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2017-10-26Macro `n Cheese

Internet retail trade pays well, but few

In this week’s edition of Macro n’ Cheese Roger takes a look at how “e-tailing” is transforming the retail industry.

Inspired by a recent piece on the effect of online shopping on the US retail trade industry, I go data hunting in Macrobond and despite widespread similarities across economies, some intriguing differences are also detected. What business model of “e-tailing” will prevail?

A couple of weeks ago, economists Jason Bram and Nicole Gorton of Federal Reserve Bank of New York (FRBNY), wrote an interesting piece on the FRBNY blog “Liberty Street Economics”. In it, they looked at how online shopping was affecting retail employment in the US. The conjectures were rather straight-forward;

  1. Online retail trade is rapidly increasing its share of total US retail trade
  2. Employment in traditional retail trade is decreasing (at least in relative terms), online retail opportunities do not make up for this
  3. Jobs in the online retail industry pay considerably more, but requires different skill sets than traditional jobs in the retail trade sector

In many ways this reminds us of how the manufacturing industry has developed from labor intensive, low-skilled work to capital intensive, high-skilled work. But are there any differences and how do other countries compare?

From a European perspective, the first obstacle is that we cannot easily access the data needed. Retail trade statistics are almost only available in index form and not in currency terms. However, to address these shortcomings, I have used Eurostat’s structural business statistics where there are annual nominal data in currency. In order to calculate the different aggregates in volume and with higher frequency, I have applied the monthly retail trade indices in constant prices to the last annual observation of the structural business statistics (if you’re a user, you can see the calculations by clicking on the chart to download the file).

Macrobond Document
Graph 1: More and more retail trade is conducted online
Note: Since only retail trade companies without physical outlets are included in the internet trade category, the shares above are probably low estimates of the true share of internet trade. That said, the data seems reasonably consistent with what survey data and ad hoc data from statistical agencies show.

It should be stated that internet trade is becoming more and more common, as the share of retail trade conducted on line has more or less doubled over the past ten years. Also, do note that the internet retail trade aggregates we look at only pertain to companies without physical outlets. Thus, to the extent that GAP, H&M etc sell via internet, it is counted as “traditional” retail trade.

As a next step, it would be interesting to see how the emergence of internet trade affects labor markets. If we follow the article by Bram and Gorton, it would imply an almost explosive increase in the number of employed in the retail trade industry. However, and in my opinion, Bram and Gorton use an overly broad measure of internet retail trade (including vending machines, door to door etc), which furthermore cannot be easily reconciled with European measures. Even with these narrower measures, developments are impressive.

Macrobond Document
Graph 2: The changing landscape of retail trade, in the US

In Europe, when searching for details on retail trade employment, we suffer from poor data, both in terms of frequency and sample periods. Again, it is Eurostat’s structural business statistics that provide us with some guidance. And from the look of it, European experiences resemble those of the US.

Macrobond Document
Graph 3: In Europe, internet retail trade employment is increasing rapidly
Macrobond Document
Graph 4: Despite strong trends in internet retail trade in the UK, employment seems to be lagging somewhat
Macrobond Document
Graph 5: In Sweden, internet retail trade is set to become a bigger employer than department stores

In the charts above, I have chosen to compare internet retail trade employment with the sub-sector it is often said to compete the most with, the traditional department stores. However, the structure of the retail trade industry probably differs between countries, which is why it should be illuminating to put internet retail trade employment in relation to total retail trade employment, as well. Indeed, European economies seem to be in the midst of a rapid restructuring from traditional retail sales towards becoming more internet based.

Macrobond Document
Graph 6: E-commerce is hiring

That said, what type of work is being offered? Can the unemployed department store sales clerk take the bus from the inner cities to one of those massive internet and logistics complexes in the suburbs?

-First of all, I think it is important to keep in mind that despite the impressive increase in employment in the internet retail trade sector, it does not seem to compensate for decreases in other retail trade sectors (in general, employment is of course growing, why this is, is to some degree, a matter of taste). Drawing from the richer US data we can see that internet trade has added some 150 thousand new workers over the past decade, whereas department stores have cut more than 300 thousand from their payrolls.

And, secondly, the skill levels are probably quite different for many of the new jobs. Using wage levels as a proxy for educational attainment we see that wages in the internet retail trade sector are some 50 per cent higher than in the retail trade industry at large1. This suggests that the skill requirements are probably higher in the retail trade industry.

1Here Bram and Gorton, have used more granular data than we have access to and claim a strong coincidence between higher education, higher wages and the occurrence of internet retail trade employers on a district level. Macrobond Document
Graph 7: Internet retailers pay a premium
Macrobond Document
Graph 8: Relative wages are better in the internet retail industry

As expected, the US pattern is mirrored in most European countries. However, and somewhat intriguingly, the internet-mature, perhaps even internet-“saturated”, economy of Sweden does post a somewhat different profile. There are actually quite a few subsectors, e.g., department stores, where the relative wages are even higher than in internet retail trade industry.

Macrobond Document
Graph 9: Sweden is different
Note: I am sure some readers will react on the level of pay, but remember that we use full-time employees, which excludes, e.g, proprietors working. To change into number of employed, which yields a considerably lower result, pls confer notes in the Macrobond-document. You can also find estimates for US, UK and EA5 in the MB-document. “Wages” include all forms of remuneration (gross); bonuses, inconvenient working hours supplements etc.

We can only speculate on the reasons for this, but perhaps the internet maturity is in itself an explanation? In Sweden, wherever you are, putting up an internet store is nowadays so effortless and cost effective that the “return” in the form of wages paid, might not even be the primary driver? Another interpretation is of course that the competition within Swedish “e-tailing” has increased dramatically, suppressing wages. But that does not rhyme well with the “churn” in the Swedish retail trade industry, does it?

Macrobond Document
Graph 10: Changes in the European retail trade industry

As can be seen, and as a testament to its widespread use of internet retailing, Sweden produced almost 5000 companies within the internet retail trade industry between 2010 and 2015, which is more than half of what the five times larger UK economy mustered, which is five times larger

In Europe, the developments are much the same, with the possible caveat that traditional retail trade companies do not yet seem to feel the heat from their new, nimble, internet competitors.

To conclude, the results from Bram and Gorton are by and large mirrored in developments in Europe. Internet retail trade captures a growing share of the market, as well as employment. Also, wage levels seem to be higher. Even though we should refrain from interpreting differences in levels, the rather large discrepancy in relative wages, both within retail trade and across countries, does stand out. The big question, perhaps, is if it is the giant company model of the US, or the extremely specialised company model of Sweden, that will prevail as internet retailing becomes the dominant form of retail trade?

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We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.