Supermarket human resource practices and competition from mass merchandisers.

In recent years, much public concern has been raised about whether industrial restructuring has resulted in the creation of more "bad jobs" in the United States. Critics argue that employers have changed long-standing practices regarding the terms of employment and the way wages are set. The fear is that there are fewer jobs that offer a traditional long-term employment relationship and, at the same time, there are more low-skilled jobs with high rates of turnover and little opportunity for training and wage advancement. Empirical evidence suggests that for workers with less education and few skills, the opportunities for advancement through job ladders are dwindling (Bernhardt et al. 2001). The objective of this article is to use a new detailed data set to estimate the impact of restructuring on human resource (HR) practices in the retail food industry.

The retail food industry is, in many ways, an ideal industry for such a study. Although the retail sector of the economy has always had a relatively flat job hierarchy, supermarket jobs were once among the most highly paid and highly coveted retail jobs. However, the typical supermarket job is no longer a full-time, relatively well-paid position (often unionized), but rather a part-time job with irregular hours, low pay, and limited options for training or promotion (Hughes 1999). This shift has occurred at the same time that the industry has undergone dramatic product market restructuring as Wal-Mart and other mass merchandisers have entered the industry. Wal-Mart is now the largest food retailer in the United States with its share of the grocery market estimated to be close to 20%, having expanded from only ten supercenters in 1993 to over 1,866 supercenters by 2005.

In this article we analyze the relationship between growing competition from mass merchandisers like Wal-Mart and changes in HR practices within the industry. While case study evidence suggests that the proliferation of big box stores has had a substantial impact on the labor market, most empirical studies to date have focused on the changes in county-level employment and wages that occur after Wal-Mart entry (Basker 2005; Neumark, Zhang, and Ciccarella 2005). (1) There has been no large-scale data set available on both firms and workers that could be used to describe HR practices at the firm level. The data set used here allows analysis of changes in supermarket hiring, promotion, pay, and turnover policies at the establishment level in response to entry of mass merchandisers in the local market. We particularly focus on the role of firm exit, since such policies have been linked to firm performance and survival (Haltiwanger, Lane, and Spletzer 2006).

Background and Motivation

Measurement of shifts in HR practices of food retailers in response to changing product market competition is a challenge. Some guidance is provided by Lazear and Oyer (2004) who use measures of promotion, hiring, and wage setting to capture key aspects of HR practices--which they (and we) refer to as internal labor markets (ILMs). ILMs are generally characterized by long-term employment relationships, with most hiring done from within the firm for positions other than low-level "port-of entry" jobs. In firms with ILMs, wages are related to job characteristics and are relatively unresponsive to changes in the external labor market. Evidence supporting (though not proving) the existence of ILMs includes the persistence of firm wage differentials over time, upward mobility and returns to seniority within firms, and limited external hiring other than at ports of entry. As described by Groshen and Levine (1998), numerous theories have been developed to explain why firms create ILMs. These models focus on the importance of firm-specific human capital, incentives, and risk sharing as possible motivations. Fairris (2004) finds evidence that firms choose ILM practices to influence workforce quality, effort, and quit rate. The critical element is that firms adjust HR practices and may change their ILM status in response to competitive conditions.

While food stores are generally not known for innovative or high-performance HR practices (Ben-Ner, Kong, and Bosley 1999), there is some case study evidence of variation in HR practices across firms in this industry. In 2006, for example, Fortune magazine's list of the top 100 companies to work for included several supermarket chains, with Wegmans Food Markets and Whole Foods Markets ranked in the top twenty. For some stores facing increased competition, customer service is seen as an important edge, and long-term employment relationships may improve productivity and thus encourage the development of ILMs. Some food retailers have expanded the range of specialized services they offer, including more labor- and training-intensive services such as bakeries, delis, prepared food items, and other services (Warner 2005). Thus, the limited evidence available suggests that there is heterogeneity in the wage and ILM structure in the retail food industry, and that individual firms may respond only sluggishly to changes in the external market.

Data and Measurement

The data used in this article are drawn from the U.S. Census Bureau's Longitudinal Employer Household Dynamics (LEHD) database that matches workers with employers. This data base includes quarterly records of the earnings of almost all individuals from the unemployment insurance systems of most U.S. states starting in the 1990s. This study uses a subset of seven states (California, Idaho, Illinois, Maryland, North Carolina, Oregon, and Washington) that have sufficient years of longitudinal data. These data have been extensively described elsewhere (Abowd et al. 2006).

For this study the LEHD data were matched with additional information on both firms and workers. Worker characteristics include date of birth, place of birth, race, and sex. Data from the 1997 and 2002 Economic Census include establishment characteristics such as payroll, sales, and product line. We also include controls for local economic conditions from Bureau of Economic Analysis data on per capita income, county population, and employment density.

Establishment-specific measures of concentration and competition are constructed for the retail food industry using the geocoded LEHD data. These measures of concentration and competition are created based on a 5-mile radius around the longitude and latitude of each establishment's location (see Davis et al. (2005) for more details). We calculate both sales-based four firm concentration ratios (CR-4) and Herfindahl indices on an establishment-specific basis. The CR-4 in this case represents the share of sales in a given region accounted for by the top four firms in that area (excluding the sales of the establishment itself). The Herfindahl index represents the sum of the squares of sales shares in each region. Measures of threat from outside the industry are derived in a similar fashion. The number, employment, sales, and payroll of mass merchandisers are calculated within each grocery-store specific 5-mile circle. A key innovation of this article is that the measures are establishment-specific and are not limited by arbitrary administratively defined geographic boundaries such as counties.

ILMs and HR Practices in Supermarkets

Following Lazear and Oyer (2004), we use measures of promotion, hiring, and wage setting to capture key aspects of HR practices of supermarkets. For promotion practices, we measure the proportion of workers hired into the second quintile that move to a higher quintile in five years and the wage growth of workers starting in the second quintile over the five-year time span. (2) Hiring patterns are captured by the churning rates (3) of all full-quarter workers in the establishment as well as by the proportion of accessions (new hires plus recalls) in the fourth and fifth earnings quintiles within the firm. Wage policies are measured by the mean and standard deviation of log real earnings for full quarter workers in the firm.

Given the high correlation of these measures across establishments (with the exception of worker wage growth) we employ cluster analysis to classify the supermarkets into two groups, which for convenience we call ILM and non-ILM. The clustering strategy uses nonhierarchical clustering based on the median value of the measures in each group. The measures include worker churning, mean earnings, the standard deviation of earnings, and the ratio of flow to full quarter workers. The clustering is done on pooled 1997 and 2002 data.

Table 1 (columns one and two) lists 2002 summary statistics for firms identified as ILM or non-ILM based on the cluster analysis. By construction, the ILM and non-ILM firms differ greatly across the variables included in the cluster analysis. The pattern in the two clusters is consistent with ILM theory. The ILM firms have significantly lower churning rates, higher average earnings, a higher standard deviation of earnings, and a higher share of full quarter workers relative to flow employment. The measures of promotion, hiring, and wage growth clearly illustrate the diversity of HR practices across supermarkets. In addition, the stores identified as ILM or non-ILM differ on other measures as well (not shown). Firms that are classified as ILM promote a larger portion of their workers into higher earnings quintiles, have stronger average within-firm earnings growth, and tend to promote from within rather than hire outside the firm to fill higher-earning positions.