New study says Wal-Mart presence may hinder local poverty reduction

10/28/04

Counties that gained a Wal-Mart store experienced smaller reductions in family poverty rates during the economically strong 1990s than did counties not gaining a Wal-Mart store, according to a new study by a rural economist in Penn State's College of Agricultural Sciences.

The study examined the effect of the retailing chain on county poverty rates. Stephan Goetz, professor of agricultural and regional economics and faculty affiliate in Penn State's Center for Economic and Community Development, explains that, even during the economic upswing of the 1990s, counties that added a Wal-Mart store during the decade saw their poverty rate decline by a smaller amount than did counties not adding a store.

"The average family poverty rate declined nationwide by more than 18 percent between 1990 and 2000," he says. "The statistical model developed for this study suggests that the net predicted effect of a new store was relatively small, amounting to a 0.2 percentage point higher poverty rate for one new store, 0.4 percentage points for two new stores, and so forth compared to the counties where no new store was added.

"Furthermore, the 0.2 percent increase in the family poverty rate associated with one new store represents 8.3 percent of the 18.3 percent national reduction in the poverty rate during the 1990s. In other words, the ability of those counties that gained a Wal-Mart to decrease the poverty rate during the decade was reduced by about 8 percent relative to those counties that did not gain a new store."

Goetz says the effect, while small, is statistically significant and remains after other factors affecting changes in poverty over time are accounted for, including initial poverty and whether the county already had a Wal-Mart at the beginning of the decade. A possible explanation for this finding -- that Wal-Mart deliberately seeks out impoverished communities to locate new stores, and that these communities may in turn have more difficulty reducing poverty over time -- doesn't hold up, according to the researcher.

"The study not only controlled for initial poverty rates, but it also found statistically significant evidence that the chain avoids poverty-stricken areas when it locates new stores," he says. "We're forced to look for other causes of this effect."

One possibility, Goetz suggests, is that the county poverty rate may rise because the chain pays its workers relatively low wages. This especially would be the case if these workers had previously earned higher wages in retail or other establishments that were closed in the face of competition from Wal-Mart.

"However, more subtle factors also may come into play," he says. "First, the local entrepreneurs and owners of the mom-and-pop type retail operations that are driven out of business often represent the leadership class of the local community. As these retail operations are lost, so is the civic capacity needed to deal with local problems of a communal nature, and for economic growth to occur.

"Second, philanthropic capacity to deal specifically with local needs is reduced as local business leaders lose the source of their livelihood. Finally, the loss of small retailers can cause jobs to disappear in well-paying local support sectors, such as accounting, wholesaling and transportation."

The higher poverty rate that is attributable to the presence of a Wal-Mart store means that more residents of the community become eligible for public assistance or welfare programs. Because these programs are funded by taxpayers, the payments basically represent a direct transfer to the corporation's bottom line. In effect, taxpayers subsidize the operation of the chain, and these subsidies can offset any savings consumers may realize by buying goods at a lower cost.

"The Wal-Mart business model has been considered a marvel of modern management and cost-reducing discipline," he says. "Company officials point out that the stores make goods available to the poor that they would otherwise not be able to afford. Our study suggests that the chain also creates costs to taxpayers in the form of greater local poverty than would occur in the absence of the chain. These costs must be added to other local infrastructure-related subsidies that the chain receives to assess the net cost of having a store in a community. In the end, these public subsidies are transferred dollar for dollar to the corporation's bottom line."

Goetz says he was intrigued by the question of Wal-Mart's effect on regional poverty because of his work as an agricultural economist.

"Other researchers and I are concerned with the economic, fiscal and social conditions of the rural and small communities in which farmers operate and into which Wal-Mart first started to expand," he says. "A sizeable share of farm family income is derived off the farm, so it is important for us to study off-farm employment and income opportunities in rural areas. And the big-box phenomenon is an important type of land use, believed to be significantly associated with urban sprawl and the conversion of farmland for development purposes."

The study is consistent with other academic research on Wal-Mart's impacts, which suggests that the chain does not increase the total number of jobs in a community over time.

"Community leaders hoping to expand their region's employment base by 'landing' a Wal-Mart will be disappointed," Goetz says. "What we think is happening is that, although Wal-Mart may increase the real purchasing power in a community by offering lower-priced goods, the store is so tremendously efficient in deploying its workers that the net employment effect is zero."

Source: Eurekalert & others

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