How huge, low-cost, low-wage retail flourished in the US economy

Until the late 19th century, the US retail sector was overwhelmingly local and consisted of small, independent merchants from around the country. It began to change after Sears and Lowbuck’s famous catalogue became popular and allowed the company to grow. Meanwhile, rival Montgomery ward has also expanded. By the 1930s, there were 130,000 chain stores in the US, with supermarkets (A&Ps) in the Atlantic and Pacific Oceans at the top, with over 15,000 stores.

Since the first century, the US retail industry has been dominated by retail giants. Today, 90% of Americans live within 10 miles of Walmart, but five of the nation’s 10 largest employers (Walmart, Amazon, Home Depot, Kroger, Target) are retailers. Two other people in the top 10, UPS and FedEx, are key parts of the retail economy.

The ubiquity of these large retailers and the overall scope of the US shopping economy is unusual compared to the country’s European counterparts. Domestic consumption plays a major role in fostering US growth, while credit plays a much larger role in supporting its consumption than in Europe. The US has five times the retail space per capita in Japan and the UK, 10 times the retail space in Germany. Unlike in Europe, shopping hours are rarely regulated.

How did this happen? Certainly, Walmart, Amazon, Target and other huge chains have a lot of business insights. However, the complete story includes over a century of political tectonics and legal debate, which helped shape the size of American retail and the prominence of its large discount chain.

“The markets we think are given are the natural outcomes of supply and demand, and the markets we consider to be largely shaped by policy and politics,” says Kathleen Terren, a political scientist at MIT.

Thelen examines this subject in her new book, “Atternest, Shoppers! The Origins of American Retail Capitalism and the Amazon Economy,” published today by Princeton University Press. In it, she examines the growth of certain models of ultra-advanced, low-cost, low-wage retailing that are now very prominent in the US economy.

Price prioritization

There is much written about certain American companies, but Thelen’s book has some unique features. One is a comparison with the European economy, where she concentrates much of the scholarship. The other is her historic lens, dating back to the start of chain retail.

“Every time they tried to explain something in the present, they seemed to have been thrown into the 19th century,” Teren says.

For example, as both Sears and the Montgomery district grew, producers and consumers were still experimenting with alternative commercial arrangements, such as cooperatives that pooled suppliers together, but eventually came across economic and legal headwinds. Especially at the time, legal headwinds.

“The US antitrust law is very tolerant of large, multi-language companies and very punitive for alternative types of arrangements like cooperatives, so during that period, large retailers were really boosted,” says Thelen. Separately, US postal services were important as large mail orderers like Sears relied not only on delivery services but also on postal delivery services to sell products to many customers with shortages of bank accounts.

Smaller retailers fought big chains during depression, especially in the South and West, forming another stage of the story. However, low-cost discounts have circumvented some laws through regulatory arbitration, finding more friendly regulations in some states, and sometimes by breaking the rules entirely. Ultimately, large retailers have thrived once again in the last half century, especially as antitrust laws increasingly prioritize consumer prices as major measuring sticks.

Most antitrust laws since the 1960s “admire consumer welfare. This is essentially defined as price, so anything that offers a lowest price to a consumer is A-OK,” says Thelen. “We are in this world where large, low-cost retailers provide consumer welfare in the way the courts define it.”

She points out that she focuses on prices, and then flows into other parts of the economy, particularly wages and labor relations.

“When pricing is prioritized, one of the main ways to cut prices is to reduce labor costs,” says Thelen. “It’s no coincidence that low-cost discounters are often low-wage employers. In fact, they often squeeze vendors to deliver products at lower prices, and in turn pushing down wages in their supplier network.”

As Thelen’s book explains, legal views supporting large chains were also common during the first US wave of chain retail growth. She writes, “large, low-cost retailers have almost always enjoyed privileged positions in the anti-trust administration of America.”

In “deep equilibrium”

“Look, shopper!” This trend reveals lower prices, lower employee wages, and convenience for high consumers are particularly prominent in the US. 22.6% of employees are counted as low-wage workers (accounting less than two-thirds of the country’s median). In other countries belonging to the Economic Co-operation and Development Organization, 13.9% of workers meet that explanation. Approximately three-quarters of US retail workers are in the low-wage category.

In other OECD countries, overall, manufacturers and producers form a larger chunk of the economy, and accordingly, often have a more friendly legal framework than manufacturers and labor. But in the US, large retailers have gained more leverage over the past half century, Thelen notes.

“You might think that large retailers and manufacturers have a symbiotic relationship, but historically there has been a huge tension, especially at prices,” says Thelen. “During the postwar period, the balance of electricity leaned towards retailers, leaving them away from manufacturers and labor, and retailers were also at their side.

Now, as Thelen writes in his book, the United States is in a “deep equilibrium” in this respect. Many low-wage workers now rely on these low-cost retailers to achieve their goals.

Things may be different, Thelen suggests that if there are major reforms to labour law, such as allowing higher wages to be sorted out between businesses, not just individual stores, but also major reforms to labour law. Otherwise, equilibrium may be maintained.

On her side, Thelen hopes that readers will learn more about the economic landscapes that are commonplace, as we shop around us and even online.

“These types of retailers won were inevitable,” says Thelen. “It was a function of politics and political choice.”

This story has been republished courtesy of MIT News (web.mit.edu/newsoffice/), a popular site that covers news about MIT research, innovation and education.