MIT professor studies high-wage retailers

In April 2015 I wrote a post about how higher minimum wages could cause massive unemployment if more employers copied Costco. I noted that “even a casual visitor to [Costco, Target and Walmart] can notice that the work being done per employee per hour is not the same.”

Can you get ahead in academia by studying phenomena that are apparent to consumers? Apparently so! “Why ‘Good Jobs’ Are Good for Retailers” is a 2012 Harvard Business Review article by Zeynep Ton, a business school professor at MIT. She turned this into a The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits in 2014 and now the New York Times is excited about it (article in today’s paper).

Professor Ton says to business people “You can cut your labor cost as a percentage of revenue by hiring higher-quality workers and leaving the low-quality workers to competitors or SSDI.” What the New York Times hears is “Every American can be a high quality worker if paid sufficiently high wages.” Professor Ton quantifies the savings of retailers from not competing with SSDI and TANF: “Sales per employee at Costco are almost double those at Sam’s Club.” As we can be pretty sure that Costco’s per-worker labor costs (wage, health care, taxes, etc.) are not double those of Sam’s Club, this means that Costco spends less on labor than does Sam’s Club. Another way to look at this is “If you don’t have the potential to be twice as productive as a Sam’s Club worker you will not be hired by Costco.”

It is worth looking at the reader comments on the NYT piece. By cutting labor costs as a fraction of sales, Costco and similar companies should be reducing the share of the economic pie enjoyed by labor and enlarging the slide of pie enjoyed by owners of capital (e.g., the Costco shareholders and/or the executives looting from them). But the liberal readers celebrate this move in the direction of less equality because they are dazzled by the headline dollars/hour number paid to the remaining handful of workers.

[Note that the New York Times pays its own journalists less than they could make by having sex with married foreigners and collecting child support. See the discussion of Times reporter Liza Ghorbani in this August 2013 posting.]

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5 thoughts on “MIT professor studies high-wage retailers

  1. I know the liberal media like to make a big deal of the supposed high wages and benefits paid by Costco (is the company a major Democrat Party supporter?) but if you’ve ever been in a Costco, there aren’t that many people working there in relation to the (enormous) size (and sales) of the store. If you have a question about a product, forget it – there’s no one out on the floor of the store to talk to. Most of the merchandise is brought in on forklift pallets and no employee touches it again until it’s scanned to go in your cart. Even there the % of cost per scan is low because Costco packages everything in enormous sizes – instead of scanning a 99 cent can of beans, with the same motion the cashier scans a $12 multipack of beans. All the deli products are pre-packaged so there’s no need for anyone to man the slicer or fill containers. Etc.

  2. Izzie: Those limitations of Costco aren’t bugs in the higher-labor-cost environment that the U.S. is becoming… they’re features. If labor costs continue to rise a traditionally staffed grocery store will be as old-fashioned as having tailor-made clothing.

  3. I would bet that Costco plays games with its average wages thru the use of subcontractors. I am under the impression that the product demonstrators giving out free samples (who constitute most of the personnel who are actually out on the floor of the store) are not Costco employees but are employees of another company that Costco contracts with. I am also under the impression that these folks are not paid all that well. I can’t give you links for this but that is my hunch. I also don’t know whether Costco also subcontracts out things like store cleaning, etc.

    The Costco model is difficult to duplicate because Costco doesn’t actually make any money selling merchandise. Their entire net income is derived from membership fees. (Net income $2 billion, Membership fees $2.4 billion) Sort of like Amazon Prime there is a first mover advantage here – once you’ve paid the membership fee once you don’t want to pay it again to a different provider in the same category.

  4. Yes, the demonstrators/sample people are not Costco employees. You can find job ads for such work on craigslist or at temp agencies. Sometimes it’s “freelance” work, which is even sketchier.

    I am surprised we hear about the Costco model so much when so many grocery stores are unionized and get pretty decent wages, sometimes quite a bit higher than Walmart or Costco,

  5. It seems Costco does a great job of executing its business strategy and taking care of its employees.

    If I purchase a product and it does not meet my expectations I can return it, no questions asked. They have a limited selection but the products are usually of high quality. The employees seem to like working there and have always been helpful when I ask a question.

    The goal should not be to replicate Costco’s business model, its under attack and will evolve. The goal for a company is to implement a business model that allows it to grow profitably with all levels of employees engaged and being fairly compensated.

    From a customer perspective Costco the membership fee is validation they have earned my business otherwise I would not pay the fee and go somewhere else. The switching cost is $0.

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