How Amazon Fulfillment Centers Influence Local Economic Growth

Dan Loney: Well, we certainly know that Amazon is dominating the retail segment right now, thanks to the growth of ecommerce. But what do Amazon Fulfillment Centers mean for local economies in those towns or townships where those facilities are located? Our guest Serguei Netessine, Wharton professor of operations, information and decisions was part of a research team that looked into this. He’s also senior vice dean for Innovation and Global Initiatives at Wharton.

This is an interesting topic, because most of us have communities where we’ve seen a business come in – a big business, a well-known business – and you think, “Wow, that’s got to be great for the community.” But you dive into the data as to whether or not or how much of a great thing it is for these local communities. First, give us the backstory on why this was such an important or an interesting piece for you and your team to look at.

Netessine: The backstory is that there are lots of studies done previously on Walmart. And what we know is that when Walmart comes into town, lots of bad things happen. First of all, prices go down, which kills retail around Walmart. And many mom-and-pop stores go bankrupt, and then their employees get hired by Walmart at a much lower wage. There are several papers over the years, some back in the ‘90s, which show that essentially the effect of Walmart coming into town – at best – is zero. And probably a little bit of a negative.

Then there are some studies done on big factories that employ thousands of people. We know that the effect is typically positive. Beyond that, we don’t really know much about big facilities coming into town. What’s interesting about Amazon is that it has many of those facilities. There are literally hundreds and hundreds of warehouses which are popping up all around the world in the last decade or so, and they employ significant number of people. So that was the academic interest in me.

Loney: But usually – and maybe this is a little bit of the policy side of it – when a company like Amazon or UPS or whoever it is, or an automaker, is looking to build a facility in a certain area, the local government looks to bend over backwards to try and give that company tax breaks, benefits, or whatever, so that it makes it more palatable for the company to come into that town and put up a facility.

Netessine: That is absolutely true. In our case, we don’t know how much local governments contributed. It’s a very complicated formula. There are some tax breaks, there are some land subsidies and so on. In certain cases, we see some local news about how much the government tried to attract the facility. Certainly, there was lots of publicity about Amazon HQ2 when it was opened in in Virginia. So we see bits and pieces. But that’s not the data that we had, unfortunately.

Loney: In terms of what you were looking at, I guess employment is part of it. Median income is probably part of it. I read that looking at the poverty side of this is also included.

Netessine: Exactly, yes. We looked at those three variables, and we looked at the county level. There are different levels you can look at. At the state level, it’s hard to see an impact, because states are big. If you go all the way down to, say, the zip code level, or census block level, there is not much data available. Typically, these negotiations with local governments happen at the county level. And that’s where we find a significant increase in employment, a significant decrease in poverty, and a significant increase in median household incomes.

Loney: I guess there’s a long term element to having a facility like this. So, if Amazon is going to make an investment to put a big fulfillment center in your area, the expectation is they’re going to keep it there for a while. And so, that level of employment is probably somewhat constant as well – that it’s going to be there for a while.

Netessine: Absolutely. And the numbers that we find there average over the first three years. But certainly they continue. They persist for a long time period. The most interesting thing we find is that there is direct employment by Amazon. Say you open a facility, you have 3,000 people working there. Some are smaller, some are bigger. But what we find is that there is a multiplier effect of about two. So for every direct job that Amazon creates by employing people directly, there are more jobs created around this facility.

As you can imagine, many of those jobs are probably in deliveries. So someone has to hire these people – UPS, USPS. Then there are companies popping up that are delivery service providers for Amazon. Then there is Amazon Flex, which has gig workers, who are also working and delivering packages. Then, of course, there is retail. You have to feed people who work at the warehouse for a while. There is some construction going on. Then someone has to do maintenance and so on. So that’s an important thing to know, that actually more people get jobs than what directly is offered by Amazon.

Loney: Are you able to tell not only what happens to the incomes of the workers who are there, but also that outside component. Is it somewhat of a-rising-tide-raises-all-boats philosophy?

Netessine: Exactly. The median household income is for the entire county. This increase is about 2.3% for the entire county. This, of course, means that for people who got employed directly or indirectly, the increase is probably much, much higher. But overall, when you even aggregate for a much bigger county, you still observe an increase in median income.

Loney: The poverty question of this, I think, is very important. It’s very interesting as well, that if you have these components of rising employment and rising income, you would expect that there will be a downside impact on the poverty level in a particular area.

Netessine: Exactly. [We found that in] our other work that we’ve done at Amazon. I have to say that I am working at Amazon one day a week, and the data comes directly from Amazon – full disclosure there. We do find that for a lot of people who join Amazon, this is their first job. They did not have a job before. They did not have income before. And so for them, it’s a drastic increase in income. Others joined from fast food and services and other retail, because Amazon has substantially higher pays than many of those places. Amazon in 2018 established a $15 minimum pay (hourly) across the company. That also leads to this increase in median household income.

Loney: Maybe this is part of the process that Amazon had when they started to think about these facilities. But does it impact the decisions of where they put these fulfillment centers, so that they can have the maximum benefit for the people in a particular area?

Netessine: Absolutely. So there is a lot of thought that goes into locating a warehouse. There are all kinds of considerations. One is, of course, being close to demand. What we see is there are very few counties with very small populations where warehouses would be located. And that makes sense. There is just no one there to shop around. Another one is locating close to supply. You want people to work at the warehouse. And if you’re located in the middle of a desert, there is no one who is going to be there to work. We had to account for this, because it’s not straightforward. It’s not like a warehouse gets selected randomly. If you just look at the impact of an Amazon warehouse, you might get into this issue that warehouses are located with intention.

Loney: Right. And it’s not they’re not going to put a facility in a desert and then all of a sudden a town pops up around it.

Netessine: No, no. You also have to have other things such as some road access, because trucks are going to be going back and forth and so on. If you look at big counties which would be million-plus in population, they all have an Amazon warehouse. Because that’s demand, that’s supply, right?

We’ve been looking mostly at medium-size counties. The way we look at this problem is we look at the counties that get an Amazon warehouse, and we compare their development to counties that did not get an Amazon warehouse – then we see the differences. That’s the methodological design.

Loney: Does anything stand out that really grabbed you in doing this research?

Netessine: I think what’s remarkable is how strong the effects are. We used several methodologies. We also used some public data to test the robustness of our results. And the results were very, very strong. There were some methodological challenges. Because of COVID, we had to stop our timeline in 2017. COVID was weird – lots of things went differently. So we could not look at the most recent years.

Frankly, the biggest impact is probably more recently. Amazon increased its minimum wage to $15 in 2018. So, if anything, our results are on the conservative side. That is one thing. then, of course, is the multiplier. We found that the multiplier is two. So, for every person that Amazon hires, another job is created elsewhere in the county. That is remarkable. In the past, academics found these kind of results for big factories. But nothing like that has ever been observed, say, for Walmart or for other retail facilities.