wal-Mart on real wages. Presumably the workers in the retail sector and more broadly also benefit from the lower prices that follow the entry of a Wal-Mart. The nominal wage effects in both papers have to be compared to the 7 to 13 percent retail price effect in the long run found by Basker or the reduction in the broader CPI found by Global Insight. Taken together, the evidence appears to suggest that, even for retail workers, the benefits of lower prices could outweigh any potential cost of lower wages –potentially leading to higher real wages even in the retail sector."
On Corporate Welfare:
"The total tax bill, however, is not the relevant question. Instead the question is whether Wal-Mart and its employees pay their “fair share” in a way that is consistent with businesses and workers in similar circumstances. Dube and Jacobs ask one version of this later question. They argue that Wal-Mart pays less than comparable employers (as discussed earlier, the evidence suggests this is not the case) and ask the question: how much do Wal-Mart’s low wages cost taxpayers? They estimate that Wal-Mart pays its full-time workers $8,620 less than comparable employers. They further estimate that Wal-Mart workers get $1,952 in public assistance annually (including Medicaid, EITC, food stamps, and other programs), or $551 more than comparable employers. They assert that this difference is a “hidden cost” of Wal-Mart.
"Their analysis, however, is incomplete and as a result features the wrong answer. Assume that the Dube and Jacobs’ numbers are accurate. If Wal-Mart pays the employee $8,620 less, that money has to go somewhere. If this money goes into corporate profits or executive compensation, it will result in an additional $3,017 in taxes at the 35 percent marginal rate. If even one-fifth of Wal-Mart’s lower wages went to corporate profits or top executives, that would be enough to make its low wages – by the Dube-Jacobs estimate – a net revenue increaser for the federal government. Based on the Dube-Jacobs results, it is overwhelmingly likely that if Wal-Mart pays lower wages, then this would improve the government’s fiscal situation.
"But encouraging private-sector companies to distribute their compensation to maximize net government revenues is peculiar and backwards. Who would recommend, for instance, that a corporation cut pay for its middle-income workers in order to raise executive compensation on the theory that this will raise total tax collections because executives are in a higher tax bracket?"