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Study: Employee Raises More Than Pay for Themselves

Catherine Ruetschlin

It is really terrific to see retailers here giving critical attention to the Demos study. As a former business owner in the health services industry, I do realize that these problems are more than just abstract theory. That's one of the reasons why Demos and I thought it would be useful to evaluate the possibilities for adopting this business model across the retail sector, especially as the importance of retail to the US economy continues to grow. As many of you mentioned, some retailers (like Costco or ShopRite) already operate using a wage plan that pays their workers higher wages than the industry average and still return real profits to shareholders (Costco, for example, is able to pay out a special $3 billion dividend because their financial position is so strong).

Empirical research substantiates the relationship between high wages and productivity gains. As commentators here noted, and studies assessing actual balance sheet data from firms reveal, building a loyal, experienced, and knowledgeable workforce does offer tangible benefits to the firm. But as one expert - MIT Business Professor Zeynep Ton - observes, "the financial benefits of cutting employees are direct, immediate, and easy to measure, whereas the less-desirable effects are indirect, long term, and difficult to measure." Firms have a choice between a short-term strategy viewing their workforce as a cost to be minimized, or a long term one that sees workers as an asset that can be leveraged for increased returns in the future. Some retailers operate according to the first strategy and others the second, but experience and profit rates show that both are viable business plans.

And what if more retailers chose to adopt the long-term view? Unlike productivity benefits, the returns to business and the economy from high wage employment can be quantified based on widely accepted measures. In the immediate term, 20 to 25 percent of the wages paid out will come right back to the retail sector as consumption increases (that's $4 to $5 billion in the first year based on the wage raise we modeled). But retail can also be lifted up by overall growth, and in a consumption-driven economy the sector can hardly escape the correlation between the success of an individual firm and that of the economy as a whole. Measuring the returns to the sector from the consumption growth associated with a wage raise can help the sector determine whether the investment will produce returns. Our measures show a first-round effect of at least $11 billion in GDP and 100,000 new jobs.

Finally, it's important to point out that someone is already paying the difference between low wages and living wages in the workforce - taxpayers. Where full-time workers rely on public assistance from food stamps, Medicaid, or S-CHIP, the public pays a subsidy to low-wage firms that allows them to rely on a large workforce without having to ensure their staff earn enough to be even minimally healthy and productive. Low-wage employers have already tied their earnings to the overall economy by transferring a portion of their costs to the state. So whether we're talking about profits, growth, consumption, or living standards, everyone shares the fortune of retailers and retail workers. The Demos report provides one means to maximize that value.

This is a response to an original post and comment thread at RetailWire, a leading online discussion forum for members of the retail industry. Read the entire exchange here