How higher wages can lead to bigger corporate profits

Updated
Shoppers push a trolley outside a Costco Wholesale store in Los Angeles, California March 6, 2013.
Shoppers push a trolley outside a Costco Wholesale store in Los Angeles, California March 6, 2013.
REUTERS/Mario Anzuoni

The average retail sales job pays only $10.09 an hour, and some retail outlets—notably Walmart, the largest private employer in the world—pay as little as $8.00 per hour. But a handful of large retail companies have made generous compensation a key part of their business models, and it seems to be paying off.

Costco, for example, pays a starting wage of $11.50 an hour. Trader Joe’s starts employees off with at least $40,000 a year. And in Spain, a country where nearly a quarter of all citizens are currently unemployed, the grocery store chain Mercadona SA pays unusually high wages and still dominates the local retail market.

High wages and high profits might sound mutually exclusive. But in a recent interview with the National Journal, MIT professor Zeynep Ton explained how the two might go together.

Companies such as Trader Joe’s and Costco “start with the mentality of seeing employees as assets to be maximized” as opposed to “a cost to be minimized,” Ton said to National Journal’s Sophie Quinton. As a result, they invest in job training programs and other ways of making their employees more knowledgeable, skilled and enthusiastic.

For example, according to the Wall Street Journal, Mercadona employs “a German-style recipe for higher productivity that includes flexible working conditions, extensive employee training and performance-linked bonuses.” Each new employee receives four weeks of mandatory training. QuikTrip, another high-paying retail outlet which came up in the interview with Ton, starts its workers off with two weeks of training.

Higher wages across the entire retail industry could be a boon to the national economy, according to Demos policy analyst Catherine Ruetschlin. In November, she issued a report arguing that an industry-wide wage floor of $25,000 could “increase GDP by between $11.8 and $15.2 billion” and “lift 734,000 people out of poverty.”

How higher wages can lead to bigger corporate profits

Updated