Skip to content

A Conversation on “Buying Power”: How the Wal-Mart Monopsony Damages Wages and Competition

February 23, 2011

This is a continuation of a previous post, springing from a conversation I had with another blogger.

Despite the savings offered by Wal-Mart’s pricing, it still creates costs for domestic consumers while forcing its suppliers to push down wages globally

As previously stated:

“my argument is a monopsony is a monopoly in reverse.”

Given this, clearly the welfare-loss does not fall directly on consumers, and yes to the extent that Wal-Mart passes on savings to consumers it enhances their welfare. However this misses the point, and we need to be careful when talking about net welfare loss/gain:

If Walmart takes rents and gives back, say, 50% of it to consumers, then this is a huge net reduction in rents, so it is an increase in welfare and efficiency. What am I missing here?

-Adam Ozimek

What you are missing is the fact that even if rents decrease for the consumer at first glance; Wal-Mart creates substantial market distortions by lowering prices, this very process generates substantial rents for Wal-Mart and substantial market inefficiencies.

Even in the first stage analysis, Wal-Mart’s rent extraction constricts supplier markets to the extent of bankruptcy for some suppliers doing business with Wal-Mart. And this is just the tip of the ice-berg!

For evidence and more discussion of Wal-Mart’s anti-competitive rents  with Adam Ozimek click here:

Instances of Wal-Mart inducing supplier bankruptcy have been documented so we know it does occur and is a non-negligible concern:

Eventually Wal-Mart became Lovable’s biggest customer. “Wal-Mart has a big pencil,” says Garson. “They have such awesome purchasing power that they write their own ticket. If they don’t like your prices, they’ll go vertical and do it themselves–or they’ll find someone that will meet their terms.”

In the summer of 1995, Garson asserts, Wal-Mart did just that. “They had awarded us a contract, and in their wisdom, they changed the terms so dramatically that they really reneged.” Garson, still worried about litigation, won’t provide details. “But when you lose a customer that size, they are irreplaceable.”

Lovable was already feeling intense cost pressure. Less than three years after Wal-Mart pulled its business, in its 72nd year, Lovable closed. “They leave a lot to be desired in the way they treat people,” says Garson. “Their actions to pulverize people are unnecessary. Wal-Mart chewed us up and spit us out.”

FastCompany December 1, 2003

Issues of supplier bankruptcy and production below marginal costs are central to Professor Roger Noll’s criticism of the anti-competitive outcomes of  Monopsony business practices.

Yet those who run the factory that produces the drink, Weijiasi Food & Beverage Co., say they haven’t yet shared in the success.

“In the beginning, we made money,” said a manager reached by telephone, who gave his name as Mr. Li.

“But when Wal-Mart started to launch nationwide distribution, they pressured us for a special price at below our cost. Now, we’re losing money on every box, while Wal-Mart is making more money.”

Washington Post February 7, 2004: Retailer Squeezes Its Asian Suppliers to Cut Costs

Also non-competitive pricing due to Wal-Mart’s bargaining down of input prices damages firms who aren’t large enough to do business with Wal-Mart or operate in other countries with higher wages. What this does is drive down wages and production standards globally.

Steve Dobbins has been bearing the brunt of that switch. He’s president and CEO of Carolina Mills, a 75-year-old North Carolina company that supplies thread, yarn, and textile finishing to apparel makers–half of which supply Wal-Mart. Carolina Mills grew steadily until 2000. But in the past three years, as its customers have gone either overseas or out of business, it has shrunk from 17 factories to 7, and from 2,600 employees to 1,200. Dobbins’s customers have begun to face imported clothing sold so cheaply to Wal-Mart that they could not compete even if they paid their workers nothing.

FastCompany December 1, 2003

Furthermore, Wal-Marts’ very size and ability to bargain with suppliers is anti-competitive not just for its own suppliers but also for other domestic retailers who do not have the same bargaining power on suppliers and increasing returns to scale from high fixed costs. So to say that net-rents are down is false. As I previously stated:

I acknowledge Walmart does help efficiency, the problem is it does so at the cost of labor standards globally and undermines retail competition in the United States through a business model based on non-convexities its cost curve and market subsidies and imperfections. Personally, I feel as though these costs to the average working consumer are heavier than any efficiency gains.

Wal-Mart takes advantage of low labor costs and in doing so creates significant market distortions

I believe Roger Noll misses a crucial difference between Wal-Mart and A&P. Wal-Mart is sourcing in a global market; this increases the distortions across regionally variable input prices. Prof. Noll this cites as a chief reason that agricultural monopsonies produce substantial welfare loss (pg.  10 (597)/37) in “Buyer Power” and Economic Policy by Roger Noll.  This wasn’t the case with A&P because it sourced from one market; so that its pricing schemes didn’t distort suppliers markets by taking advantage of input cost variability.

To clarify: Walmart drives prices down in China to the point where production is no-longer profitable, what results is that other countries are forced to drive down their own wages and costs (often to standards which are not sustainable locally: one reason why we see EPZ and migrant labor in Asia). Additionally, as production in China produces increasingly diminishing profits there is less incentive to open factories in China thus production falls globally and as firms fail (or new entrants are slow to set up shop there because of low profitability)  so too does global productivity (from its potentially higher level) .

It is incorrect to only look at Wal-Mart’s prices and then conclude it is good for consumers:

I think your supposing some counterfactual where all rents are dissipated, but really the counterfactual is rents continue to rest with suppliers. Also note that Hausman suggests Walmart takes a lower profit margin then competing grocery stores, so it is apparently reducing rents there as well, not just supplier rents.

You are looking at rents to narrowly. Just because Wal-Mart successfully passes on some savings to consumers doesn’t mean it doesn’t generate its own market distortions because of non-convexities from its cost curve and distortions to supplier markets (which are one part of what is generating non-convexities). Wal-Mart’s savings come at the expense of manufacturing wages and domestic retail competition.

Walmart is bad for Chinese Workers

Mr. Ozimek denies that Wal-Mart is bad for Chinese workers in this blog post and in this comment:

“I acknowledge Walmart does help efficiency, the problem is it does so at the cost of labor standards globally”

This is a huge claim which you should offer some evidence for if you have it. Are you arguing that Chinese laborers have were previously accumulating rents that Walmart is bargaining down from consumers? I see no indication why that should be the case, and given the quickly raising wages in China I’d be very surprised if it were true.

-Adam Ozimek

However, there is abundance evidence to contradict those who deny that Wal-Mart’s demands for low prices exact concessions from Chinese labor.

“Wal-Mart pressures the factory to cut its price, and the factory responds with longer hours or lower pay,” said a Chinese labor official, who declined to be named for fear of punishment. “And the workers have no options.”

Washington Post February 7, 2004: Retailer Squeezes Its Asian Suppliers to Cut Costs

The claim that Wal-Mart helps Chinese workers is further disputed as just a PR stunt, by this blog which cites a study stating:

China Labor Watch has published a report on its long-term investigation of Wal-Mart’s Chinese supply chain. The report is based on CLW’s investigations from April to June 2009 of Wal-Mart suppliers Huasheng Packaging Factory and Hantai Shoe Factory.

The group lists violations at Huasheng including:

  • Elaborate system to cheat Wal-Mart audits
  • Some workers make only $0.51/hour, 60% of the minimum wage
  • Poor working conditions: workers inhale large amounts of paper particles and other debris
  • Twelve workers live together in cramped dorms
  • Workers not paid overtime wages
  • During busy season, workday is 11 hours or 77 hours per week, and overtime is mandatory.

If you don’t like these sources, here is a 2008 New York Times article on the subject of Chinese wages and Wal-Mart:

In 2007, factories that supplied more than a dozen corporations, including Wal-Mart, Disney and Dell, were accused of unfair labor practices, including using child labor, forcing employees to work 16-hour days on fast-moving assembly lines, and paying workers less than minimum wage. (Minimum wage in this part of China is about 55 cents an hour.)

No company has come under as harsh a spotlight as Wal-Mart, the world’s biggest retailer, which sourced about $9 billion in goods from China in 2006, everything from hammers and toys to high-definition televisions.

In December, two nongovernmental organizations, or NGOs, documented what they said were abuse and labor violations at 15 factories that produce or supply goods for Wal-Mart — including the use of child labor at Huanya Gifts, a factory here in Guangzhou that makes Christmas tree ornaments.

Wal-Mart officials say they are investigating the allegations, which were in a report issued three weeks ago by the National Labor Committee, a New York-based NGO.

Guangzhou labor bureau officials said they recently fined Huanya for wage violations, but also said they found no evidence of child labor.

Walmart pays less then other similar retail employers

To address Mr. Ozimek’s request to consider the counterfactual:

You’ve also claimed again that Walmart benefits from “market subsidies”, but again consider the counterfactual. It’s not “no low wag jobs”, it’s “low wage jobs in other grocery stores”. Is there evidence Walmart benefits more per worker compared the correct jobs counterfactual?

From a 2005 New York times article on Wal-Mart’s pay versus its competitors:

Here in Bentonville, Mr. Scott pursued that theme. “If you’re telling me because you’re Wal-Mart and you’re going to pay $12 an hour and this other retailer is going to pay $5.15 an hour, the federal minimum wage, and they’re not going to provide any benefits at all and somehow the consumer is rewarded in all this, all you’re doing is perpetuating the status quo,” he said. “You’re driving inefficiencies into the system. It doesn’t make any sense.”

Wal-Mart argues that, as retailing companies go, it treats its workers better than average. It says 74 percent of its employees work full time, compared with fewer than 40 percent at many other retailers. But critics note that a leading competitor, Costco, pays $16 an hour – 65 percent more than the average wage at Wal-Mart stores and 33 percent more than the $12 average at its Sam’s Club stores. At Costco, 82 percent of the workers are covered by company health insurance, compared with 48 percent at Wal-Mart.

Here is another counter factual from a congressional report, where Wal-Mart’s wages were cited as an reason to decrease the pay going to other domestic retail workers:

When a giant like Wal-Mart shifts health insurance costs to employees, its competitors invariably come under pressure to do the same. Currently engaged in the largest ongoing labor dispute in the nation, unionized grocery workers in southern California have refused to accept higher health care costs resulting from cost-shifting on health insurance premiums by their grocery chain employers – cost-shifting, the grocers say, inspired by the threat of Wal-Mart competition. Beginning on October 11, 2003, 70,000 grocery employees of Vons, Pavilions, Ralphs, and Albertsons have either been on strike or locked out. The companies want to dramatically increase workers’ share of health costs, claiming that the change is necessary in order to compete with Wal-Mart’s incursion in the southern California market. E. Richard Brown, the director of the Center for Health Policy at the University of California, Los Angeles, told the Sacramento Bee that, if the grocery chains drastically reduce health benefits, the trends toward cost shifting and elimination of health coverage will accelerate. Following the grocers’ lead, more employers would offer fewer benefits, would require their workers to pay more, and may even drop health benefits altogether.[50] Whether the current pressure from Wal-Mart is real or imagined or merely a convenient excuse for the grocers’ cost-cutting bargaining position, Wal-Mart has sparked a new race to the bottom among American retail employers. Undeniably, such a race threatens to undermine the employer-based health insurance system.

Furthermore here is clear evidence Walmart receives substantial government subsidies from taxpayers

From the same congressional report:

The Democratic Staff of the Committee on Education and the Workforce estimates that one 200-person Wal-Mart store may result in a cost to federal taxpayers of $420,750 per year – about $2,103 per employee. Specifically, the low wages result in the following additional public costs being passed along to taxpayers:

  • $36,000 a year for free and reduced lunches for just 50 qualifying Wal-Mart families.
  • $42,000 a year for Section 8 housing assistance, assuming 3 percent of the store employees qualify for such assistance, at $6,700 per family.
  • $125,000 a year for federal tax credits and deductions for low-income families, assuming 50 employees are heads of household with a child and 50 are married with two children.
  • $100,000 a year for the additional Title I expenses, assuming 50 Wal-Mart families qualify with an average of 2 children.
  • $108,000 a year for the additional federal health care costs of moving into state children’s health insurance programs (S-CHIP), assuming 30 employees with an average of two children qualify.
  • $9,750 a year for the additional costs for low income energy assistance.

In Conclusion

Wal-Mart has also lulled shoppers into ignoring the difference between the price of something and the cost. Its unending focus on price underscores something that Americans are only starting to realize about globalization: Ever-cheaper prices have consequences. Says Steve Dobbins, president of thread maker Carolina Mills: “We want clean air, clear water, good living conditions, the best health care in the world–yet we aren’t willing to pay for anything manufactured under those restrictions.”

FastCompany December 1, 2003

Click Here for a study on Wal-Mart’s domestic wages and ability to raise them without raising prices.

Click Here for some fun Wal-Mart facts.

One Comment leave one →
  1. Anonymous permalink
    November 16, 2012 11:24 am

    Excellent breakdown on this economic issues. It’s clear that American consumerism threatens the global economy. These standards are simply not sustainable.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: