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Walmart and productivity

August 21st, 2003

Brad de Long links to this piece by Robert Gordon arguing that an important segment of the recent gain in US productivity growth has come in retail trade. Gordon says

America’s retail productivity performance has all been achieved in stores newly built since 1990, not in existing stores.

The new stores are the “big boxes” such as Wal-Mart, Home Depot and Best Buy, large new buildings set up on greenfield sites at interstate highway junctions, in suburbs and, increasingly, in inner cities. As these new stores reap the rewards of their size, openness and accessibility and drive smaller stores out of business, they bolster the average productivity of the US retail sector as a whole.

While countries differ, Europe has many ways of stifling modern retailing, from green belts and land-use restrictions to laws that prevent companies from lowering their prices. These make life difficult for new, more efficient retailers in order to protect small, traditional merchants. This is one of many cultural chasms across the Atlantic. Many Europeans could not care less about retail productivity and instead are adamant that Europe must avoid the US’s unregulated land use and starvation of public transport, which have produced its overly dispersed, energy-wasting metropolitan areas.

This is interesting in a couple of ways.

First, it helps to resolve a puzzle I’ve been pointing out for some time. If US productivity growth is so strong, why is employment in tradables like manufacturing shrinking so fast? On this account, the productivity growth is mainly in nontradables.

But the second point is more important. Retail productivity is very hard to measure. For example, measured retail productivity declined in Australia when shopping hours were extended – the extra convenience wasn’t taken into account in the statistics. By Gordon’s account, the apparent efficiency of big, edge-of-town stores is offset by a lot of negative externalities, and higher travel costs borne by consumers, and other road users. As I observed here and here the US has experienced a big increase in distances travelled, even compared to Australia and this has been accompanied by an increase in road deaths, giving the US one of the highest rates of road death in the OECD, about 50 per cent higher than Australia’s. And all of this reflects the fact that road use in the US is substantially underpriced, as was noted in a recent Chicago Fed letter.

Of course, there’s no easy way of telling whether the costs I’ve mentioned outweigh the benefits that are measured in the retail productivity statistics. Since so many of the costs are externalities, the success of WalMart in driving out the competition doesn’t prove anything. But it’s disappointing to see a fine economist like Robert Gordon fall back on cliches like ‘cultural chasm’ in relation to outcomes that are largely the product of economic policy. And, whatever the net balance, it’s clear that the measured growth in retail productivity is an overestimate.

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  1. Uncle Milton
    August 23rd, 2003 at 17:30 | #1

    Where are the externalities? Are you saying all these road deaths are due to people driving to their Home Depot? Road usage is underpriced only when there are congestion costs, or something similar, that are not priced. Are US roads really clogged by shoppers driving to these greenfields stores? And if they were driving instead to brownfields stores, why would the road costs be any less?

  2. John
    August 23rd, 2003 at 18:36 | #2

    The price is too low, therefore people drive more often further, therefore total congestion is greater. Where is the difficulty in that?

    Note that, in this context, the most significant externality is not traffic jams but road death. Insofar as if affects other motorists, this is a ‘congestion’ externality in the economic sense, but not in the ordinary language sense. But costs imposed on nonmotorists are also important.

  3. oss
    August 25th, 2003 at 17:41 | #3

    What does Walmart care about the externality? People will not only travel a long ways, they will also wait in long lines to check out…the one I’ve been to never has more than 3 or 4 of 15 lines open at a time. But like everything at Walmart, the agressive hiring of near-indigents, constant manipulation of prices, etc….its by design.

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