Fair wages and healthy profits: Tapping the virtuous business cycle

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

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