HAS WAL-MART BURIED MOM AND POP?: THE IMPACT OF WAL-MART ON SELF-EMPLOYMENT AND SMALL ESTABLISHMENTS IN THE UNITED STATES

This paper explores the widely accepted view that Wal-Mart causes significant harm to the traditional small "mom and pop" business sector of the U.S. economy. We present the first rigorous econometric investigation of this issue by examining the rate of self-employment and the number of small employer establishments using both time series and cross-sectional data. We also examine alternative measures and empirical techniques for robustness. Contrary to popular belief our results suggest that the process of creative destruction unleashed by Wal-Mart has had no statistically significant long-run impact on the overall size and profitability of the small business sector in the United States. (JEL L81, D59, C21) ********** Wal-Mart has indeed set prices low enough to drive mom & pop stores out of business all over the country and kept the prices that low forever. (1) During the last 20 years, Wal-Mart has moved into communities and destroyed them, wiping out stores, slashing the tax base, and turning downtown areas into ghost-towns. (2) I. INTRODUCTION The argument that Wal-Mart inflicts significant harm on the small "mom and pop" business sector of the U.S. economy is so widely accepted that one of the paper's opening quotes is actually from a pro--Wal-Mart article, which goes on to discuss the merits and efficiency enhancements that result, claiming that "[i]n a free market, large suppliers of nearly every thing will drive most small suppliers out of business." Even President Clinton's former Secretary of Labor, Robert B. Reich, writes in the New York Times that Wal-Mart will turn "main streets into ghost towns by sucking business away from small retailers." (3) Wal-Mart Watch, one of the largest anti--Wal-Mart organizations, features an article claiming that in Iowa, Wal-Mart's expansion has been responsible for widespread closings of mom and pop stores, including 555 grocery stores, 298 hardware stores, 293 building suppliers, 161 variety shops, 158 women's stores, and 116 pharmacies. Previous estimates of the negative impact of Wal-Mart on other businesses, such as the numbers cited above, however, are misleading for several reasons. First, these estimates come from a series of applied policy studies that simply compare averages for counties with Wal-Mart stores to those without Wal-Mart stores. (5) While the findings from these studies have garnered significant media publicity and widespread public acceptance, they are problematic because no econometric methods are employed, making it hard to know if the differences are statistically significant and whether or not the difference is really due to the many other economic and demographic factors that differ between counties with Wal-Mart stores and those without. The second, and biggest, problem with these previous studies is that they employed data only for directly competing retail business sectors within that specific county. (6) Because of its sheer size, Wal-Mart's true impact on the overall U.S. small business sector stretches far beyond the impact any one store has in any one county. The idea of creative destruction, first eloquently stated by Schumpeter (1934), explains how entrepreneurs, like Sam Walton, are a disruptive force in an economy. (7) Schumpeter emphasized the beneficial aspects of this process of creative destruction, one in which the introduction of new products results in the obsolescence or failure of others. Schumpeter pointed out that while these inventions do indeed result in business failures in certain areas, they result in overall net gains because of the positive impacts on economic activity in other areas. (8) These impacts are, however, widespread and often hard to identify. (9) Similarly, Wal-Mart's openings, while resulting in the failure of some small businesses, create opportunities for new businesses, both large and small, not only in that local area but also in other more distant places. …