Measuring Productivity in Retail Trade and Services

Walter Y. Oi
(University of Rochester, Feb. 22, 2006

The role played by labor differentiates the service sector from the goods producing
sector. Will Baumol argued that in the goods sector labor is primarily an instrument, an
incidental requisite to the attainment of the final product, while in the service sector, labor is
itself the end product. One sector is assumed to be technically progressive, the other static.
Over time, an ever larger fraction of labor must be employed in the static sector. The share of
the workforce employed in the service sector rose from 51 per cent in 1950 to 76 per cent in
1990. It is claimed that technical progress has historically exhibited a goods bias. The
increasing importance of services must ultimately inhibit the rate of growth for the economy
as a whole.

Output per hour, X/H, is a valid measure of labor productivity if employee hours are
homogeneous. But labor is heterogeneous. Productivity is a function of worker
characteristics, sex, age (a proxy for experience), and education. When the composition of
employee hours is adjusted for changes in these human capital, supply side variables, an
employee hour today is 18.19 per cent more productive than an hour supplied by a worker in
1950. On the demand side, employers can affect productivity by varying the effort intensity
of an hour at work. Incentives matter. Paying piece rates or rewarding performance with
bonuses increase productivity and hourly earnings. Firm size matters. Big firms can organize
the workplace to achieve a faster arrival rate of work. The initiative to find the work is not
left to the employee, the work is brought to the employee. Employees at large private sector
firms may be covered by pension plans. A theory of compensating differences would predict
that covered employees would give up some current wages. However, pension coverage is
accompanied by wage premiums of around 15 per cent. The wage premiums are sustained by
providing firm-specific training and a higher effort intensity. In measuring the labor input,
the statistical agencies should adjust the labor composition for both supply side human capital
variables as well as demand side workplace practices.

In section 5, the low levels of per capita GDP in the less developed countries are
attributed in part to a self containment hypothesis. Firms in the LDC's tend to be small
because entrepreneurs want to control all phases of production. Very few firms attain the size
needed to enjoy the economies of scale and scope. Hall and Jones appeal to the concept of a
social infra structure, the set of institutions and government policies that provide the
incentives for productive activities such as the accumulation of skills and the development of
new products and techniques. The model does quite well in accounting for the cross-national
differences in per capita GDP.

I mentioned to Robert L. Steiner that toys in the United States were cheaper than
almost anywhere else in the world. He replied, "Of course, we have the most efficient
distribution system.". What is the product of a toy store or a grocery store? Why are these
stores more efficient in the United States? Section 7 sketches the model in which consumers
provide an essential input and appear as an argument of the production function. Because of
the economies of massed reserves, there are increasing returns to firm size. We are told that
technical progress has exhibited a goods bias, but progress here pertains only to the technical
relation, X = Af(K,L). Efficiency in the service sector depends not only on technical progress

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progress but also on the organization of work. David Appel correctly concluded that the self
service, cash & carry supermarket was an institutional innovation. The savings were passed
on through lower retail prices. Rising incomes and lower prices encouraged consumers to
demand a greater variety of food and non-food items. Stores got larger and handled a wider
assortment allowing the consumer to engage in one-stop shopping. Retail gasoline service
stations also turned to self service, but unlike grocery stores, they narrowed the product line.
They shed their service bays and specialized in selling gasoline, tires, and accessories. Minor
repairs and oil changes were shifted to other establishments. The growth rate of labor
productivity for retail gas stations exceeded 3 per cent a year, while X/H for foodstores was
falling from 1970 to 1995. Over this period, there was an increase in the rate of new product
introductions which stimulated growth. Scanners were installed in 1974 raising labor
productivity at the checkout lanes. Gross margins got larger as foodstores supplied more
services including integration into private brands, prepared foods, and distribution centers.
Labor productivity in retail trade kept pace and in some instances exceeded the growth rates
of labor productivity for many of the goods producing industries.

The measurement of productivity must recognize that the "output" is a composite

bundle of services. These services can be performed by manufacturer, retailer, or consumer.
The efficiency in performing these services depends on the prices of complementary inputs
[cars, refrigerators, and large houses] as well as the transport and communication infra-
structure of the economy. Retail prices are lower in the U.S. due in part to the efficiency of
the distributive trades.

1. Implications of the Sectoral Shift

"The United States became the world's first service economy, that is, the first nation in
which over half the employed population was not involved in the production of
food, clothing, houses, automobiles, and other tangible goods. Virtually all of
the net increase of employment from 57 million in 1947 to 67 million in 1967
occurred in institutions that provide services such as banks, hospitals, retail
stores, and schools." [Victor Fuchs (1968: p. 1)]

Will Baumol (1967: p. 415) divided the economy into two sectors, one progressive,
the other static. "The basic source of differentiation resides in the role played by labor. In
some cases, labor is primarily an instrument, an incidental requisite for the attainment of the
final product, while in other fields of endeavor, for all practical purposes, the labor is itself the
end product." Manufacturing exemplifies the former, while teaching is an example where
product quality is judged by the quantity and ability of the labor input. Baumol assumed that
labor productivity is stable in the service sector but climbs at an exponential rate in the goods
sector. This model implies that an increasing fraction of the workforce will be employed in
the service sector. The share of total employment involved in producing goods fell from 49
per cent in 1950 to 24 per cent in 1990. As the weight attaching to the service sector
continues to rise, it inhibits the rate of productivity growth for the economy as a whole.
Victor Fuchs (1968) identified three additional factors contributing to the increase in the
relative size of the service sector. (a) The income elasticities of demand for services are, on
average, greater than the income elasticities for tangible goods. (b) Economic growth is
accompanied by increasing specialization which raises the demands for intermediate services.
Transportation, communication, and business services that might have been produced "in
house" by a factory or mine may be shifted to a larger service sector. (c) Technical advances

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have historically exhibited a goods bias. A shave at a barber shop was accompanied by a hot
towel and banter. The invention of the safety razor substituted self-service. It sharply
reduced the unit cost of removing facial hair, but the quality of the shave was inferior,
especially if the towel was hot and the banter lively. A shift of output toward the stagnant
service sector thus implies a secular decline in productivity for the economy as a whole.

2. Output and Labor Productivity

"GDP per capita is simply the product of labor productivity multiplied by the fraction
of people who work. The fraction of people who work varies somewhat
around the world. Interestingly it does not vary much. Productivity, however,
varies enormously around the world." [W.W. Lewis (2004: p. 9)]

The production function is the building block supporting the productivity studies
conducted by John Kenderick (1961) and W.E.G. Salter (1966). Jan Tinbergen (1942)
defined a production function in which output was produced by combining capital and labor
inputs.

(1) X = Af(K,L).

Labor productivity is simply X/L, while the ratio of output to an index of all inputs is total
factor productivity described by the parameter A. Technical progress yields innovations that
improve the efficiency with which inputs can be transformed into outputs. Process and
organizational innovations introduce new ways of doing things, while new goods and services
are the results of product innovations. Consumers have expressed their preferences for new
things. The data on consumer expenditures reveal a rapid turnover of items in the market
basket, a trend examined by Stanley Lebergot (1993). Truly new products such as nylon,
penicillin, television, and prosac may be treated as a shift in preferences complicating inter-
temporal measures of well-being. Martin Bailey and Robert Gordon (1998: p. 392)
conjectured that the computer might have been responsible for a sharp increase in the rate of
new product introductions in the 1980s. Ferguson and Wascher (2004) pointed out that a firm
must re-engineer the organization to introduce a new product or service. The adoption of new
technologies in manufacturing was positively related to establishment size which ought to be
included as an argument of the production function.i

3. The Labor Input and Worker Characteristics.

Labor productivity, output per hour, is a function of technology, capital deepening,

and labor quality. The denominator in the BLS measure of (X/H) is the product of the number
of employees times average hours per worker, H = Nh. Yoram Barzel (1973) observed that
output per worker was not proportional to weekly hours. He introduced a nonlinear relation
to define the labor input, L = Ng(h). The problem here is that g(h) varies across industries
and over time.

T. W. Schultz (1960) estimated that 20 per cent of the increase in total factor
productivity was due to the higher educational attainment of labor. Age is a proxy for
experience, and sex is a trait related to differences in productivity. BLS constructed an index
of the labor input adjusted for education, age, and sex. Let Hi denote the hours of workers in
the i-th cell. Hours in the BLS index is an unweighted sum, H = ΣHi. An hour supplied by a

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teen-age high school drop-out contributes as much to the labor input as an hour by a college
graduate. BLS has developed a labor input adjusted for labor composition, HA = ΣwiHi where
the weights are hourly wages. The adjustment assumes that (a) hourly wages are proportional
to marginal products and (b) the marginal product represents the contribution to output. Larry
Rosenblum (1993) calculated HA for the manufacturing sector. The share of the labor input
provided by prime age males has declined, but the college graduate share has increased. The
ratio of the adjusted index to unweighted hours is shown in Table 2. The old BLS index of
labor productivity (Y/H) increased at an annual rate of 2.34 per cent compared to a growth
rate for the adjusted measure (Y/HA) of 1.98 per cent a year. When the labor input is adjusted
for changes in three familiar human capital variables, an hour of work supplied by a
representative employee in 1999 was 18.9 per cent more productive than an hour provided by
the average worker in 1950. Labor productivity can rise due to technical progress, capital,
deepening, or higher labor quality. Our measurement procedures should allow us to
distinguish among these.

4. Effort and Workplace Characteristics.

"The formal wage contract is almost always explicit about the rate of pay but is rarely
precise about how much effort is expected for a given wage and vice versa."
[W. Baldumas (1951: p. 35)]

A job that calls for heavy physical or mental exertion requires more effort. The worker who
fills the position produces a greater output. In 1790, Josiah Wedgewood introduced a simple
factory discipline at his pottery plant in Etruria, England. "Instead of leaving it to the worker's
initiative to find the work, the work was brought to him. Ceramic pieces were first formed
and advanced in a continuous process through the painting room, the kiln room for firing, the
account room where the inventory was kept, and finally to the storage room to await
shipping." [Kranzberg and Gies (1975: p. 91)] This organizational innovation raised labor
productivity. It was the forerunner of the conveyor belt at a meat packing plant. Henry Ford
and his colleagues, Charles Sorrinson and Clarence W. Avery used it as a model for their
assembly line. When a carcass is placed on a mechanical conveyor belt, the work pace is no
longer controlled by the employee. As a carcass moves down the track, each employee has
his or her assigned task. One whacks off the front quarter, another removes the kidneys, a
third gets the liver, and so on. Adam Smith realized that repetitive work raised productivity
but could be injurious to health. Alexander De Toqueville (1839: p. 158) remarked, "Doing
one task, the worker becomes more adroit but less industrious. But as the worker is improved,
the man is degraded.".

Effort is an elusive concept. Foster and Rosenzweig (1994) reported that when farm
workers were paid by the hour rather than by the piece, their daily calory consumption
decreased by 23 per cent. Regrettably data on calory consumption are not readily available
for all employees. Work effort can be elicited by offering incentives. The repairmen who
replaced broken windscreens at the Safelite Company were shifted to a piece rate of
compensation. Earnings rose by 9.6 per cent and productivity by 20 per cent, confer Edward
Lazear (2001). Edward Leamer argued that the effort intensity of work E was similar to an
index of total factor productivity yielding a production function of the form, Q = Ef(K,L).
Effort varied across countries being higher in industrialized countries where workers are paid
higher wages. When the labor input is adjusted for the effort intensity of work, the ratio of the
adjusted labor input to capital, (LA/K), is higher in effort intensive countries which explains

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explains why capital in a high-wage industrialized country earns a higher return and hence
does not move to low-wage, less developed countries.

The organization of work and the method of pay are some of the demand side
variables affecting labor productivity. I have earlier discussed how piece rates raise earnings
and productivity. Pensions were initially introduced as rewards for superior performance.
Later, pensions along with time-off and in-kind fringe benefits were added to the
compensation package to circumvent wartime wage controls, to postpone taxes, and to reduce
labor turnover. There is considerable evidence supporting a productivity hypothesis. If
pensions were primarily a device to defer taxes, the data should reveal a negative trade-off.
Workers covered by a company pension plan ought to be prepared to accept lower cash
wages. Nearly all of the studies find a positive wage premium. Even and MacPherson (1990)
analyzed the 1983 CPS data and found that covered men enjoyed a 15 per cent wage premium
over the wages of men not covered by pensions, the premium for women was 13 per cent.
Dorsey (1989) reported wage premiums ranging from 12 to 29 per cent across four different
wage surveys. Allen and Clark (1987) estimated that average hourly earnings would have
been 38 per cent greater if industries had 100 per cent pension coverage relative to having no
pensions. The wage-pension relation implies a market in which covered employees receive
more training or are asked to put forth more effort receive in return both pensions as well as
higher cash wages. Work rules and performance standards designed to raise the effort
intensity of the time at work are more likely to be promulgated by big firms which also offer
pensions. The number of jobs on piece rates is falling. However, the share of employment
located in large firms is climbing which has contributed to the upward trend in labor
productivity.

5. A Self Containment Hypothesis.

Differences in per capita income are large, $27,311 in the United States, $17,799 in
Germany, $1,754 in India, $839 in Bangladesh, and $471 in Chad.ii Why is productivity so
much greater in the industrialized countries?

Henry L. Moore (1913) was one of the earliest economists to direct attention to the
relation of wages and productivity to firm size.iii Firms in less developed countries are
small and produce simple products. In India, high quality soap required electricity and
was manufactured by large firms, confer Little Mazundar, and Page (1988). The O-ring
theory proposed by Michael Kremer (1993) offers a partial explanation for the prevalence of
small firms. A simple product such as a sickle involves only a few tasks, while a complicated
engine may require the successful completion of N inter-dependent tasks. If any one of the N
tasks is flubbed, the product is ruined. The expected output in an O-ring production function
is a multiplicative function of the skills of all N workers. If qi is the skill of the i-th worker,
[the probability that she will do the task right], we have,

(2) Y = kΠqiNb = kqNNb,

where the expression on the right assumes that all N workers in the workforce have the same
skill level.iv Output Y is positively related to skill level q and inversely related to the number
of tasks N. In an economy with unskilled low-q workers, firms will avoid complex products
calling for many tasks.

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 A self containment hypothesis was advanced by Mancur Olson (1987) and Christopher
K. Clague (1991). An innovation is more likely to fail if success depends on new kinds of
performance by actors over whom the innovator has no control. Less developed countries are
less efficient in implementing new projects calling for large scale organizations, extensive
support systems, or high quality inputs from other sectors of the economy. Self containment
describes a situation where an owner-entrepreneur tries to control the entire operations
placing little reliance on inputs supplied by outside vendors. Less developed economies are
characterized by a high share of primary products [from Agriculture, Forestry, Fisheries, and
Extractive Industries] in the gross domestic product. A self contained enterprise exhibits a
low ratio of purchases to sales and makes little use of high cost inputs. Large firms in more
developed countries produce complicated products. Input-output tables for a rich economy
reveal many interactions among agents who make transactions with the aid of a well-
functioning transportation and communication system. Engines, aircraft, and instruments are
exchanged in a global market for beans, cloth, and copra.

Self containment may result from a desire to control all phases of production, a
distrust of outside vendors, or an inadequate enforcement of property rights. Smallness is an
impediment to growth. Superior managerial talent, financial markets, and a lower price of
capital have led to some very large corporations. Employees at the large firms are asked to
put forth more effort and are rewarded by higher wages, the wage premium in 1998 was
wF5/wF1) = 10.68/8.20 = 1.302, confer Table 3. "When are organizations superior to individual
effort? Clearly when there are increasing returns to scale .. . organizations are the best known
method of capturing returns to scale." [M. J. Beckmann (1987: p. 66)]Superior management
achieve better organizations. According to W.W. Lewis (2004:p. 244), Firms in the U.S. have
better organizations. "These better organizations are usually more demanding of workers.".
The consequence is higher productivity and wages in the big U.S. firms.

6. Components of the Gross Domestic Product

"The rates of growth of the farms and the mines and the manufacturing staples were
falling, and yet the income tax receipts were buoyant, and people generally felt
good about the economy. What could be going on?" [Robert Giffon (1904)]v

The decennial censuses since 1851 gave descriptions of the occupations of all household
members. Giffon analyzed these data and observed a general increase in the number of
people engaged in "incorporeal functions", people who did not produce material objects but
immaterial services. Although Giffon did not use the word "services", he had discovered the
service sector.

Tangible goods fashioned with the aid of human effort were always considered to be
output. Everyone agreed that wheat from a farm, cloth from a knitting mill, and shingles from
a lumber mill ought to be included in the national product. However, when a dress is
purchased at wholesale for five dollars and sold at retail for nine dollars, should the difference
of four dollars for services rendered be counted in calculating the national product? Geoffrey
King (1696) was one of the earliest economists to develop an estimate of the national product.
He recognized that at least a part of the value generated in the service sector was truly output.
". . .(a) the distribution services of some merchants are needful, (b) some things of real use
and value are not material, and (c) the services of lawyers, physicians, and divines indeed fall

6
and divines indeed fall into that useful category".vi Adam Smith threw a monkey wrench into
the measurement of the social dividend when he offered two definitions for productive labor,
those who produce material goods, and those whose products earned money profits when
sold. Domestic servants and state employees were unproductive. "The labour of the menial
servant . . . does not fix or realize itself in any particular subject or vendable commodity.
Their services generally perish at the very instant of their performance and seldom leave any
trace of value behind them" [Adam Smith (1776: pp. 314-6)]. Garnier (1802) in his notes to
the WEalth of Nations pointed out Adam Smith's error. He argued that value is unrelated to
the materiality or immateriality of the product. The critical consideration was whether the
thing, tangible or invisible, was thought to be worthwhile by the consumer.

The gross national product is the value of final goods and services that pass through
market transactions. Allan G. B. Fisher (1939) and Collin Clark (1939) proposed a three-way
classification presumably because a dollar of value-added in one class is not always
interchangeable with a dollar generated in another class. Tertiary production is distinguished
from primary production on the one hand (by farmers and the like) and from secondary
production on the other (by manufactures and artisans). "The original purpose . . . in making
the term tertiary production was to suggest a framework in answering the highly important
question, 'in what direction . . . is it desirable to accelerate the rate of economic
development?'. . . many people, worried by the problem of chronic unemployment eagerly
suggested that the solution was to persuade more people to take up farming. If any kind of
production was primary, it was surely impossible, it was thought, to over-do it." [Fisher
(1939: p. 30)]. Some observers voiced concerns about the rapid growth of the service sector,
confer Helen Boss (1990: p. 189). "Tertiorization is a menace. Industries threatened by
encroachment need protection from ephemeral services." Robert L. Steiner (1976:p.6)
reminded us about the selective employment tax enacted by Labour in 1966. "The avowed
goal of the Selective Employment Tax was to drive labour from the unproductive trade and
service occupations and lure them to the productive manufacture and other form utility
enterprises. To acomplish this, a head tax was imposed on firms in trade and the proceeds
were to be distributed on a per employee basis to form utility enterprises. Although the
Labour party quickly abandoned this policy, it reflects the way in which many regard the
importance of work in producing tangible goods versus invisible services. Political
candidates promise us that if elected, I will bring in good manufacturing jobs, by implication,
these jobs are superior to lousy service sector jobs.

At the start of the 20th century, one-third of the workforce was employed in
agriculture. Only 20.7 per cent of adult women were gainfully employed compared to 92.1
per cent of men. Women were working but not always for wages, they were engaged in
household production. According to the time diary data analyzed by Lebergott (1993:Table
8.1, p.51) a housewife spent 42 to 45 hours a week preparing meals and another 14 hours for
laundry and cleaning. In 1975, meal preparation required only 10 hours a week. One-fourth
of all families in 1900 provided room and board to lodgers, only 2 per cent in 1975 reported
having boarders. Technical advances raised the productivity of women, not only in the unpaid
household sector but also in the labor market. It became economical to send the woman into
the labor market and use her earnings to purchase bakery bread and running water. Nordhaus
and Tobin (1973) estimated a measure of economic welfare which included imputed values
for leisure and non-market activities. This measure for 1965 was three to four times the gross
domestic product estimated by the Bureau of Economic Analysis. Helen Boss (1990: Chapter
8) argued that we are far from finding where to draw the line between Gary Becker's X goods

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Gary Becker's X goods that pass through markets and his ultimate Z-goods which are the
arguments of the utility function in Becker (1965).

7. Retail Trade and the Economies of Massed Reserves

The production of services differs from the production of goods in at least two
important respects. First, the consumer supplies an essential input and belong alongside labor
and capital in the production function.

(2) X = Af(N,L,K).

Without customers N, a firm in the service sector could not produce a sales transaction, an
airline trip, or a dental filling. Sometimes, his role is passive, sitting in a barber's chair, but at
other times at the laundromat or gas station she works. Second, output X is stochastic
because demands are random, and delays are costly. A person-trip from Oblong to Normal
requires inputs of both the trip--taker as well as the transport mode. Time and resources are
allocated to shopping for the right product and price. A buyer usually carries his fresh fish
home but asks to have his firewood delivered. A store hires clerks to wait on customers,
maintains inventories, and stays open even when it has no customers. On the other side,
customers may have to wait to be served. Someone or something is almost always idle. Idle
resources are, however, productive when they are in a state which W.H. Hutt (1939) called
pseudo-idleness. E.A.G. Robinson (1958) argued that the production function for services is
characterized by the economies of massed reserves. A retail firm enjoys increasing returns
from the economies of massed reserves which result from the coordination and
synchronization of activities rather than by the law of large numbers. This distinction is
clarified by J.G. Mulligan (1983)A low patient arrival rate is accompanied by some empty
hospital beds. On other days, patients may be forced to wait for a bed. The production
technology is such that on average, there will be some empty beds and the economy of massed
reserves, namely a doubling of beds K and patient arrivals N leads to more than a two-fold
increase in occupied beds. The largest hospital in a city almost always realizes the highest
bed occupancy rate. The airline that supplies the largest number of available seats on a
particular route enjoys the highest passenger load factor. A store assembles a product line,
hires clerks, and waits for customers. Sometimes customers may have to wait to be served.
Idleness could, in principle be reduced, but the synchronization of the arrival rates of
customers, clerks, and "just in time" inventories may be prohibitively expensive. The
distributive trades must balance the explicit costs incurred by vendors against the implicit
costs borne by consumers.

Retailers come in all sizes and shapes, from a street peddler hawking t-shirts to a Wal-
Mart superstore. The output of a retail firm is a composite bundle of services whose central
element is its sales volume, a flow of transactions X along with some or all of a number of
related services Y. Selling is the raison d'etre for its existence. A store assembles a product
line y1 that can be examined by potential customers. A location and store hours are chosen for
the transactional convenience y2. Mail order catalogues and the internet offer other ways to
provide this service. Free delivery and credit, return privileges, lunc counters and coffee bars
and child-care facilities at department stores, are some of the ancillary services y3 provided by
a store to enhance the shopping experience. Delivery and store credit represent downstream
integration into transportation and finance. Some stores enter into producing tangible goods
such as prepared salads, bread, and various items sold under private labels. An increase in

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An increase in sales X is one way to expand the output of a foodstore, but "output" can also be
increased by providing more "services", a wider product line, longer store hours, better snow
removal in the parking lot, and more in-house production. Failure to incorporate the
contribution of the Y vector to the composite bundle that makes up the output of a retail firm
accounts for the puzzling behavior of labor productivity in SIC 541, Foodstores. This
omission is discussed in the concluding section.

8. Self Service

A retail format describes a way of doing business, the kinds of customers that it tries
to serve, the breadth and quality of the product line, location and ambiance, etc. A general
store was the prototype of a retail firm in the first half of the 19th century. With economic
growth, the general store gave way to specialized sellers handling particular merchandise
lines, iron mongers, butchers, green grocers, druggists, and haberdashers. Marshall Fields
introduced the department store selling a wide array of products under one roof. Customers
no longer had to ask for prices which were affixed to the items. Satisfaction with product
quality was achieved to some extent by giving customers return privileges. Lunch counters
and nurseries for kids made the shopping experience more enjoyable. In 1872, Aaron
Montgomery Ward and later Richard Sears created the mail order catalogue store which could
be patronized by both urban and rural customers.

The idea for a self service, cash & carry foodstore was conceived and implemented by
Clarence Saunders in 1916 when he opened his Piggly Wiggly store in Memphis, Tennessee.
His chain was bankrupted by the Great Depression. Michael Cullen sent a letter to the
President of the Kroger Company outlining his plan for a modern supermarket.vii The market
would be located in the outskirts where rents were low. The store would offer low prices for
nationally advertised brands hereby shifting the responsibility for product quality to
manufacturers. Selling costs could be reduced by making all sales on a cash & carry basis.
The Kroger Company rejected the plan. Michael Cullen moved to Queens, New York and
opened his King Cullen store. The Great Atlantic and Pacific Tea Company, A&P, embraced
part of Cullen's plan by offering two formats.

"In our so-called economy stores, we make no deliveries, we have no telephone

communications, we close the store when the manager goes to lunch, we sell
strictly for cash and give no premiums, trading stamps or other inducements.
In our livery stores, we do give trading stamps, we do make deliveries and
have telephones, and in some instances give credit."viii

David Appel (1972) correctly concluded that the supermarket was an institutional innovation.

Self service was almost a necessity. The customer traffic generated by low prices was
so large that if each customer had to be waited upon by a clerk who took the order, gathered
the groceries, bagged them, and made change, clerks would have out-numbered customers.
The supermarket had to figure out how to categorize and display goods. The problem of
gathering a week's supply of groceries was solved by the shopping cart.ix The substitution of
unpaid customer labor for hired clerks was not only efficient, it was probably a necessity.
Michael Cullen was unable to patent his idea, the savings were passed on to customers via
lower prices.x The spread of the supermarket was facilitated by the high ownership rates of

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automobiles, refrigerators, and large houses.xi

Self service altered the structure of SIC 554, retail gasoline service stations. I first
observed this format in 1947 at a large station located on Beverly Boulevard in Los Angeles.
When a driver filled his tank, a young lady in shorts came to the pump on roller skates to
collect. She placed the cash in a change box strapped to her waist, made change if necessary,
and skated to the next car. The innovation did not spread until the mid-1970s, perhaps
because of state safety regulations or waiting for the development of suitable pumps. Only
22 per cent of retail gasoline sales passed through self service stations in 1975, 40 per cent in
1977, and 85 per cent in 1991.xii Self service was accompanied by a consolidation of stations.
Automobile registrations almost doubled from 70 million in 1963 to 137 million cars in 1992,
but the number of service stations fell from 181 to 94 thousand. Self service was more
efficient measured by the time required to pump and pay for a tank of gasoline. Stations got
larger by installing more pumps per station and utilizing each pump more intensively
measured by throughput per hour. The transition to self service was associated with a change
in the product mix. Many stations eliminated their service bays which were used to make
repairs. Establishments in SIC 554 specialized in the sale of gasoline, tires, and accessories,
making minor repairs and changing the oil were left to Jiffy Lube. The superior efficiency of
the self service gasoline service station is the reason for its rapid diffusion. If the format is
legalized in New Jersey and Oregon, output and output per hour will rise if output is measured
by sales and not by value-added.

Sam Walton was unable to renew the lease on his 5 and 10 cents store in Newport,
Missouri. His search for another outlet led him to Bentonville, Arkansas. He took a lease for
one of three variety stores in the town of 3,000 inhabitants. Variety stores in 1950 usually
placed a cash register at each counter. Walton heard of a new operating practice at a store in
Minnesota which had only two registers, one at each door. Walton rode an overnight bus to
Minnesota. Customers would collect the items at the various counters and bring them to the
cash registers at the doors. After observing this self service system in operation, Sam Walton
decided to install it at his Bentonville store. The spread of self service from the Piggly
Wiggly store in Memphis to the King Cullen supermarket in Queens to the Walton variety
store in Bentonville is strong evidence that the practice can raise profits and reduce store
operating costs.

9. Variety and Novelty

The choice of a store is a function of four variables: assortment, price, transactional

convenience, and the net utility of the shopping experience. If a shopkeeper in the economy
that prevailed before 1940 earned a profit, it was probably due to the skill in buying rather
than in the efficiency of serving customers. Specialization can lead to lower costs. The price
of a model-T Ford was $890 in 1913, but with volume production and specialization, the price
was reduced to $290 in 1922. Henry Ford told his public that "You can get a Model-T in any
color so long as it is black.". Nearly all buyers in 1913 were buying their first car. By 1922,
dealers were encountering some repeaters trading in used Fords for a new model. Some
customers were voicing a preference for variety. Alfred P. Sloan at General Motors filled the
void by offering customers a choice, [Chevrolet, Oldsmobile, Cadillac], as well as annual
model changeovers. Measured either by units sold or profits, General Motors passed Ford in
1925, a lead which it retained until 1986.

10
 Three factors contributed to the success of the supermarket. First, cities grew resulting
in higher densities of customers. SEcond, rising real incomes increased the demand for food.
Third, the relative prices of cars, refrigerators, and houses fell. Higher car ownership rates
expanded the geographic area from which customers could be drawn. Refrigerators and larger
houses reduced the cost of holding larger home inventories. Grocery stores got larger. The
1931 King Cullen supermarket had a selling area of 5,000 square feet. The average for the
supermarkets responding to the 1983 Progressive Grocer survey was 26,991 square feet. The
size distribution measured by employment shifted to the right confirming the trend to bigger
stores. Some 40.8 per cent of the foodstores enumerated in the 1954 Census of Retail Trade
were sole proprietors, in the 1992 Census, the fraction was only 2.3 per cent. I define an E1
establishment as one that has one or more paid employees and operated for the entire year.
Each E1 foodstore in SIC 541 served an average of 874 households in 1954 and had a larger
customer base of 2,348 households in 1987. The data on households and sales per E1
establishment shown in Table 4 confirm the growth in the size of the customer base.

fIn addition to food, the King Cullen supermarket sold radios, small appliances,
hardware, paints, and clothing. Larger selling areas were accompanied by an expansion of the
product line, a development analyzed by Messinger and Narasimhan (1997). The typical
supermarket in 1974 carried an assortment of 8,948 stock keeping units, sku's. The size of the
average chain supermarket increased when size is measured by employment, selling area, or
assortment (sku's), confer Table 5. The supermarket was replaced by a combination store.
The share of food expenditures captured by conventional supermarkets fell from 73.1 per cent
in 1980 to 42.0 per cent in 1989.xiii In addition to groceries, meats, and produce, the larger
combination store sold pharmaceuticals, video rentals, liquor, prepared foods, clothing,
banking services, and more. Consumers with higher real incomes demanded a wider variety
of goods. Florists, butchers, and druggists are specialists who, in principle, should have been
able to provide their respective services at a lower cost than the supermarket.xiv However, the
numbers of these specialty shops are declining. The rising cost of shopping time is
responsible for the trend toward one-stop shopping where I buy my flowers, pork chops, and
prescriptions at a supermarket.xv

The width of the product line is constrained by the store's selling area and shelf space.
Management must decide which products will be placed in its store, how to price them, and
when to change prices. Levy, Bergen, Dutta, and Venable (1997) found that the unit cost of a
price change in states without an item pricing law was $0.52. In response to fluctuating
demands and costs, 13.66 per cent of the items carried by a supermarket had their prices
changed during a typical week. The unit cost of making a price change in Connecticut was
substantially higher, $1.33 per price change, because the state imposed a regulation, the price
had to be changed on the shelf as well as on the UPC code. The frequency with which prices
were changed in Connecticut supermarkets dropped to only 6.3 per cent of items carried. A
larger assortment enhances the attractiveness of shopping at a store, but it also raises store
operating costs and hence retail prices.

The composition of the market basket is continually changing. Americans have

expressed their preferences for new products. It is hard to measure the contribution to
economic growth due to a particular new product such as a vacuum cleaner, disposable
diapers, or sugar coated cornflakes. Herry Hausman (1992) measured the value of a new
product such as Apple Cinnamon Cheerios by the area under the demand curve, the sum of

11
consumer expenditures plus the consumer surplus. Admiral Land's Polaroid camera was a
truly new product, but how about the Kodak disposable camera? There is no bright line
separating truly new products from imitations and improvements. According to New Product
News, there were 1,365 new products introduced in 1970. The flow of new products has
expanded to 13,344 in 1990. The entry of a successful new product or service is a strong
stimulus to growth. The digital camera created jobs for those involved in the production and
marketing of the new product. People employed in producing traditional cameras and film
lost their jobs, but the welfare of the community is improved by the successful introduction of
the new product. Marco Polo carried spices and silks to Europe raising the standard of living
of those in Cathay who produced the exports but also the consumers who worked harder to
earn the incomes to purchase silks and spices. Southland opened a small chain of 7-11
convenience stores to sell the surplus fluid milk from its dairies. The 7-11 stores, a new retail
format, were so successful that Southland sold its dairies.

Eating and Drinking Places, SIC 58, are part of Retail Trade. The share of food
expenditures spent on "Food Away from Home" increased from 25 per cent in 1964 to 46 per
cent in 1990. Part of this increase involved vertical integration by supermarkets making
prepared meals, pizza's, and roticery chickens. Some superstores have built "in-store"
restaurants so that a customer can combine dining with shopping. Supermarkets are
competing by expanding the product line, handling new products and introducing new
services.

Consumers like novelty. They are not content with the items that occupied a place in
last year's market basket. Cell phones and fresh lobsters have replaced radios and canned
tuna. An increase in the rate at which new products and services are introduced entails higher
adjustment costs, not only in the production of those goods and services but also in the
consumption of those goods. The welfare of the community has clearly been enhanced by the
discovery of new products and services.

10. Scanners, Distribution Centers, and the Power Shift

The scanner was installed in a supermarket in Troy, Ohio in 1974. It was initially
used for checkout lanes and inventory control. The innovation spread quickly, by 1995, fully
95 per cent of all supermarket checkout lanes were equipped with scanners. Replacing cash
registers with scanners should have raised labor productivity, but the BLS index declined.
The puzzle can be traced to the way in which the BLS measures output, a topic discussed in
section 12.

Some retail chain stores and certain manufacturing establishments always owned and
operated private truck fleets. Sam Walton carried the vertical integration a step further by
establishing a distribution center in 1978. The center with its moving conveyor belts not only
performed warehousing functions but led to a minor institutional innovation, cross-docking.
hand-held scanners were used to receive, identify, and redirect goods that were labeled with
uniform product codes, UPC. Many items were never put in the warehouse but were moved
across the dock into local delivery trucks resulting in savings of 50 per cent or more in the
manhours required by earlier freight handling practices; confer Vance and Scott (1994: p. 94).
The data bank played a pivotal role in an electronic system connecting Wal-Mart stores to
distribution centers and over a third of its suppliers. In 1987, David Glass launched Wal-
Mart's own private satellite to handle its transportation and communication system. By 1992,

12
twenty distribution centers handled over 75 per cent of Wal-Mart sales. Distribution costs for
Wal-Mart were only 1.3 per cent of sales compared to 3.5 per cent for K-Mart where only half
of sales passed through distribution centers. These savings gave Wal-Mart an advantage in
pricing.

Over a period of two decades, Messinger and Narasimhan (1995) document a

structural change which they call a power shift. The manufacturer's price was 70.2 per cent of
the retail price in 1971 but fell to 60.0 per cent in 1991; confer their Table 11. Several
developments contributed to a wider gap. The gross margins which approximate the cost of
the services provided by the foodstore were 23.1 per cent for groceries, 31.0 per cent for
produce, and 41.9 per cent for delicatessens.xvi Margins will be higher if the product, e.g.
fresh fish, requires more labor to handle it, or spoilage is significant. A supermarket is
obliged to provide a richer bundle of services when the demands for meat and produce
increase in relation to sales of canned soup and flour. The shift in consumer demands toward
high margin products was accompanied by an expansion in Y4, "in-house" production. My
recollection is that thirty years ago, only around 10 per cent of the 30,000 square feet of
selling area was allocated to the bakery, it is nearly 30 per cent today. The product line
reveals a strong upward trend for sales of prepared salads, ready to eat pizza's (instead of
frozen pizza's), and sushi. Private brands accounted for 14.1 per cent of sales in 1958 and
21.1 per cent in 1982, see Table 6. The power shift has placed the retailer in a position where
the supermarket is providing many of the services that were previously supplied by outside
vendors or manufacturers. These are practices undertaken to dominate the market through
lower prices. Wal-Mart allegedly asked it suppliers for a 3 to 6 per cent discount which is the
amount usually paid to a manufacturer's rep. MacDonald and Nelson (1991) found that
linking outlets in a chain led to economies. Prices at chain supermarkets were lower than
independents even when store size, assortment, and city size are held constant. Some twenty
years ago, discount warehouse stores entered the market handling a narrower product line of
things sold in big packages at even lower prices. As one English journalist put it, "Wal-Mart
pulls off the remarkable trick of selling goods so cheaply so that it appears in effect to be
giving them away, all the time taking billions from the consumers' pockets." [London Times,
June 15, 1999].

11. A Digression on Franchising

Singer Sewing Machine and McCormick Harvester established networks of sales

agents to distribute a particular manufacturer's products. These were product franchises, a
contractual form used for auto dealers and retail gasoline stations. Franchising as we know it
today was probably invented by Martha Matilda Harper who on August 21, 1888 opened her
hair salon in room 516, Towers Building, Rochester, New York.xvii Customers asked Ms.
Harper to open a salon in their home town. She responded by creating an organization
patterned after the Christian Science Church. Administrative policy was set by Mary Baker
Eddy at headquarters. Local churches had some autonomy so long as they followed the
mother church's spiritual and procedural guidelines. The essential features of the Harper Hair
Salons involved three elements, training, enforcing compliance with precise specifications for
the output, and providing support services. The owner-operator had to complete a training
course. The cost of a chair, dryer, and basic hair products was often pre-funded and repaid by
the owner in installments. Periodic visits were made by Ms. Harper or someone from
Rochester to assure product quality.

13
 Franchising could be viewed as a way of mass-producing a service. A hair styling at
one Harper Salon was nearly interchangeable with that at another. A & W rootbeer in 1925
and Howard Johnson in 1935 sold franchises with organizational structures similar to the
Harper Hair Salons. However, it became apparent to the parent company, the franchisor, that
it was selling something more than a permanent wave, a root beer float or an ice cream cone.
The franchise involved a contractual arrangement which gave the franchisee the right to
produce a particular product or service carrying the trademark. The franchisors [Martha
Matilda Harper, Howard Johnson, Ray Krok at McDonald's] realized that there was more
money to be made selling packages which were bundles of services. The individual who
purchased a Domino's pizza franchise obtained an opportunity to possible business success.
The hair styling and the Big Mac were by-products of the primary product, the right to operate
one's own business. In addition to the profit motive, Martha Matilda Harper was pursuing a
social objective. At the turn of the century, working girls in Rochester were mainly employed
as servants or factory operatives in the shoe, tobacco, and clothing factories. A woman who
became a Harper agent was buying an opportunity to become a self-employed entrepreneur.
Jane Plitt (2000: p. 62) told us that franchise comes from a French word meaning "free from
servitude". Newsletters and conferences gave her operators a chance to participate in the
management of the larger company.

Ray Krok was 52 years old and was selling milk-shake machines in San Bernardino,
California where he met Richard and Max McDonald. The organization of the McDonald
franchises was nearly identical to that of Ms. Harper and the Christian Science Church. Krok
succeeded, and several years ago, his widow donated a billion dollars to the Public
Broadcasting Service. Franchising is arguably an efficiency improving institutional
innovation that reduces bankruptcy rates.xviii

The contract defines a business format franchise. The format spread in the fast-food
industry creating some giant corporations and intricate vertical structures described by Eric
Schlosser (2001). Dicke (1992) reported that in 1990, there were a half million franchise
outlets that accounted for over one-third of all retail sales.

12. Concluding Remarks

A century ago, over one-third of the U.S. workforce was employed in Agriculture and
8.5 per cent in Distribution. By 1997, these employment shares were 2.3 and 22.7 per cent.
The transition to a service economy has not been satisfactorily handled by the statistical
agencies. The transformation of inputs into outputs is different in the service and goods
producing sectors. The consumer supplies an essential input in many of the service industries
which enjoy the economies of massed reserves. The neoclassical production function with
constant returns must be abandoned.

Output per hour is a valid measure of labor productivity when the hours of labor are
homogeneous. Sex, age, and education are characteristics that influence the quality of the
labor input. The bureau of Labor Statistics has constructed an hours index which adjusts for
changes in these supply side variables. Effort and the arrival rate of work are workplace
characteristics affecting the quality of the labor input. BLS should be urged to incorporate
proxies for the demand side variables and develop a superior measure of the labor input.

Self service and the supermarket were institutional innovations that increased

14
productivity in retailing. However, the BLS index of labor productivity declined over most of
the decades of the 1970s and 1980s. The statistical agency simply ignored the fact that the
output of a retail firm is a composite bundle of services whose composition has changed over
time. Finally, productivity surely depends on competition, government policies, and the
social infra-structure.

[A] Increasing REturns

The service sector is growing and accounting for an increasing share of the economy's
productive activities. Victor Fuchs (1968) identified three factors contributing to this growth;
(a) the income elasticities of demand for services are larger than those for goods, (b)
specialization is increasing the demands for intermediate goods and services, and (c) technical
advances have historically exhibited a goods bias. The implication is that a growing service
sector should have been accompanied by a productivity slowdown for the economy as a
whole. The data for the last fifteen years refute this implication. The service industries have
realized productivity gains through organizational innovations such as the self service, cash &
carry supermarket. The output of a retail firm is a composite bundle of services. The
supermarket shifted some of these services to the consumer. Customers provided an input
that properly belongs as an argument of the production function. Innovations in other
industries reduced the relative prices of cars, refrigerators, and houses. Customers could be
drawn from more distant places resulting in a faster arrival rate of work. Retail
establishments got larger and enjoyed the economies of massed reserves. Outlets got larger
measured by employment, sales, selling areas, and assortment size. A&P consolidated many
outlets into a chain store, a consolidation copied by others, Kroger, Jewel, and Wal-Mart. The
big chain stores were the leaders in developing other organizational innovations such as
distribution centers, cross-docking, private brands, combination stores, and discount
warehouse stores. The distributive trades, retail gasoline stations, category killers, are
characterized by increasing returns to scale. The depiction of a static sector with no technical
progress hardly fits the picture for the service sector in a highly industrialized economy.

[B] Effort and Labor Productivity

Labor productivity is systematically related to worker characteristics, sex, age, and

education. It is also a function of a number of demand side variables that operate by affecting
the effort intensity of the time at work. An employee on piece rates works harder, is more
productive, and realizes a higher rate of pay than one who is paid by the hour. A person
baking pizza's in downtown Manhattan confronts a faster arrival rate of work than one doing
the same task in Oblong, Illinois; she is according paid a higher wage for supplying more
work effort. A theory of compensating wage differences implies that an employee who is
entitled to a pension at retirement ought to accept a lower wage. However, pension coverage
in the private sector is nearly always associated with a wage premium because the employee
typically has received firm-specific training and is asked to meet a faster work pace. Work
rules and performance standards are workplace characteristics that try to elicit greater effort,
but they are not readily observed by an outside researcher. Effort is an elusive variable that
defies easy quantification. We must turn to proxy variables such as (a) the method of pay,
piece vs. time rates of pay, (b) incentive pays including pension coverage, (c) firm size that is
associated with effort intensive work practices, and (d) industry/occupation. The hourly rates
of pay for these proxies can serve as weights to construct an index of employee hours
combining both supply and demand side variables.

15
[C] Sales and Output

Scanners were introduced in the middle of the 1970s, the new supermarkets were
getting bigger, the small Mom & Pop stores were closing, and the share of food expenditures
captured by conventional grocery stores was falling. In spite of these developments, the BLS
index of labor productivity for foodstores, SIC 541, was declining. It fell from 110 in 1970 to
95 in 1995, see Figure 1 in Ratchford (2003). Messinger and Narasimhan (1995) showed that
in the power shift, grocery stores were supplying more services. Betancourt and Malinowski
(1999) conducted a survey which showed the increase in the number of services such as deli's,
bakeries, fresh fish, etc. that were being supplied by the supermarket. In addition to sales X, a
supermarket provides a vector of "services"; Y1 = a product line measured by assortment size,
Y2 = transactional convenience, location, store hours, etc., Y3 = ancillary services, and Y4 =
"in-house" production. If vi is the value of the i-th service, output is given by,

output = X + (v1Y1 +v2Y2+v3Y3+v4Y4) = X + v'Y.

Brian Ratchford (2003) asked, "Has the Productivity of Retail Foodstores Really Declined?".
The BLS index measures "output" by sales X. Ratchford pointed out that the ratio of services
to sales, v'Y/X, increased over the 1970-95 period. If "output" is correctly measured,
Ratchford finds that (X+v'Y)/H rose indicating an upward trend in productivity.

[D] Dispersion in Per Capita GDP

In 1,000 A.D., per capita income in Europe was $405, slightly below that in Africa,
$416, confer Angus Maddison (2001: p.58). Maddison places the date of the take-off at 1820,
the period of rapid growth in the industrialized countries [Western Europe and the western
off-shoots, U.S., Canada, Australia, New Zealand, and Japan]. By 1998, per capita income in
the west was 21,470, 15.7 times that in Africa. In section 5, I appealed to a self containment
hypothesis to explain, in part, the slower growth rate of per capita income in the less
developed countries. Smallness is an impediment to growth. the inability or unwillingness to
assemble large organizations that can enjoy the economies of scale and scope prevent the
LDC's from realizing faster growth.

In 1988, per capita income in the U.S. was 35 times greater than that in Niger. Hall
and Jones (1999) find that differences in capital accounted for a factor of 1.5 of the relative
gap, while education accounted for 3.1 leaving a remaining difference of 7.7 for the residual.
The social infra structure consists of the institutions and government policies that provide the
incentives for the individuals and firms to engage in productive activities such as the
acquisition of skills and the development of new products and techniques. Their measure of
the social infra structure is the average of two indexes, one for Government Anti-Diversionary
Policies, GADP, constructed by political risk services, and the other measures the openness of
trade over the period 1950-94.xix The three countries with the highest index of social infra
structure were Switzerland, United States, and Canada and the three lowest were Zaire, Haiti,
and Bangladesh. Per capita GDP was regressed on this index using latitude and languages as
instruments. The model does remarkably well in explaining the cross national dispersion.

16
 The McKinsey Group began with the identity, (per capita income) = (labor
productivity)*(fraction of the population P who work); (Y/P) = (Y/N)*(N/P). W. W. Lewis
claimed that the fraction that works doesn't vary much across countries. The United States
has one of the highest labor force participation rates due to an increase in the female LFPR.
Early retirement and withdrawal due to disability operate to reduce per capita income (Y/P).
The policies for growth recommended by W. W. Lewis (2004)encourage competition,
consumerism, and smaller government, a libertarian path.

17
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21
Table 1 Employment and GDP by Industry

1950 1970 1990 g

Employment (000) 53,526 76,461 114,604 0.019

percentage in:
1. Goods Producing 47.95 35.37 24.56 0.002
1-a Agriculture 11.9 5.5 2.7
1-m Manufacturing 25.8 27.9 14.8
2. Transport/Utilities 7.54 5.90 5.07 0.009
3. Trade 17.54 19.67 22.58 0.026
4. Services 13.54 19.87 30.39 0.040
5. Government 13.44 19.19 17.40 0.025

Gross Domestic Product 288.3 1,035.6 5,743.8

percentage in:
1. Goods Producing 44.1 33.7 26.2
1-a Agriculture 7.2 2.9 1.9
1-m Manufacturing 29.1 24.1 18.0
2. Transport/Utilities 9.2 8.5 8.4
3. Trade 17.7 16.7 15.2
4. Services 8.4 11.6 18.4
5. Government 8.4 15.2 13.8

Source: Economic Report of the President, 1988 and 1999.

Table 2 Output, Hours, and Adjusted Hours

(BLS Indexes, 1987 = 100)

1950 1970 1990 1999

Output Y 26.8 55.0 109.6 151.9

Hours H 66.7 76.0 105.8 122.5

Adjusted Hours HA 60.6 73.4 107.7 131.1

Y/H 40.2 72.4 103.6 124.0

Y/HA 44.3 74.9 101.8 115.8

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Table 3 Households and Sales per E1 Establishment/a

Year Grocery Gasoline

Stores Stations

A. Households per E1 Establishment

1954 874 300
1963 1,302 334
1972 1,853 478
1982 2,078 649
1992 1,939 1,120

B. Sales per E1 Establishment/b (000)

1954 873.9 299.7
1963 1,302.4 334.4
1972 1,852.7 478.2
1982 2,077.8 648.8
1992 1,939.0 1,120.0

/a An E1 establishment has one or more employees "operated entire year".

/b Sales are in constant 1987 dollars.

Table 4 Employees, Selling Areas, and Items Stocked

Employees Selling Items

(FTE) Area Stocked

A. Average Chain Super

1984 40.3 21,295 11,384
1989 57.1 25,011 18,967
1994 68.6 31,577 21,949
growth rate 0.0513 0.0337 0.0584

B. Largest Chain Super

1984 93.6 33,520 17,415
1989 95.5 34,253 26,216
1994 142.2 54,170 30,995
growth rate 0.0307 0.0315 0.0518

Source: Progressive Grocer selected April issues

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Table 5 Manufactured Foods Sold to Retail Stores by Brand Type
(percentage distribution)

Manufacturer Private
Unbranded Brand Brand/a

1958 20.7 65.2 14.1

1967 21.5 61.5 17.0
1977 17.2 63.2 19.6
1987 13.2 68.0 18.8

/a Private brands include retail, wholesale, and generic brands.

Source: Alden Manchester (1992: p. 65).

Table 6 Wages and Percentage of Part-time Employees

Males Females
Firm Size Wages % PT Wages %PT

F1 1-24 10.29 18.5 8.20 39.9

F2 25-99 12.38 8.4 9.05 24.1
F3 100-499 13.46 7.7 10.11 21.5
F4 500-999 13.52 7.5 10.53 19.2
F5 1,000 + 14.95 9.7 10.68 23.7

ratio F5/F1 1.453 0.526 1.302 0.595

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i.The adoption rate for 17 high technology innovations was positively related to establishment
size, education of the workforce, and the fraction of nonproduction workers, confer Doms,
Dunne, and Troskey (1997).

ii.The data pertain to 1998 and were obtained from Appendix A in The World Economy by Angus
Maddison (2001).

iii.This relation was studied by among others Wesley Mellow (1981), Walter Oi (1983), Charles
Brown and James Medoff (1989); a partial survey of the literature appears in Oi and Idson
(1998).

iv.Costs are minimized when qi = q for all i. A firm that hires a highly skilled lawyer will not hire
the first applicant for a job as a secretary or legal aid. It will interview a larger number of job
applicants to achieve assortative matching.

v.Exercpt from his Presidential address to the British Association for the Advancement of Science
in 1887. Cited by J. Gershuny (2001: p. 1).

vi.cited by Helen Boss (1990: p. 22(.

vii.An excerpt of Cullen's letter is reproduced by Richard Tedlow (1990: pp. 381-4).

viii.cited by Richard Tedlow (1990: p. 191).

ix.Harry T. Wilson (1972: p. 78) described the career of Sylvan M. Goldman who invented and
patented the shopping cart. Customers were reluctant to use the cart. The store had to assign
clerks to teach customers how to use the shopping cart.

x."Priceline.com" was created by J. Walker. A customer quoted the price that he would pay for
an airline ticket. Priceline would accept or reject the customer's quote within a specified interval.
Walker was able to obtain a patent for his idea. The domain of intellectual property has
expanded.

xi.A refrigerator allowed a family to hold a home inventory of perishable goods thereby
minimizing the sum of shopping and storing costs. It also contributed to a longer life expectancy
by providing a way of preserving food without the excessive use of salt. The stock of home
refrigerators increased from 3 million units in 1931 to 52 million in 1958.

xii.Penetration rates varied across states. It was 62 per cent in Massachusetts, while eight states
[Arizona, Colorado, Florida, New Mexico, Nevada, Utah, Texas, and Washington] reported
penetration rates of 95 and 96 per cent. Self service is illegal in New Jersey and Oregon.The data
were taken from Figures 3.8 and 3.9 in Gasoline Marketing in the United States Today, Third
edition (Washington, D.C.: American Petroleum Institute) Publication 1693.

xiii.These estimates were taken from Alden C. Manchester (1992: p. 22).

xiv.The economies of scale and specialization are clear in meat packing. Big firms slaughtering a
million or more hogs a year captured 38 per cent of industry output in 1977. With technological
advances, these big firms supplied 87 per cent of slaughtered hogs in 1997. Ten plants
slaughtered 40 per cent of all hogs. The largest plants reported unit costs that were 10 per cent
lower than competing plants one-tenth of their size. Over the 1977-97 period, the largest packing

25
packing plants reduced the share of revenues generated by processed pork, they specialized in
producing carcasses which were shipped to smaller packing houses which transformed the pork
into bacon and ham. MacDonald and Ollinger (2000) analyzed these developments in hog
slaughter, a pattern not unlike that of gasoline service stations.

xv.Pashigian and Bowen (1989) attribute the move toward one-stop shopping to higher wages for
women and the increase in the number of two-earner families.

xvi.The margins were taken from the web page for the Food Marketing Institute.

xvii.A history of Ms. Harper was published by Jane Plitt (2000). Harper had an initial investment
of $350. In the same year, George Eastman put down a million dollars to start his firm in
Rochester.

xviii.Data on bankruptcy rates of franchise outlets are hard to obtain. The parent franchisor often
buys back the franchise and operates it until a new franchisee is found.

xix.The risk index is an average of five components, two protecting against private diversion (law
& order, bureaucratic quality) and three for government diversion (corruption, risk of
appropriation, gov't repudiation of contracts). The open trade index is taken from Sachs and
Warner (1995). References to these indexes are at note 14 of Hall and Jones (1999: p. 97).

26