Friday, July 11, 2008

Wal-mart Growth is Beautiful!

Never thought you'd hear yourself say that? Well, watch this video and listen closely as your brain tells your mouth to say it. hattip to J who knows the value of such things.

When you watch this, you can immediately see the appeal of using distance from Bentonville as an instrument for estimating the effect of Wal-mart's presence on local markets. See Neumark, et al for this pioneering approach. Here's the abstract.
Abstract

We estimate the effects of Wal-Mart stores on county-level retail employment and earnings, accounting for endogeneity of the location and timing of Wal-Mart openings that most likely biases the evidence against finding adverse effects of Wal-Mart stores. We address the endogeneity problem using a natural instrumental variables approach that arises from the geographic and time pattern of the opening of Wal-Mart stores, which slowly spread out from the first stores in Arkansas. The employment results indicate that a Wal-Mart store opening reduces county-level retail employment by about 150 workers, implying that each Wal-Mart worker replaces approximately 1.4 retail workers. This represents a 2.7 percent reduction in average retail employment. The payroll results indicate that Wal-Mart store openings lead to declines in county-level retail earnings of about $1.4 million, or 1.5 percent. Of course, these effects occurred against a backdrop of rising retail employment, and only imply lower retail employment growth than would have occurred absent the effects of Wal-Mart.
Using distance as an instrument for location is becoming more and more common, but for this particular Neumark paper, I've read that some economists think it's a very weak instrument. But, when you watch the above flash program, you can at least understand why Neumark might find this so appealing, since the clustering of Walmarts is tight around Arkansas.

BTW, compare the abstract from Neumark et al to Basker's 2005 ReSTAT paper, "Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion." They each find opposite effects, and in this paper, Basker explains why. These kinds of methodological debates over the appropriateness of instruments are very hard to get involved in, so I won't comment.
Abstract

This paper estimates the effect of Wal-Mart expansion on retail employment at the county level. Using an instrumental variables approach to correct for both measurement error in entry dates and 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 as other retail establishments exit and contract, leaving a long-run statistically significant net gain of 50 jobs. Wholesale employment declines by approximately 20 jobs due to Wal-Mart's vertical integration. No spillover effect is detected in retail sectors in which Wal-Mart does not compete directly, suggesting Wal-Mart does not create agglomeration economies in retail trade at the county level.

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