Is Wal-Mart Good for the Local Economy - Term Paper Example

 Introduction: Wal-Mart is the largest retailing company in the world. It has more than 5000 stores all over the world. It employs about 1.5 million people. It attracts about 100 million people per week. According to the traditional system of retailing, the manufacturer would decide how much quantity of a good is to be produced and how much must be sold by the retailer. The manufacturer also would decide the price at which the retailer would sell the good. This was called the “push system”. However, the Wal-Mart came out of such a push system and adopted the “pull system” in which the retailer would direct the manufacturer in terms of how much to produce and what to produce. Wal-Mart is driven by the objective that they should serve their customers to the best way possible keeping the costs as low as possible but still earn a reasonable amount of profit. The paper will analyze the reasons as to why Wal- Mart is not good for the U.S. economy. (The Multiple Meanings of Wal-Mart, April 2005; Lowhorn, 2004) Pitfalls of Wal-Mart: Wal-Mart being the largest retailer in the world has focused on the objective of serving the people of America to the best possible way. Wal-Mart has made the goods available to the consumers at low prices. Wal-Mart aims at keeping its costs low. This very objective of Wal-Mart has raised a debate relating to its existence to be good or bad for the society. To keep the costs of production low, Wal-Mart keeps the wage level that it pays to its employees at a low level. In other words, the workers of America who work in Wal-Mart remain underpaid. The low wage also implies that the workers have a very little level of disposable income, which in turn will not help to stimulate the growth of the U.S. economy. The fact that Wal-Mart provided the consumers with goods at cheap rates had created a negative effect on other retailers. This was because consumers would obviously prefer the cheap rates of Wal-Mart rather than the high rates of local retailers. This affected the business of the local retailers. Wal-Mart does not provide its workers with good medical facilities. The workers have to pay a huge amount of money from their pocket for their medical purposes. The amount that they get from Wal-Mart for their medical bills is minimal. We know that the wages that are given to the workers are low. Therefore, it is obvious that the workers will not be able to afford good medical facilities. This affects the productivity of a worker largely. The money that Wal-Mart earns does not go to the society. In other words, Wal-Mart dodges its taxes. The company makes false statements thereby neglecting its tax burden. Such a situation immediately raises the tax rate for individual taxpayers. The government raises their tax rate to curb the difference. Wal-Mart creates an unhealthy environment. It is not friendly with their workers and their families. The parking lot of the company is not safe; the company also does not impose strict regulations on smoking. Therefore, the company creates an unhealthy and unsafe environment for the children. (Why Wal-Mart does not strengthen our economy, 2008). We can relate the above issues of Wal-Mart to macroeconomic concepts. Analyzing the Relation with macroeconomic concepts: The first point is that Wal-Mart introduced a “pull” system of retailing. This means that Wal-Mart would direct the manufacturers regarding what to produce and how much to produce. While studying macroeconomics, the first three basic questions that are asked are - what to produce, how much to produce and for whom to produce. In this case, also Wal-Mart decides what consumer goods the manufacturers must produce. Wal-Mart also instructs them regarding the quantity that is to be produced. The question of for whom to produce implies the customers that Wal-Mart will serve. This is the first macroeconomic idea that can be related to the business of Wal-Mart. Wal-Mart, as any other company will want to maximize its profit level. For attracting more customers, it keeps the price of the goods at a low level. However, if prices are kept low then the profit level of the company must also be low. However, this does not happen because the company reduces its cost of production. One way of reducing the costs that has been adopted by the company is by paying low wages to the workers. Low wages means that the income earned by the workers is low. This in turn again implies that the workers have a low disposable income. According to macroeconomic theory, a low-income level automatically implies a low consumption level. If consumption is low together with low income, level the investment in the economy will also be low. If investment is low then the aggregate output level of the economy is bound to fall. Therefore, the economy will be characterized as a low-income country with low output level. In this context, we can refer to the IS-LM model. The IS curve or the investment-saving curve and the LM curve or the liquidity-money curve shows the relationship between rate of interest and the aggregate output of the economy. The main determinants of the IS curve are consumption, investment, government expenditure and the income level. The main determinants of the LM curve are money demand, interest rate and the income level. Investment is inversely related to interest rate i.e.: higher the interest rate lower is the investment level in the economy and hence low level of income and output in the economy. Demand for money is also inversely related to rate of interest. The IS curve is negatively sloped because the output level falls with an increase in interest rate. The LM curve is positively sloped because when rate of interest raises demand for money falls and supply of money in the economy rises. The IS-LM concept can be depicted in the figure below: (R) Rate of interest LM” LM curve (LM) R1 Initial equilibrium point R0 Is curve (IS) Y1 Y0 IS” New equilibrium point Aggregate output (Y) (Mankiw, 2007) In the above figure the initial IS and LM curves are depicted as IS and LM respectively. The initial equilibrium point is shown. The initial levels of aggregate output and interest rate are Y0 and R0 respectively. They are obtained from the intersection of the initial IS and LM curves. Now, when Wal-Mart gives a low wage to its workers, the consumption level of the workers will also be low. This implies that the level of investment will also be low. When investment falls it implies that the aggregate level of output will fall resulting in a downward shift of the IS curve to IS”. The fall in investment will increase the rate of interest from R0 to R1 thereby shifting the LM curve towards the left to LM”. The new equilibrium is now at the intersection of IS” and LM”. Therefore, the basic idea that we can develop from the above diagram is that when Wal-Mart Company gives a low wage to its workers, they are unable to maintain a good standard of living. Their consumption level falls, which in turn reduce the investment, income level of the economy and ultimately lead to the loss of aggregate output level in the economy. The next point that can be related to the macroeconomic idea is that of tax evasion. It was found that Wal-Mart evaded many of the state and local taxes. Tax evasion causes loss of revenue for the society. The tax revenue would go to the treasury of the government. The tax revenue would in turn have provided benefits for the society like establishment of health centers, parks, or any form of public good. Since much of the tax revenue amount is being evaded, to curb the difference the government distributes the tax burden on other individuals of the society. The tax rate of the individuals increases. An increase in tax rate reduces the disposable income together with the level of consumption. A fall in consumption level once again implies fall in investment and fall in the level of aggregate output level of the economy. Therefore, a tax evasion by the Wal-Mart enhances the fall in output of the economy. Another point that can be referred here is that Wal-Mart provides unimpressive health plans for its workers. The amount of health aid that the workers receive from the company is not a very handsome amount. Therefore, the workers, owing to low wage, are unable to afford costly medical facilities. Such a situation can lead to the death of many workers. This will result in the loss of productivity level per worker in the economy. If productivity level falls, then obviously the aggregate level of output in the economy will also fall. Wal-Mart also creates gender discrimination. Wages given to female and male workers vary largely. Female workers are generally given a low wage than the male workers. Female workers can therefore have a tendency to shirk their work. They feel that even if they work hard the wage that they will earn will be low so they find it optimal to shirk. Such a concept can be applicable for the male workers as well. However, if any worker is found shirking he or she may be fired. If this happens then many workers will lose their jobs resulting in an increase in the unemployment level. On the other hand, if unemployment increases then the GDP of the country that is the output of the economy will fall. This concept comes from the Okun’s law, which states that if the unemployment rate increases by one unit then there will be a negative impact on the GDP of the country. Conclusion: Wal-Mart being the largest retailing company does not stimulate the growth of the U.S. economy. It has led to low wages for its workers, poor health facilities, gender discrimination and tax evasion. Wal-Mart has ignored its moral responsibilities. With the objective of providing goods to the consumers at cheap rates and cutting down the costs of production, Wal-Mart was not at all able to make the U.S economy strong. Low wages have not improved the living standards of the workers. If the people in the U.S economy were, only consumers then a low price would be beneficial for the economy. However, the fact is that there are also workers in the society who aim at earning a handsome amount of income in order to support their family and improve their standard of living. The low wage that they get does not actually permit them to do so. The advent of Wal-Mart affected the business of the small-scale retailers. Some individuals are of the view that the people belonging to the anti- Wal-Mart group belong to the elite class, they do not understand the condition of the middle class families and therefore they feel that the objective of Wal-Mart to provide goods at cheaper rates coupled with low wages is not correct for the economy. However, such a concept is not at all valid because of the reasons described earlier. The worth of the Wal-Mart Company will be identifiable only if it gives high wages, good quality health facilities and pays their taxes regularly without any possibilities of tax evasion. Therefore, Wal-Mart is not good for the local economy. References: 1) Lowhorn, A. (November 16, 2004). Special report on is Wal-Mart good for America. Retrieved on June 22, 2010 from: http://www.uky.edu/CommInfoStudies/IRJCI/reports/reportswalmart.htm 2) Mankiw, N. (2007). “Principles of Macroeconomics”. USA: South-Western Cengage Learning 3) The Multiple Meanings of Wal-Mart. (April 2005). personal. Retrieved on June 22, 2010 from: http://www-personal.umich.edu/~walkerdm/papers/multiple_meanings_wm.pdf 4) Why Wal-Mart does not strengthen our economy. (2008). huffingtonpost. Retrieved on June 22, 2010 from: http://www.huffingtonpost.com/david-nassar/why-wal-mart-does-not-str_b_99463.html Read More