August 20, 2003

Productivity Growth: America vs. Europe

Robert Gordon argues that a big chunk of the miraculous growth in U.S. productivity--and the bulk of the difference between the U.S. and the European experience--comes from the interaction of high investment in IT in the U.S. and the economic freedom to reconfigure retail and sell goods in high-volume from newly-built "big box" automobile-accessible stores: Home US: ...Where does Europe fit in? The data show that Europe's performance is worst in those industries that are heavy users of ICT, especially retail trade, which just happens to be where the US's productivity showing is strongest. America's retail productivity performance has all been achieved in stores newly built since 1990, not in existing stores.

The new stores are the "big boxes" such as Wal-Mart, Home Depot and Best Buy, large new buildings set up on greenfield sites at interstate highway junctions, in suburbs and, increasingly, in inner cities. As these new stores reap the rewards of their size, openness and accessibility and drive smaller stores out of business, they bolster the average productivity of the US retail sector as a whole.

While countries differ, Europe has many ways of stifling modern retailing, from green belts and land-use restrictions to laws that prevent companies from lowering their prices. These make life difficult for new, more efficient retailers in order to protect small, traditional merchants. This is one of many cultural chasms across the Atlantic. Many Europeans could not care less about retail productivity and instead are adamant that Europe must avoid the US's unregulated land use and starvation of public transport, which have produced its overly dispersed, energy-wasting metropolitan areas.

Posted by DeLong at August 20, 2003 08:23 AM | TrackBack


Interesting post. The following statement seems unjustified (and inconsistent with the remainder of the post).

"These make life difficult for new, more efficient retailers in order to protect small, traditional merchants."

Green belt legislation is not set up to protect small, traditional merchants. It is set up to preserve green space. Having just returned to Canada from visiting the place I grew up in the UK, I can say that the green belt idea makes a huge difference, and mainly for the better.

Posted by: Tom Slee on August 20, 2003 08:34 AM

Interesting. The richest man (according to general believe)from this country is Ingvar Kamprad. He is the "I" and "K" that bought out the "E" and "A", whose name is all forgotten. If you recognise the brand, it should gives Robert Gordon's idea further support.

Posted by: Mats on August 20, 2003 09:06 AM

When we are in France or Germany or the Netherlands, we are always impressed with how comfortable the lives of middle class families are. I suppose it would be an endless tragedy if middle class Americans had the vacation time the French or Germans or Spanish or Swiss have, but perhaps perhaps perhaps not.

Really, I do not wish to watch the French become Americans. They really do well being French.

Same for the Swedes or Italians and even even the Japanese.

Posted by: anne on August 20, 2003 09:14 AM

I recall from my time studying abroad in France, eight years ago that "les Grande Surfaces" (the big box stores) were a contentious political issue there.

In particular, the ones that used cheap gas as a loss leader to draw people in seemed to have rather adverse effects on the gas stations/general stores for miles around.

Posted by: Patrick (G) on August 20, 2003 09:19 AM

"They really do well being French", actually, most OECD populations do better than the US one in terms of expected life-time, infant mortality etc.

Posted by: Mats on August 20, 2003 09:23 AM

Italy's High Quality of Life and Strained Pension Plans

MILAN - Amelia Antonetti retired nine months ago after 31 years as a high school teacher and now spends her days looking after her husband and three grown children. All the while, Mrs. Antonetti, 56, collects 90 percent of her last salary and will do so for the rest of her life.

The laws that let Mrs. Antonetti retire when many countries would still consider her to be of working age have helped make Italy's quality of life among the highest in the world. Those same laws are stretching the country's pension system to the limit as the government struggles to pay its obligations to a rapidly aging population....

Posted by: anne on August 20, 2003 10:06 AM

So who is our economy FOR?

It comes down to whether we want to be greeters at Wal-Mart, and look at Wal-Marts, and have our downtowns be all Starbucks and Gap stores -- or live in nice, pleasant communities with small bakeries and neighborhood stores owned locally... We (those few in America who get to make these decisions) are choosing the former. France chooses the latter.

Economically the Wal-Mart scenario doesn't help the average person one bit - we're going to be the greeters. The products on the shelves will be produced by people making 15 cents an hour somewhere. Fewer and fewer people getting the benefits.

Am I exaggerating? The answer lies in the statistics for concentration of wealth. If concentration of wealth is accelerating, then no, I am not exaggerating.

Posted by: Dave Johnson on August 20, 2003 10:44 AM

Well, I live in Bethesda (Maryland), which is known as a place with bakeries, neighborhood stores, street life, restaurants-- all those cozy, desirable urban amenities. The catch is that it's expensive. I tell people that the motto inscribed under the Bethesda coat-of-arms is 'Bring Money'. You may object to Wal-Mart's esthetic lapses, but it has brought wide retail choices at low prices to places that didn't have it before.

Posted by: Matt on August 20, 2003 12:18 PM

I would gladly sacrifice the productivity gains the US has gotten in the last few years for Big Box stores. It is clear that the vast majority of the economic growth gains made over the last two decades has gone to the wealthiest Americans. Perhaps most Americans would be better off with lower productivity gains, espeshally given the current productivity gap producing unemployment.

This might be a good place to point out the positive externalities of having local community based retailers, and land use regulation.

I currently live in downtown Oakland, a place evicerated by Big Boxes set up in that whore of a town, Emeryville.

Posted by: mrkmyr on August 20, 2003 12:31 PM

I think most of the commentors here have it backward. Small specialized shops benefit the upper-middle classes and the rich; these are the folks who want to pay for variety, convenience and service. The middle and upper classes live very well in Paris and in Bethesda. The working classes and the lower middle class benefit tremendously from Walmart. You can make your snide middle-class comments about Walmart "greeters" but the guy who stocks the selves at "Joe's MainStreet Shoe Store" gets paid the same amount, isn't unionized either, and gets fewer benefits. And, further, the vast majority of the lower-middle class doesn't *work* at Walmart they *shop* at Walmart. How are they better off paying twice the price at Joe's Shoe Store? It is fine if you think society ought to force poor folks to pay higher prices so that the rest of us can shop at cute neighborhood stores. But don't claim you have the best interest of poor folks at heart.

Posted by: Steve Berry on August 20, 2003 01:06 PM

The guy stocking the shelves at Joe's Shoe Store is Joe's kid; he isn't paid much but he'll inherit a share of the capital. So will the kids of Sally's shoe store in the next little town. When Walmart moves in, Joe & Sally junior - and their parents - fight for the shoe-stocking jobs there, 2.5 of them get work, at most one of them is counted as fulltime and gets benefits, and none of them inherit anything.

Posted by: clew on August 20, 2003 01:37 PM

I wonder if the gain in productivity greater than the direct time losses to individuals (the amount of time spent driving to and from such stores is staggering) and the externalities of a large-scale automobilie infrastructure?

Posted by: Randolph Fritz on August 20, 2003 01:39 PM

I respectfully disagree with Steve Berry.

Walmart is cheaper because it is more productive, that is to say, less labor intensive. Joe's Main Street Shoe Store "wastes" more money on shelf stockers because Joe maybe isn't so efficient, or maybe just because Joe can't look human beings in the eye and still treat them the same way Wal-Mart does.

And I think I'm not going too far out to say that shelf stocking is an entry-level job, that is, something that the more the merrier for poor folks.

And even free-trade economists don't seriously attack the "multiplier" concept of local wages, which Joe generates whilst Wal-Mart's money flows out of the community to Arkansas and China.

So I *do* claim that I have the best interests of the poor at heart, and don't presume to tell me otherwise.

PS: Didja know that there are nearly 400 shut down Wal-Marts in the US?? Discuss, using your cherished Econ 101 concepts.

Posted by: a different chris on August 20, 2003 01:42 PM

If true, this analysis fits nicely into the exploitation argument I have been pushing all along. After all, Wal-Mart is synonymous with "exploitation," both of its workers and its suppliers. "Modern retailing" gives corporations big profits and gives consumers cheap goods. It also supplies low wages and low benefits, battles union activity, acts as a huge accelerator on the US current account deficit, destroys smaller businesses (which notably funnel much more of their revenue into local communities), undermines democracy and aggravates deflation.

I have some interesting numbers comparing capital investment and productivity gains on the web site.

Posted by: General Glut on August 20, 2003 02:28 PM

If true, this analysis fits nicely into the exploitation argument I have been pushing all along. After all, Wal-Mart is synonymous with "exploitation," both of its workers and its suppliers. "Modern retailing" gives corporations big profits and gives consumers cheap goods. It also supplies low wages and low benefits, battles union activity, acts as a huge accelerator on the US current account deficit, destroys smaller businesses (which notably funnel much more of their revenue into local communities), undermines democracy and aggravates deflation.

I have some interesting numbers comparing capital investment and productivity gains on the web site.

Posted by: General Glut on August 20, 2003 02:33 PM

Many to most of those "shut down Wal-Marts" were replaced by reasonably nearby bigger Wal-Marts. I used to live near one. Its exit blighted the immediate area; but before Wal-Mart came, there was no immediate area, businesswise - Wal-Mart created it. Wal-Mart leaving didn't hurt anything that Wal-Mart hadn't created.

The productivity gains Wal-Mart receives aren't merely due to lower labor costs. Their warehousing system allows them to stock their stores at far lower cost - in labor, fuel, transport - than local stores. Their market power allows them to purchase inventory at a lower price than mom-and-pop do, as well. However, by providing a single big customer, suppliers such as Johnson&Johnson benefit by having standardized systems for selling to Wal-Mart, vs. having to hand process the orders from Mom&PopMart - lower costs for them, as well.

All of these things put people in filing, shipping, etc. out of work. These people then find work elsewhere, because those poor people who now shop at Wal-Mart, rather than Mom&Pop, spent less to buy the stuff they need, so they can now buy other stuff with the leftover money. Someone has to make that other stuff, ship that other stuff to Wal-Mart, etc. Wal-Mart creates the jobs for the people it puts out of work.

Mom&Pop's kid may well have inherited Mom & Pop's store. Something like 7 chances in 10 he would run it into the ground, too. Most small businesses do not survive the transition to the second generation. (My father's didn't.) Talent in running small businesses is rare, and apparently not consistently heritable.

If you are confused - higher efficiency means that the same amount of useful stuff is created using fewer raw materials and labor. The left-over raw materials and labor can then be used to make other useful stuff. More stuff created with the same raw materials and labor = more material wealth for society. Some of that accrues to the owners as profits. Some of it as higher wages to labor. Some goes to consumers as lower prices - and thus makes labor's old wage buy more. Wal Mart is good because it makes the buck the guys working at McDonalds, McDonnell-Douglas, and McUniversity earn go further - those benefits far offset the losses to the people Wal-Mart displaces.

Posted by: rvman on August 20, 2003 02:47 PM

Mats makes his point very elegant: I think we should avoid to focus to much on this figure of productivity growth. It's too bad that stockholders do that.
Even more important maybe to avoid such a theoretical way of reasoning rvman shows. I refer to the last part of his contribution (I agree that we should not idealize the work at mom&pop or demonize the work at big corporations): it looks to me that he just CLAIMS on theoretical grounds that everyone profits from (every?) productivity growth.

Posted by: Frans Groenendijk on August 20, 2003 05:52 PM

Not to disturb the ongoing discussions about Wal*Mart and related topics, but here's an interesting summary graph of retail productivity growth across the Nineties:

The first big surprise to me was the big growth numbers, which I guess was the point. :-) Except for things like restaurants and grocery stores, productivity gains were really robust. It's almost as if what US productivity has done in this decade is catch up with the best sectors of retail productivity...

Which brings me to my second surprise. I had always naively assumed that retail productivity was calculated as the ratio of value added at retail (sales minus cost of goods) and hours worked. But I was unable to find anything on the net in a few minutes that gave the US definition as anything other than "output per hour worked" which sounded suspiciously like sales per hour worked. Is this really what is used? If so, then it strikes me that you could be measuring something very different than what I think would intuitively be assumed. Couldn't you spoof this measure of productivity just by having people substitue more expensive goods for what they purchased before? So, even within a sector, if I buy the better grade plywood or the more expensive pritner or (heck) even the grande size coffee, then I've increased retail productivity. I guess that would make sense if we think it was something about the salesmanship of retailers that caused the upgraded purchases, but in an era like the late 90s when luxury grew common place in some circles, I wouldn't jump to blame the sales drones. So what am I missing here?

Posted by: Jonathan King on August 20, 2003 10:27 PM

Jonathan, I think the examples you give would likely do well under a value added measure too. Whether a Wal-Mart type example with lower margins but higher sales from a limited number of employees would look as good is less clear to me. What the improvement actually is makes a good question however. Is it fewer sales people per square foot? Better stock control? Better check out procedures? Do the new figures include Amazon? Do postal workers get included in the numerator if they do?
As far as I can see the main US retailers that have a presence in Europe are Starbucks and soon possibly Wal Mart, neither of which seems to be very technologically based. Starbucks decoffeinated caffeine and sofas for rent seems to rely on a simple product innovation while Wal-Mart's great strength seems to be its buying power and focus. In contrast the afore mentioned Ikea and Zara which has reduced the length of its product cycle by a factor of two and so can change its product range mid season and has much less wastage than rivals.
I don't know that I disagree but large stores in cheap to uild barns will be cheaper without any technological innovation because they have lower rent, may be more efficient in use of labour, will certainly be cheaper logistically, and will be easier to stock accurately even without technological developments. I'm not sure that the gains aren't real but what do they have to do with IT and to what extent are they substituting the shoppers gas for the store's gas?

Posted by: Jack on August 21, 2003 12:01 AM

he productivity gains Wal-Mart receives aren't merely due to lower labor costs. [...] Their market power allows them to purchase inventory at a lower price than mom-and-pop do, as well.

You've nailed exactly why Wal Mart tops the Fortune 500 IMO: Market power. Their size, both in terms of increasing returns to scale and distorting their markets for supplies and labour allows them to extract more profit than any competitor.

Posted by: Lorenzo on August 21, 2003 06:14 AM

That's just it - their Labor market isn't distorted. They may be the monster in supply-chain, but they are in the same marketplace for labor as every grocery store, shoe store, department store, drug store, Home Depot, restaurant, and fast food chain around. They may be the "big employer" in retail in some very small markets, but they are not dominant most places, and they aren't deflating wages. They are dominant in their RETAIL niche, but not in their LABOR niche. Someone who worked for the clothing store they replaced might go to work for them, but he might go to work at the mall, he might go to work at Mervins, or he might take a completely different job. Retail is not a specialty skill even on the level that sales could be, so dominance in the discount retail niche doesn't translate into dominating some kind of discount retail labor market - there isn't such a thing.

Posted by: rvman on August 21, 2003 07:21 AM

I'm not claiming Wal-Mart pays great wages. They don't. Neither did the stores they replaced, except maybe nepotistically. Most of retail is stocking shelves, mopping bathrooms, carrying bags and boxes to cars, running computerized cash registers, and pointing customers to merchandise. Trained monkey work, earning trained monkey wages. "Greeters" are typically elderly people who wouldn't otherwise have jobs at all - why is it so horrid that Wal-Mart provides $6 an hour jobs to people who otherwise wouldn't have a job? If anything, Wal-Mart probably has better wages and benefits than the small mom&pop it replaced - as a large chain, it is much more likely to be caught and assailed if it forces unpaid overtime, pays less-than-minimum wages, docks pay illegally, etc. Small stores pay bad wages, they cheat, they provide no benefits to anyone (even managers), and there is no room for advancement. Wal-Mart pays low wages, they don't cheat, or are caught when they do, provide benefits to certain workers (some not even managers), and there is room for advancement. On the flip side, there is no union. Small store unions? Hah! Face it, Wal-Mart replaces lousy low-paying jobs with slightly fewer slightly less lousy low-paying jobs. That's it.

Posted by: rvman on August 21, 2003 07:33 AM

rvman, you must be confused. Don't you see the obvious similarities between the increasing productivity gains in retailing and manufacturing and the previous gains made in farming? Didn't larger more efficient farms lead directly to permanent unemployment/underemployment by all of the displaced Sally and Joe Jrs. Why shouldn't we expect the same effects here? ;)

Seriously, calling greenfield laws stifling to retailing requires a naive disregard for the concept of externalities. It is pretty poor economic reporting.

Posted by: Stan on August 21, 2003 07:52 AM

In his last set of comments, rvman just goes off the deep end. Does he really not know that Walmart has repeatedly been shown to force workers to stay for unpaid overtime (not even overtime w/o time-and-a-half - simply free work for the world's richest company)? What Mom&Pop does this, and gets away with it? And as Stan points out, rvman's Bizarro claim that Walmart replacing, wholesale, the downtowns of 5 communities at a time results in no net job loss (let alone income loss) is directly opposed to his earlier comments about how Walmart frees up people to be more productive (apparently flipping burgers for McDonald's is inherently more productive than running the soda counter for Mr Gower).

Furthermore, rvman claims that Walmart has little power in the labor market. Oh? Then why do people put up with being locked into a building to work for no pay? Shouldn't they just walk across the street to the clothes store, the drugstore, the McDonald's? Oh wait - all of those businesses are INSIDE Walmart. Yes, in the more suburban location Walmart's moved into in the last 5 years, there is a better (more competitive) labor market. But the majority of Walmarts remain in rural America, where they've effectively demolished any competing retail employers.

I love the part where rvman claims that closed Walmarts don't "destroy anything they haven't created." Really? So Walmart created a working farm, a healthy watershed, and a diverse ecosystem? Because when Walmart builds on a greenfield site, that's what gets destroyed (along with, of course, local businesses). Then 5 years later, Walmart gets a bigger greenfield, demolishes it, and closes down the surrounding Walmarts, leaving empty hulks polluting the landscape (in every sense).

This isn't some idealist paean to rural America and Mom & Pop - this is what Walmart does. It's the free market ideologues who don't figure anything without a literal price tag who are idealists. Americans haven't chosen Walmart - it's been chosen for them, by land use lawyers and by business opposition to regional planning. Plenty of communities - rich and poor - have opposed Walmarts, but there's always a town next door or down the highway that is willing to give Walmart what they want - another race to the bottom. Doesn't matter if the bums get thrown out of office - Walmart's there, and the woods are gone, and Mom's greeting, while Pop tries to figure out what to do.

Posted by: JRoth on August 21, 2003 08:40 AM

JRoth, did larger more efficient farms lead directly to permanent unemployment/underemployment by all of the displaced Sally and Joe Jrs during the agricultural revolution? It is what you and others here are arguing will happen this time. Is rvman confused?

Posted by: Stan on August 21, 2003 09:08 AM

I only know what I read in the papers, but recent articles in the business press note non-Wal-Mart retailers are burdened with union labor at higher wages than Wal-Mart pays. Thus while the claim that all wages in the retail sector are "monkey wages" may be true, but some simeons are better paid than others.

And now, the news. The Philly Fed's headline factory index rose to 22.1 in August from 8.3 in July (that is, to stupendous from pretty good), but what do you know, the employment index fell to -8.7 ("you're all fired") from 0.8. That's productivity, by gum!

Posted by: K Harris on August 21, 2003 09:24 AM

I've been playing with some toy models of a small economy, trying to figure out the dynamics of productivity increases.

One aspect that I've noticed is that: if one entity has a resource/product/service that the others need to survive, should one of the other entities increase (or is capable of increasing) their productivity, the monopolist can increase the price of its resource/product/service without any additional effort on his part. The non-monopolist(s) is(are) not in a position to negotiate.

In the case of Walmart, it looks like it adroitly used its comparative advantages in semi-rural areas to grow to a near-monopoly retail player that allows it to extract productivity increases from its suppliers, which ends up costing the national economy manufacturing jobs. Some of the productivity increase is passed on to walmart customers, undercutting other retailers, thereby firming up its monopoly position, which then allows it to extract maximum productivity for minimal wages from its retail employees.

Good for Walmart,...up to the point were its productivity exploitation starts to undermine the national labor market.

Posted by: Patrick (G) on August 21, 2003 10:00 AM

Well, the farm exmple is someone else's, so I don't feel too obliged to defend it. Suffice it to say that a single "farmer" could conceivably supply every bit of produce sold in the US, but a single retailer can't supply every consumer need. Farms were only brought up because rvman was claiming (at one point) that Walmart somehow was _not_ displacing workers.

It's worth noting that ex-farmers became (better-paid, more productive) factory workers, who have become (worse-paid, less-productive) service workers. Oh ye White Gods!

Posted by: JRoth on August 21, 2003 10:40 AM

I do want to make one point clear: I don't think Walmart is an unalloyed evil. Many of their productivity improvements have been pure, innovative increases in efficiency - superior inventory tracking, better product management. But they have combined these positive contributions with negative ones, including labor outrages - here and overseas - for which they should be closely overseen, if not shut down. Bizarrely, they have fought against making their stores greener, although their own research has shown that it is more efficient (higher sales in daylit stores, etc.). I suspect they don't want to be forced to be any greener than they choose to be, so they avoid the entire area.

Why can't the world's most efficient retailer succeed without abusing human beings and the environment? I wish I knew.

Posted by: JRoth on August 21, 2003 10:49 AM

I did point out that it is easier to catch cheating by the big guys than by miriad little guys. I am aware that Wal-Mart's labor practices have been less than optimal, to say the least. And they were caught. I am proposing that conditions are often, indeed typically, worse in mom & pop outlets. Yes, many of the latter are model citizens. But a great many are as bad or worse than Wal-Mart could even dream of getting away with. There is more to the world of small retailers than the romantic ideal of the family business. Many resemble "the family business" in their business practices.

Sally and Joe have not been left permanently unemployed by leaving the farm, by the way. Sally and Joe ran the farm until they died, and the kids sold out - not wanting to be farmers under the circumstances. Or Sally and Joe lost the farm to the bank, or sold it, moved to Seattle,and went to work on the line for Boeing. (That is the story for one farm family I know.) Short term trauma is the necessary cost of long run growth. We can reduce the pain, but any reduction of the pain which leaves Sally and Joe on the farm, or in the obsolete small retailer, or punishes the more efficient alternative (corporate farms or Wal-Mart) is deferring, not mitigating, the pain. The family farm which produces "bulk" produce is a relic. Sally and Joe may have survived, by farming "organically" and marketing the product as an elite brand. (See Oxbow Hay, for example.) We are not served as a nation by protecting businesses which cost more to preserve than the value of the product they produce.

Posted by: rvman on August 21, 2003 12:12 PM

The debate over Wal-mart seems to be a class thing. Upper-middle class people generally consider Wal-Mart an abomination and a blight on the landscape. Their taste in shops runs to the small and quaint. Lower-middle and working class people fill Wal-Mart in droves, and love a trip to Wally World. The popular classes, alleged victims of Wal-Mart, are unable to perceive the great wrong allegedly being perpetrated on them.

Posted by: Joe Willingham on August 21, 2003 03:17 PM

Patrick - I don't quite understand what you're saying. If manufacturers become more productive, why doesn't that benefit other retailers as well? If you go to Target, or most supermarkets, you'll see the exact same things that Wal-Mart sells, but they're more expensive at these other stores. I had assumed that Wal-Mart somehow ran its business more efficiently, and that was the reason for their lower prices.

Posted by: rps on August 21, 2003 10:37 PM

There was a time magazine article on Wall Mart store practices. Unfortunately I have not been able to find it again. The article did point out an interesting fact. Wall Mart maintained strict price control on purchases long before it became the shopping behemoth it is today. It did this through removal of gifts from producers to Wall Mart purchasers, non-specific store inventory, superior inventory management, superior merchandise turnover, and flexible store space. In many ways, the Wall Mart model is an upgrade of the Kmart/Sears shopping model. Much the same has the Japans assembly line was an upgrade on the original Ford assembly line. Producers earn more, Wall Mart earns more, and the customers pay less.

I was under the impression that Improved production or sales methods have always resulted in a loss of jobs in a specific industry. Why is it so bad when related to Wall Mart?

Posted by: James on August 22, 2003 12:41 PM
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