Fair wages and healthy profits: Tapping the virtuous business cycle

August 23, 2012 | Economic Opportunity Institute

costco wholesale

Costco Wholesale
PHOTO: Stu pendousmat at en.wikipedia

Complaints about the minimum wage are a favorite refrain among socalled small business advocates like the National Federation of Independent Businesses (NFIB). But their argument’s fatal flaw is the assumption that happier workers and higher profits are mutually exclusive.

According to Zeynep Ton, a professor of Operations Management at MIT’s Sloan School of Management, many retailers are caught in the vicious cycle of driving down wages to maximize profits. In her study of low-cost retailers, Ton found that the prevailing trend – competing by cutting workers wages, hours, and benefits – is a recipe for disaster that leads to “understaffed stores with high turnover of low-skilled employees who are often part-timers and have little or no commitment to their work.”

The takeaway: maximizing profits at the expense of employees isn’t necessary for businesses to turn a profit. In fact, Ton found that companies who bucked the trend by providing decent wages and adequate training tapped into a virtuous cycle of profit and employee well-being.

Ton’s study, published in the Harvard Business Review  and highlighted in TIME, details how a more motivated, better trained workforce provides a big boost to a company’s bottom line. According to Ton:

Highly successful retail chains—such as Quik-Trip convenience stores, Mercadona and Trader Joe’s supermarkets, and Costco wholesale clubs—not only invest heavily in store employees but also have the lowest prices in their industries, solid financial performance, and better customer service than their competitors. They have demonstrated that, even in the lowest-price segment of retail, bad jobs are not a cost driven necessity but a choice. And they have proven that the key to breaking the trade-off is a combination of investment in the workforce and operational practices that benefit employees, customers, and the company.

Paying a decent wage isn’t just good for business, it’s also good for our economy as a whole. Margot Dorfman, CEO of the Women’s Chamber of Commerce, explains how wage increases for low-wage workers invigorate the economy:

Raising the minimum wage puts dollars in the pockets of workers who are by necessity most likely to spend them immediately at the grocery store, the pharmacy, the auto-repair shop and other local businesses. Raising the minimum wage boosts the economy from the bottom up, which is exactly what we need.

Senator Tom Harkin (D-IA) and Representative George Miller (D-CA) have introduced legislation that would raise the federal minimum wage to $9.80 by 2014, and adjust it each year to keep up with the rising cost of living. Although Washington has the best state minimum wage in the nation, a raise to our federal minimum wage is long overdue.

By EOI Intern Ashwin Warrior

Tagged with: , ,
Posted in Minimum Wage

Comments

  1. John Bancroft says:

    While I applaud Costco’s approach to wages and benefits, I think it would be good to at least mention the very destructive role they played in foisting privatization of the retail liquor business on Washington. Having one corporation buy an initiative result with $20 million in advertising is an assault on the democratic process that should not go completely unmentioned. Add to that the resulting elimination of over 1,000 good Washington public sector jobs, to be replaced by inferior private sector jobs (probably lower paid, and certainly with inferior pension and family and medical leave benefits EOI supports), and you have a corporation perhaps not so virtuous as to deserve the unqualified positive spot light you shined on them. One of the strengths of EOI is its focus on a variety of economic issues, and showing their interconnectedness. While I understand that this blog post focuses on minimum wage issues, why not avoid a silo approach to companies like COSTCO by including one sentence referring to their recent corporate political swagger and its results on the wages and benefits paid to retail liquor workers?

  2. Margaret L Edgar says:

    Sure wish I could wholeheartedly endorse COSTCO but the irony keeps tripping me up. It’s admirable that COSTCO has realized the long-term benefits of providing living wage jobs. Unfortunately, a number of those jobs are at the expense of state employees who held living wage union jobs. The loss of these existing jobs was due in large part to the efforts of COSTCOs funding of both the initiative and subsequent dishonest campaign to privatize state liquor sales. In the end COSTCO’s stockholders will be the only beneficiaries of privatization – consumers lose, state employees lose, and community safety loses.

  3. Thanks for those comments – both of you are making very important points. While this post singles out some of the ‘high road’ business practices of COSTCO and other businesses, it’s definitely not a blanket endorsement of their other actions.

  4. Geoff says:

    Let’s not forget that Washington State tried to impede Costco’s liquor sales by effectively putting a price floor on the private sector but not themselves. Costco took the state to court, and the judiciary favored with Costco as long as they agreed not to sell for less than their acquisition costs.

    If the state couldn’t compete with Costco, that’s simply economics at work. This is the market determining what the more appropriate wage is for a person to furnish alcohol; the top rate of $20-something + bonuses + benefits one receives at Costco is certainly reasonable for the work they’re doing.

    Margaret: I’m curious how you concluded that consumers lose. And community safety? How on earth is that affected?

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