A Perspective on the High Cost of Low Wages

A thought-provoking Harvard Business Review article, The High Cost of Low Wages by Wayne Cascio challenges the assumption that low labor rates (in terms of wages and benefits - or lack thereof) equal low labor costs.  To support his point, he presents a comparison of the practices (and results) of Costco and Walmart's Sam's Club.

Although these businesses are very similar and directly compete with each other, Costco provides significantly higher wages and benefits than Walmart's Sam's Club.  The average wage at Costco is $17.00 an hour while Cascio estimates the average wage rate at Sam's Club to be in the range of $10.00 to $11.52.  82% of Costco's employees have health insurance coverage (for which they pay about 8% of the premium) compared to less than half of Walmart's employees (where those that are covered pay about 33% of the premium).  91% of Costco's employees are covered by a retirement plan (with the company contributing an annual average of $1,330 per employee), while 64% of employees at Sam's Club are covered (with the company contributing an annual average of $747 per employee).

While Costco's labor practices are clearly more expensive, Cascio asserts that they have an "off-setting cost-containment effect".  In return for this labor investment, Costco has significantly lower turnover rates than its competitors, "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".

Comments

[Paul Hebert]

Unfortunately, what Wall Street rewards is performance and that is why Wal-Mart makes the decisions it does. I'm not a savvy investor nor an analyst but at first blush it would seem that Wal-Mart is doing what Wall Street wants:

Wal-Mart realizes double the profit margin, double the operating margin and almost double return on equity (on a percentage basis per Yahoo financials) than Costco.