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Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion Emek Basker

University of Missouri - Columbia November 2002


The phenomenal expansion of Wal-Mart provides a clean case for studying the labor-market effects of increased efficiency. I estimate the effect of Wal-Mart entry on retail employment at the county level. Using an instrumental-variables approach to correct for both measurement error in entry dates and possible endogeneity of the timing of entry, I find that Wal-Mart entry increases retail employment by 100 jobs in the year of entry. Half of this gain disappears over the next five years, leaving a statistically significant net gain of 50 jobs at the five-year horizon. The decline in retail employment in the years immediately following entry is associated with the closing of both small and large retail establishments. At the same time, retail employment in neighboring counties declines by approximately 30 jobs, and wholesale employment in the entered county declines by a similar number.

∗ I thank Daron Acemoglu, Olivier Blanchard and Sendhil Mullainathan for their support and guidance throughout this project. I have also benefited from conversations with Josh Angrist, Saku Aura, David Autor, Glenn Ellison, Bengte Evenson, Amy Finkelstein, Guido Kuersteiner, Jeffrey Miron, Whitney Newey, Marko Terviö, Ken Troske and seminar participants at the Board of Governors of the Federal Reserve System, Case Western Reserve University, the Federal Reserve Banks of Atlanta and St. Louis, Hebrew Univeristy, MIT, the Univesity of Chicago GSB, the University of Missouri, Tel Aviv University, the US Census Bureau, Washington University in St. Louis and Wellesley College. I also thank Amy Mok, Steven Sadoway and David Von Stroh for their help with typing, and Dorothy Carpenter, Kathy Cosgrove, Rich Lindrooth, Erich Muehlegger, Mike Noel, Jon Zinman, and especially Maurice Drew, Catherine Friedman and Steven Sadoway for helping me gather data for this project. † This paper was completed while visiting the Federal Reserve Bank of St. Louis, which I thank for its hospitality. Needless to say, the views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

“By contributing overwhelmingly to the productivity growth jump in general merchandise retail, Wal-Mart demonstrates the impact that managerial innovation and effective use of IT can have on market structure, conduct, and performance.” — McKinsey Global Institute, 2001



A recent study by McKinsey Global Institute (2001, henceforth MGI) attributes the increase in the productivity growth rate in the 1990s to only six industries: retail, wholesale, securities, telecommunications, semiconductors, and computer manufacturing. Within the retail industry, Wal-Mart has emerged as a clear industry leader. The MGI report states unequivocally that Wal-Mart has “directly and indirectly caused the bulk of the productivity acceleration through ongoing managerial innovation that increased competitive intensity and drove the diffusion of best practice (both managerial and technological)” in the generalmerchandise subsector. This sentiment is shared by industry analysts and, grudgingly, by Wal-Mart competitors.1 How has the expansion of Wal-Mart affected local labor markets? An extensive body of literature in empirical macroeconomics analyzes the effect of technological change on aggregate employment (see, for example, Galí 1999). There is also a growing body of literature in labor economics concerning the effect of firm-level technology adoption on wages and employment within the firm (a recent example is Bresnahan, Brynjolfsson and Hitt 2002). In light of these thriving areas of research, there is a surprising dearth of studies of the effect of entry (or expansion) of a more efficient firm on an industry. There is convincing evidence that much of the growth in aggregate...
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