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HarBus Review: The High Cost of Low Wages

Lafayette

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The High Cost of Low Wages, Harvard Business Review, WF Cascio, 2006

Excerpt:
Wall-Mart’s legendary obsession with cost containment shows up in countless ways, including aggressive control of employee benefits and wages. Managing labor costs isn’t a crazy idea, of course. But stingy pay and benefits don’t necessarily translate into lower costs in the long run.

Consider Costco and Wal-Mart’s Sam’s Club, which compete fiercely on low-price merchandise. Among warehouse retailers, Costco—with 338 stores and 67,600 full-time employees in the United States—is number one, accounting for about 50% of the market. Sam’s Club—with 551 stores and 110,200 employees in the United States—is number two, with about 40% of the market.

Though the businesses are direct competitors and quite similar overall, a remarkable disparity shows up in their wage and benefits structures. The average wage at Costco is $17 an hour. Wal-Mart does not break out the pay of its Sam’s Club workers, but a full-time worker at Wal-Mart makes $10.11 an hour on average, and a variety of sources suggest that Sam’s Club’s pay scale is similar to Wal-Mart’s. A 2005 New York Times article by Steven Greenhouse reported that at $17 an hour, Costco’s average pay is 72% higher than Sam’s Club’s ($9.86 an hour). Interviews that a colleague and I conducted with a dozen Sam’s Club employees in San Francisco and Denver put the average hourly wage at about $10.

On the benefits side, 82% of Costco employees have health-insurance coverage, compared with less than half at Wal-Mart. And Costco workers pay just 8% of their health premiums, whereas Wal-Mart workers pay 33% of theirs. Ninety-one percent of Costco’s employees are covered by retirement plans, with the company contributing an annual average of $1,330 per employee, while 64 percent of employees at Sam’s Club are covered, with the company contributing an annual average of $747 per employee.

Costco’s practices are clearly more expensive, but they have an offsetting cost-containment effect: Turnover is unusually low, at 17% overall and just 6% after one year’s employment. In contrast, turnover at Wal-Mart is 44% a year, close to the industry average. In skilled and semi-skilled jobs, the fully loaded cost of replacing a worker who leaves (excluding lost productivity) is typically 1.5 to 2.5 times the worker’s annual salary. To be conservative, let’s assume that the total cost of replacing an hourly employee at Costco or Sam’s Club is only 60% of his or her annual salary. If a Costco employee quits, the cost of replacing him or her is therefore $21,216. If a Sam’s Club employee leaves, the cost is $12,617. At first glance, it may seem that the low-wage approach at Sam’s Club would result in lower turnover costs. But if its turnover rate is the same as Wal-Mart’s, Sam’s Club loses more than twice as many people as Costco does: 44% versus 17%. By this calculation, the total annual cost to Costco of employee churn is $244 million, whereas the total annual cost to Sam’s Club is $612 million. That’s $5,274 per Sam’s Club employee, versus $3,628 per Costco employee.

In return for its generous wages and benefits, Costco gets one of the most loyal and productive workforces in all of retailing, and, probably not coincidentally, the lowest shrinkage (employee theft) figures in the industry. While Sam’s Club and Costco generated $37 billion and $43 billion, respectively, in U.S. sales last year, Costco did it with 38% fewer employees—admittedly, in part by selling to higher-income shoppers and offering more high-end goods. As a result, Costco generated $21,805 in U.S. operating profit per hourly employee, compared with $11,615 at Sam’s Club. Costco’s stable, productive workforce more than offsets its higher costs.

MY POINT?

When a company treats people like cattle, to be herded from job-to-job at the lowest-possible-wage in order to make products/services supposedly competitive with those of another company (made by herding people from job-to-job at the lowest-possible-cost), the consequence is low-productivity due to (amongst other reasons) tremendous turnover of employees that simply adds to Total Overhead Costs.

Which is why a Minimum Wage will indeed raise Labor Costs by shifting the lowest higher in a defined range, but not entirely. Which will be compensated by higher unit-productivity. The companies lose nothing in terms of output overhead-costs, and workers gain considerably more with a decent pay ...

The above study was conducted in 2006, ten years ago. But significantly it was done BEFORE the Great Recession that forced companies into a scramble to the bottom to reduce frantically production overhead-costs. Meaning this: With our sufficiently buoyant Growth-Economy in-the-making, companies can well afford to offer a minimum wage ...
 

lpast

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Walmarts and Samsclub have a minimal amount of full time employees so very few of their employees actually make the 10 bucks an hour. The lionshare of their workers are part time.

If you have the means you dont shop in walmart period. I rarely if ever set a foot in walmart. I go in only If I need something right away and cant get it anywhere else.

I refuse to stand in line like a Moron waiting to give them my money until my ice cream melts because they have 16 self checkout lanes and 4 out of 12 cashier checkouts open. I refuse to use self checkout because I DONT WORK FOR WALMART hire someone, I am not going to do the work of a cashier to SAVE YOU MONEY. Give an american a job.

I food shop strictly in publics which is a pleasure and the little extra it costs me is miniscule. I buy hard goods online and costco

Walmarts profits are down because people that can afford to shop in walmart that do have some disposbable income DONT because its a pain in the ass. They lose untold millions because of their business practices that they think makes them more money
 
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