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Why Costco got praised in the State of the Union

"Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover," said President Obama on Tuesday night.
President Barack Obama greets an employee in the bakery at a Costco store in Lanham, Md., Jan. 29, 2014.
President Barack Obama greets an employee in the bakery at a Costco store in Lanham, Md., Jan. 29, 2014.

One of Washington's most enduring clichés is that government should be run like a business. President Obama offered his own spin on that analogy in his 2014 State of the Union address when he argued that it should be run more like a specific business. The federal government, he said, needs to be a little more like Costco.

"Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover. We should too," said the president during his Tuesday night address. To that end, he announced his plans to sign an executive order that would raise wages for hundreds of thousands of federally contracted workers.

The president didn't stop there. The following morning, he visited a Washington-area Costco in person, where he called for a higher federal minimum wage and again praised the company.

"Costco's commitment to fairness doesn't stop at the checkout counter; it extends down the supply chain, including to many of the farmworkers who grow the product—the produce that you sell," he said. "Now, what this means is that Costco has some of the lowest employee turnover in your industry."

Why all the love for one company? Part of it may have to do with CEO Jim Sinegal's support for President Obama and the Democratic Party. In 2008, Sinegal donated the maximum legal amount to Obama's presidential campaign, and hosted a fundraiser for the president during his 2012 reelection bid.

But the president's interest in the retailer extends beyond political quid pro quo. Costco meets President Obama's vision for how American corporations should treat and compensate their workers. It's the single biggest real-world example of where the president wants the economy to go next.

That's in large part thanks to Costco's unusually high wages. Whereas the average retail sales employee earns only $10.29 per hour, the average wage at Costco is $21 per hour.  Even the lowest-paid Costco employee earns $11.50 per hour, more than the $10.10 hike in the federal minimum wage currently being proposed by President Obama.

The retailer doesn't pay such high wages out of charity. In a 2005 New York Times story that described Costco as "the Anti-Walmart," Sinegal insisted that high wages lead to low employee turnover, greater productivity, and improved customer satisfaction. The investment appears to have paid off, too; while Costco's earnings have softened a bit over the last few months, the company is still faring better than some other large retailers. In contrast, Walmart's strategy of aggressively driving down wages to save on labor costs did not spare the retail giant from sagging domestic sales numbers.

Costco demonstrates that it's possible for a national retail chain to provide a living wage and still turn a profit. That's especially important given that much of the country's recent jobs growth has been concentrated in the retail sector. If the president wants to improve wages and working conditions for Americans as a whole, he'll need to pay special care to the growing retail economy, which is coming to occupy the role in the country's economy previously occupied by manufacturing.

The example of Costco offers a promise that working conditions can improve in this sector even as it continues to create jobs. But it's unlikely that other large retailers will simply acquiesce to the president's request for higher wages and adopt the Costco business model. In order to change the labor economy from the bottom up, progressives and striking retail employees may need to ensure that they don't have a choice.