Before campaigning to shut down Wal-Mart for paying low wages, progressives might remember that poor people are buyers as well as workers. From the latest issue of the Journal of Urban Economics (the link is to the working paper version):
Selling a cheaper mousetrap: Wal-Mart’s effect on retail prices
I quantify the price effect of a low-cost entrant on retail prices using a case-study approach. I consider the effect of Wal-Mart entry on average city-level prices of various consumer goods by exploiting variation in the timing of store entry. The analysis combines two unique data sets, one containing opening dates of all US Wal-Mart stores and the other containing average quarterly retail prices of several narrowly-defined commonly-purchased goods over the period 1982â€“2002. I focus on 10 specific items likely to be sold at Wal-Mart stores and analyze their price dynamics in 165 US cities before and after Wal-Mart entry. An instrumental-variables specification corrects for measurement error in Wal-Mart entry dates. I find robust price effects for several products, including shampoo, toothpaste, and laundry detergent; magnitudes vary by product and specification, but generally range from 1.5â€“3% in the short run to four times as much in the long run.
I don’t have much time for Wal-Mart’s union-busting practices, but it’s important to also remember that reducing prices by 2% in the short-run, and 8% in the long-run, matters a lot to low-income families.
Downunder, Australian Labor has long known that cutting prices helps the poor more than the rich, which is why all our major tariff cuts (1973, 1988 and 1991) were implemented by Labor governments. Here’s hoping the party doesn’t go forgetting these simple principles.