A Measure of Fairness

February 25, 2015

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Robert Pollin, Mark Brenner, Jeannette Wicks-Lim, and Stephanie Luce. A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States. Ithaca: Cornell University Press, 2008.

Having looked at a book about the history of the living wage, I turn now to the modern economic debate over efforts to raise wages. Most of this book reports research on the costs and benefits of state and municipal wage legislation. In general, the authors find these laws effective in modestly raising incomes for the low-wage workers they are intended to benefit. They also impose some costs, but those are generally small and widely diffused among many people, such as consumers who have to pay slightly more in prices.

The most common argument against legislated wage increases is that they may hurt the very workers they are trying to help, since some employers may employ fewer workers, relocate their businesses, or spend less money on other things that benefit workers. I will discuss the authors’ research on such issues in a later post.

First, however, I’d like to address a more philosophical issue on which advocates and opponents of living-wage laws often disagree. The argument over wages is not just an economic argument in the narrow sense; it is also a moral debate. The title of Chapter 2, “The Economic Logic and Moral Imperative of Living Wages,” makes that clear. So does this passage from the UN’s Universal Declaration of Human Rights (expressed in the gendered language of the 1940s): “Everyone who works has the right to a just and favorable remuneration ensuring for himself or his family an existence worthy of human dignity and supplemented, if necessary, by other means of social protection.” In discussing Glickman’s history of the living-wage movement in the previous post, I quoted his statement that “religious reformers were the first group outside of the labor movement to call for a living wage, beginning with Pope Leo XIII’s encyclical of 1891.”

Some of the opposition to living-wage proposals is based on resistance to the idea that moral considerations can be brought to bear on economic behavior. Chapter 3 includes a reprint of Paul Krugman’s critique of an earlier book by Robert Pollin and Stephanie Luce, The Living Wage: Building a Fair Economy. For Krugman, the very fact that Pollin and Luce have a moral preference for higher wages over government handouts makes their entire argument suspect.

The problem for Krugman is that markets are “absolutely and relentlessly amoral. Labor, in a market system, is just another commodity; the wage a man or woman can command has nothing to do with how much he or she needs to make to support a family or to feel part of the broader society.” Krugman sees three possible responses to this amorality of markets: (1) a pro-market conservative response that fails to see any moral problem here, since whatever the market does is just, (2) an anti-market “socialist” response that tries to “do away with the market’s determination of incomes,” in favor of some more just alternative, or (3) “after-market intervention: Let the markets rip, but then use progressive taxes and redistributive transfers to make the end result fairer.”

Krugman supports choice #3 as the “standard economist’s solution, which is also the main way the U.S. welfare state operates.” It accepts the amorality of the market and confines moral responses to the political sphere. The living-wage movement, on the other hand, is a form of choice #2, which can’t work because it tries to bring morality into an inherently amoral sphere of behavior. So he concludes:

In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand–the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.

In his response to Krugman, Pollin is troubled by the implications of such a sweeping argument. If living-wage legislation is “doomed to failure” because it tries to counter market forces, then wouldn’t the same objection apply to any effort to regulate wages and working conditions, even laws against child labor and slave labor? If markets are absolutely amoral, then how can “letting the markets rip” always be good social policy?

In essence, Krugman’s position seems to me to come down to three propositions:

  1. Powerful market forces determine wages
  2. Efforts to counteract those forces as they are operating are doomed to failure
  3. Only after-market policy measures can be effective

I wonder if scientists working in any other discipline besides economics would accept this logic. If we were talking about forces of nature, such as the weather or harmful bacteria, would we agree not to counteract such forces as they are operating? Well, we don’t have much control over the weather, so we do often resort to “after-weather” measures to undo whatever damage is done. We “let it snow, let it snow, let it snow” (the meteorological equivalent of letting the market rip), and then clean up the mess afterwards, just as Krugman wants to do with incomes through progressive taxation). But where we have gained a measure of control over natural forces, such as diseases, we do try to counteract harmful forces as they are operating, with timely treatment and even preventive measures like vaccination.

Isn’t this true in the economy as well? Supply and demand considerations may lead a pharmaceutical company to market an unsafe drug, but the FDA tries to intervene before the damage is done. The market may reward a company for dumping toxic waste, but society can act to prevent that damage rather than accepting the cost of “after-market” cleanup. And regarding wages, if widespread prejudice has lowered the price of female and minority labor, civil rights legislation can work against that by mandating equal pay for equal work. Economists can study the effects of legislation, but they should not declare entire categories of law a waste of time just because they promote some moral good like health or justice.

Why treat market forces as uniquely powerful and unstoppable, even more powerful than forces of nature? After all, the capitalist economy from which those forces emanate is a modern human creation. Market forces are really aggregations of human decisions that are subject to moral and legal influences. Society allows economic actors to pursue their self-interest up to a point, but also makes some rules to keep selfish behavior from getting out of hand. As a financial advisor, I was subject to a whole set of legal and ethical rules involving matters like respecting client confidentiality, disclosing conflicts of interest, and recommending only investments in the client’s best interest. Economic behavior is not, by definition, amoral behavior.

Of course, some people in powerful economic positions would like to be free to pursue profit without regard to ethical or legal constraints. That’s not a surprise, but what is more puzzling is why economists would want to encourage such an attitude. One reason may be that exaggerating the power of amoral market forces serves to place the field of economics itself in a uniquely powerful and privileged position in society. Other authorities such as political or religious leaders may try to tell us what we should do, but economists are the only ones who can tell us what we must do. Only they understand the amoral forces that rule our lives, and resistance is futile.

Economists have a lot to tell us about the probable consequences of economic actions and policies. If raising the minimum wage is likely to increase unemployment, as Krugman and many other economists believe, the advocates of higher wages need to address that concern (and this book does). But I think economists go too far when they try to settle policy debates by invoking a doctrine of moral fatalism, encouraging people to feel morally impotent in the face of economic forces.

Continued

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A Living Wage (Glickman, part 2)

February 11, 2015

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The previous post discussed how Lawrence Glickman links the demand for a living wage to the historical transformation of the US economy. As independently owned and managed farms and businesses became less common, American workers had to rethink their hostility to working for wages. Increasingly they pinned their hopes for freedom and independence on better wages instead of on control over their own labor. The labor movement called for a high American standard of consumption supported by a living wage, at least for white males.

An idea whose time had come

By the end of the nineteenth century, this idea was gaining support beyond the labor movement itself. “Religious reformers were the first group outside of the labor movement to call for a living wage, beginning with Pope Leo XIII’s encyclical of 1891.” The Pope declared it a “dictate of nature more imperious and more ancient than any bargain between man and man.” In 1906, the Catholic priest and social activist John Ryan, published A Living Wage, which also made a distinction between prevailing market wages and ethical wages based on natural moral law. Prevailing wages were partly determined by the relative power of capital and labor, so were unlikely to reflect the true value of workers or their work. [On a personal note, my father told me that when he studied economics at a Catholic college in the 1930s, his ethics professor argued for the moral responsibility of employers to pay a living wage.]

States began passing minimum-wage laws in 1912, and the platform of the Democratic Party began calling for a federal minimum wage in 1916. From organized labor’s point of view, the minimum wage was exactly that, only the lowest point on the “spectrum of conceivable living wages,” but it was a start.

Opposition to higher wages was still intense in the early 1900s. The opposing arguments were partly economic, based on the idea that the wage set by the market represented the real value of labor. But this easily became a moral argument: since the worker’s labor was only worth what the market said it was worth, any demand for more was an immoral attempt to get something for nothing. Another argument was that any interference with the labor market violated the principle of freedom of contracts. A market wage represented an agreement between two free parties, but a legally mandated minimum deprived employers of their right to bargain freely with workers. It was this last argument that most impressed the Supreme Court when it declared minimum-wage laws unconstitutional in 1923. [It probably didn’t occur to justices to worry about whether the individual worker really had much freedom to bargain with a powerful employer.]

By the 1930s, support for a living wage became stronger, as economists, politicians and the general public came to associate low wages with economic depression. President Roosevelt stated it bluntly in 1938: “We suffer primarily from a failure of consumer demand because of lack of buying power.” With the productive capacity of the nation expanding, not to raise wages made it impossible for workers to buy enough goods to keep the factories humming and the labor force employed.

I don’t recall Glickman telling this part of the story, but the Supreme Court reversed itself in 1937 and upheld a state minimum-wage law. Interestingly, this happened because a certain Justice named Roberts departed from his usual practice of voting with the four most conservatives justices (perhaps setting a precedent for the Affordable Care Act!). This decision marked the end of an era in which the Court had generally resisted government efforts to regulate industry.

In 1938, Congress passed the Fair Labor Standards Act, which set a national minimum wage and a standard work week of forty hours beyond which overtime must be paid. Perhaps just as important, although not discussed by Glickman, the National Labor Relations Act of 1935 gave workers the right to organize and bargain collectively. A combination of union organizing and government support helped millions of workers achieve a higher standard of living and move into the middle class.

An idea whose time has gone?

Because Glickman is concerned primarily with the rise of the living wage as an idea, he ends his story in the early twentieth century with its partial implementation. He does not address the question of why the struggle for higher wages became so much harder in the latter part of the century, or why the very term “living wage” went out of fashion. I’ll just mention a few of the many developments that impeded or even reversed the progress that workers had been making:

  1. Runaway inflation not only eroded the buying power of wages, but it also reduced popular support for wage increases, since high wages could be blamed for inflation.
  2. Globalization undermined the argument for a distinctly “American standard” of wages. Employers could justify low wages in order to keep their companies globally competitive, or replace well-paid US workers with lower-paid foreign workers.
  3. New technologies reduced the demand for unskilled labor and the market price of that labor.
  4. Globalization and automation led to job losses in the highly unionized manufacturing sector, while employment in the less unionized service sector expanded. The decline of unions reduced the workers’ political clout too, since the labor-friendly Democratic Party had relied heavily on unions for its grass-roots organizing.
  5. The decline of the patriarchal, male-breadwinner family undermined the argument for a “family wage.” In theory, wages could be lower if families were accustomed to relying on multiple earners, but households with only one earner lost ground.
  6. The struggle for higher wages focused increasingly on racial minorities and women, who had been largely excluded from high wages in the past. Many white males felt threatened, however, and became more interested in holding on to what they had than advancing the cause of labor in general. They abandoned their traditional Democratic allegiance and voted Republican in large numbers, especially in the South, helping insure that public policy would tilt toward business and away from labor. The labor movement eventually paid a price for once thinking of the living wage as only a white man’s wage.

A new interest?

The recent attention focused on economic inequality suggests that the issue of just wages may once again move center stage. At the low end of the income scale, increases in the minimum wage have failed to keep up with inflation. In today’s dollars, the original minimum of about $4 an hour increased to over $10 in the 1960s before falling back to $7.25 since then. Meanwhile, incomes in the middle have largely stagnated while incomes at the top have increased dramatically (especially after-tax incomes because of large tax cuts for the wealthy).

Thomas Piketty observes that in the US recently, “income from labor is about as unequally distributed as has ever been observed anywhere,” with the top tenth of workers receiving 35% of the total and bottom half of workers only 25%. Income from investments is even more uneven, since the share of wealth controlled by the richest tenth has risen to over 70% in recent decades. The distribution of total income is a combination of the distributions of both labor income and investment income. The share of total income going to the top tenth fluctuated in the range of 30-35% between 1950 and 1980, but has gone up to 45-50% since 2000. So 15% of the national income has been transferred to the top tenth from everybody else. (See my discussion of Piketty’s Capital in the Twenty-First Century, especially part 3.)

In our new Gilded Age, with the rich living in increasing luxury while so many others can barely scrape by at all, the stage may be set for a new national discussion of a living wage.

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A Living Wage (Glickman)

February 9, 2015

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Lawrence B. Glickman. A Living Wage: American Workers and the Making of Consumer Society. Ithaca: Cornell University Press, 1997.

This week, I turn to an older book than I usually discuss because I want to provide some background on the current debate over just wages. The struggle for higher wages goes back a long way, of course. Labor leaders started talking about the “living wage” in the 1870s, and the concept was widely discussed during the Progressive Era. The country’s first minimum wage law was passed in Massachusetts in 1912.

Lawrence Glickman links the concept of the living wage to the great economic transformation of the United States, involving both the ascendancy of industrial wage labor and the acceptance of mass consumption as an economic counterpart of industrial production. Both of these developments forced Americans to confront the question of the adequacy of wages.

“Wage slavery”

Before the Civil War, the very idea of wage labor was a contested notion. Children worked for wages, and so did young adults unless and until they acquired enough property to have their own trade, shop or farm. But the ideal American was generally thought to be an independent producer of some kind. Even as wage labor was becoming more common by the mid-1800s, “nineteenth-century workers deemed it acceptable only as a temporary step on the way to self-employment.”

The popular concepts of liberty and self-government were commonly applied to individuals as well as the nation as a whole, and they included the idea of being in control of one’s own labor. Selling one’s labor to an employer meant losing one’s liberty and being reduced to a mere commodity. “Some workers considered wage slavery more dehumanizing than chattel slavery because employers, unlike slaveholders, did not have to provide even basic subsistence.”

Critics of “wage slavery” often compared it to prostitution, blurring the distinction between the “wages of sin” and the “sin of wages.” On one level this was a powerful metaphor, comparing two activities that involved selling one’s body. But it could also be a powerful narrative, the story of how low wages drove women into the most immoral of economic transactions. The living wage could refer to either of two solutions: a female wage high enough to remove any need for prostitution, or a male wage high enough to support an entire family and so eliminate any need for a women to make money.

These two views of prostitution–as a metaphor for all wage labor or a narrative about low wages–correspond to two different views of the wage labor problem. The more radical critique was that wage labor by its very nature robs the workers of their freedom as well as of some portion of the value of their labor. The more moderate critique was that wage labor was acceptable if wages were high enough to support families. As industrialization proceeded and the US became predominantly a nation of wage-earners, the second view came to prevail. The term “wage slave” faded into the background, and the term “living wage” came to the forefront. A newer conception of liberty, the freedom to live well through consumption, superseded the older notion of freedom through independent production.

Conceptions of the living wage

In 1898, American Federation of Labor president Samuel Gompers defined the living wage as “sufficient to maintain an average-sized family in a manner consistent with whatever the contemporary local civilization recognizes as indispensable to physical and mental health, or as required by the rational self-respect of human beings.”

From the beginning, the living wage was a vague and controversial idea. Many economists maintained that wages were determined by impersonal economic forces in accordance with scientific laws. They regarded assertions that wages should be higher than they already were as at best irrelevant and at worst a threat to the natural order of things. Others acknowledged that wages had a moral dimension, but supported only a “fair wage” based exclusively on the value of what workers produced, not on what they needed to consume.

Even advocates of living wages had trouble agreeing on what standard of consumption to apply. Was it enough to meet the subsistence needs of the worker, or should it allow for support of a family? Was it a fixed standard based on unchanging needs, or should it expand along with the nation’s productive capacity?

Most labor leaders came to define the living wage rather broadly to include family needs and gradually rising living standards. “Fundamental to the concept of the living wage for most proponents was the belief that needs were ever expanding, that wages should grow correspondingly, and that the limitless capacity of production made continual growth possible.” Labor theorist Ira Steward developed a concept of “productive consumption” that linked rising consumption with the general well-being of society. He opposed the old producerist morality that saw frugality as a virtue and spending as a vice, regarding it as an excuse to underpay workers. While he condemned spending on certain “human follies and vices” like drinking and gambling, he regarded more “civilized” forms of spending as good for families, good for the economy, and good for society.

The idea of the living wage became closely associated with an “American standard” of consumption. As one advocate put it, “The American laborer should not be expected to live like the Irish tenant farmer or the Russian serf. His earning ought to be sufficient to enable him to live as a respectable American citizen.” By insisting on good wages, American workers could claim their fair share of rising productivity, support families, and sustain the growing economy through their buying power.

The living wage and the “American standard” became entangled with issues of race, nationality and gender. To put it simply, it was often seen as the proper wage for a white man. Such a good wage might be wasted on Chinese or African-American workers, whose lower standards were said to make them both more accepting of lower wages and unable to use more money constructively. Instead of making common cause with the most disadvantaged classes of workers, white workers tried to set themselves above and apart from them. “The ‘caucasions’, Samuel Gompers bluntly wrote in 1905, ‘are not going to let their standard of living be destroyed by negroes, Chinamen, Japs, or any others.'”

The living wage was also entangled with a patriarchal conception of family in which the man was the sole breadwinner. His wage was the one that needed to be high enough to support a spouse and children. Should a woman need to support herself, she only needed the bare minimum to survive and avoid prostitution. That meant that the modern conception of freedom and independence based on well-paid labor was primarily for male breadwinners. Only the most radical elements of the labor movement questioned women’s continued dependence on men.

Glickman summarizes, “In adjusting to the wage labor economy, organized workers used the idea of the American standard of living not only to reclaim economic and political rights that they feared they were losing in the new economy but also to exclude other groups from its benefits.”

After emerging in the labor movement of the nineteenth century, the idea of the living wage gained much broader support in the twentieth, although not without continued opposition as well. That will be the subject of my next post.

Continued

 

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Made in the USA

April 25, 2014

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Vacliv Smil. 2013. Made in the USA: The Rise and Retreat of American Manufacturing. Cambridge, MA: The MIT Press.

In 1950, manufacturing’s share of US GDP was 27%. By 2010, that had declined to 13.5%. After peaking in 1979, US manufacturing jobs declined from 19.5 million to 11.5 million by 2010, enough jobs for only 8.2% of workers. In the first decade of this century alone, “Michigan lost nearly 47% of its manufacturing jobs (mostly in the auto industry) and North Carolina lost almost 44% (mostly in textiles).”

Vacliv Smil is an interdisciplinary scientist on the Environment faculty at the University of Manitoba. He does not believe that the United States should give up its manufacturing industries without a struggle. He say he is “convinced that no advanced modern economy can truly prosper without a strong, diverse, and innovating manufacturing sector whose aim is not only affordable, high-quality output but also to provide jobs for more than a minuscule share of the working population….”

Many observers accept or even welcome the decline of American manufacturing. One line of reasoning is that manufacturing growth is unsustainable because of its impact on environmental resources. A quite different argument is that manufacturing should go the way of farming, becoming so productive that it needn’t employ a very large segment of the labor force. The future of the economy lies in the growth of service industries.

With regard to the environmental argument, Smil seems a little ambivalent. On the one hand, he acknowledges that “the notion of a successful modern life has become overly defined by the possession of manufactures.” On the other hand, he is skeptical about scaling back consumption of manufactured goods very much, especially since so much of the world has yet to participate in mass consumption. He is even more critical of the second argument, rejecting the notion that services alone can create a strong domestic economy and generate enough exports to pay for imported manufacturing goods.

Smil’s belief in the continuing importance of manufacturing rests on three main points:

  1. “Manufacturing has been the principal driver of technical innovation, and technical innovation in turn has been the most important source of economic growth in modern societies.”
  2. Although job losses in manufacturing have been very large, the sector’s absolute output continues to be large and growing. Reversing that trend would damage overall economic growth and make it even harder to address domestic problems such as poverty.
  3. The United States needs to increase its manufacturing exports to reduce its trade deficit and stop accumulating unsustainable debt, since it probably cannot export enough services to do so.

Dominance and decline

The book goes into some detail on the rise in American manufacturing to a position of world dominance in the mid-twentieth century. I will pass over the details, since that story has so often been told. Smil summarizes:

During the quarter century of postwar economic expansion between 1948 and 1973, America’s manufacturing progress made it possible to create, for better or for worse, the world’s first true mass consumption society, to reach new peaks of industrial production, and to start diffusing the powers of electronic computing. These accomplishments were made easier by abundant and inexpensive supplies of natural resources, the absence of any foreign economic competition that could seriously weaken US primacy, and, as has become clear in retrospect, a relative strategic stability of the bipolar superpower contest during the decades of the Cold War.

In 1970, the US had less than 6% of the world population, but 30% of the world’s economic activity.

The very strength of the US economy sowed the seeds of its later decline. Smil writes of two great advantages that eventually became disadvantages–the producer’s market in manufactured goods and the availability of cheap energy:

The first reality was created by rising disposable incomes, a relatively high rate of saving, a population shift to the suburbs, and the high fertility of the baby boom era. This combination generated an enormous demand for durable goods, and US manufacturers could sell almost anything they made. Product durability, functionality, and design quality were of secondary (and sometimes, it seems, of hardly any) importance compared to the quest for quantity, a quick profit, and built-in obsolescence. Some designs were completely devoid of any functionality or any design sensibility: we need only think of those massive chrome ornaments and risible fins of large automobiles of the day.

The ready availability of inexpensive energy and other resources meant that “durable goods could be, and were, designed as if material and energy did not matter.” In particular, automobile manufacturers made cars that were “progressively larger, heavier, and more powerful.” As other countries recovered from World War II and began competing for resources, and as developing nations drove a harder bargain in selling their resources, manufacturers faced growing pressures for increased quality and energy efficiency.

Some of the decline in the US share of global manufacturing was inevitable, as a result of developments in other countries. But Smil does not believe that the decline had to be as bad as it has been, or that it had to be accompanied by large trade deficits, indebtedness to other countries, a low savings rate, government budget deficits, poor educational performance, deteriorating infrastructure, and rising economic inequality.

What went wrong?

US manufacturing has not adapted very well to the new global environment. Smil says that American manufacturers had been able to prosper for a long time by focusing on the domestic market. “For more than a century the world’s largest manufacturing economy was an efficient mass-maker of industrial products for its huge domestic market, but in relative terms, the United States has been always a rather inferior exporter.” That was okay as long as imports were modest, but as American consumers were increasingly drawn to foreign goods because of their low cost or high quality, US exports didn’t increase enough to compensate. Americans wanted foreign cars much more than foreign consumers wanted American cars.

Relatively high wages and health benefits made it hard for American manufacturing to compete with a country like China. “China’s ruling party…attracts foreign companies and enormous direct investment by guaranteeing the stability of a police state and by supplying a docile workforce that labors with minimum rights, commonly for extended hours under severe discipline, and is housed in substandard conditions.” Walmart went from importing 5% of its products in the mid-1980s to importing over 80% from China alone more recently. But what is especially disturbing is that the US became a net importer even of advanced technology products that American companies had originally developed. Smil is very critical of high-tech companies like Apple that could have done very well competing on the basis of quality, but chose to make additional profits by outsourcing much of their operations to China.

Smil concludes that most of the manufacturing decline “has not been an inevitable outcome of either unstoppable economic forces or an equally unstoppable mechanization and robotization of modern manufacturing but a matter of deliberate choices, the self-inflicted weakening of America’s productive capacities resulting from companies’ dubious quest to maximize profits and individuals’ and households’ desire to maximize the consumption of cheap goods.”

Smil’s suggestions for trying to remedy the situation are relatively familiar. Among them:

  • Improve the educational system to provide more students with the skills most relevant to advanced manufacturing, especially science and engineering skills
  • Control the health care costs that have become a burden on US employers and workers
  • Increase spending on infrastructure
  • Reduce taxes on corporate income and increase them on consumption
  • Encourage countries with trade surpluses to increase domestic consumption

Smil is not at all sure that the United States can recover from the deterioration of its manufacturing base and the advantages that other countries have gained over us in key industries, such as aerospace. He concludes:

I believe that in the affairs of large nations, no situation is ever completely hopeless— and as a lifelong critical observer of American society I am well aware how it has repeatedly demonstrated its impressive capacity for renewal. And yet I am not sure whether it can demonstrate it again as I have not seen, so far, enough commitment and resolve even to acknowledge fully the severity of the accumulated challenges . Even odds of success are thus the best bet I can offer— hoping that I will be wrong, fearing that I am expecting too much.

 

 

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The Good Jobs Strategy

February 3, 2014

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Zeynep Ton. The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits. Seattle: Lake Union Publishing, 2014.

Why is it so hard to find a good job? Part of the problem is matching the good jobs with workers who are qualified to do them. We hear about hi-tech companies that can’t find enough applicants with the right technical skills. But even more often these days, we hear about the disappearance of jobs with decent pay and benefits, and the proliferation of jobs with low pay, no benefits, and erratic work hours.

Globalization and technological change are often cited as factors contributing to high unemployment and low wages. Many American workers are in a poor bargaining position, vulnerable to being replaced by an industrial robot or a lower-paid foreign worker. Workers with low pay can’t afford to spend very much, giving a competitive edge to businesses that can cut costs and hold down prices. So the conventional wisdom is often that businesses cannot invest very much in their labor forces and still make a profit. Maybe this is the real “class warfare,” the attitude that regards workers as an unfortunate expense to be minimized as much as possible.

Zeynep Ton is an adjust associate professor at the Sloan School of Management. Her studies of business management have convinced her that even in today’s competitive environment, businesses have a choice. They can profit from what she calls a “bad jobs strategy,” at least in the short run. But a “good jobs strategy is also a viable option:

You can certainly succeed at the expense of your employees by offering bad jobs— jobs that pay low wages, provide scant benefits and erratic work schedules, and are designed in a way that makes it hard for employees to perform well or find meaning and dignity in their work. You can even succeed at the expense of your customers; for example, by offering shoddy service. People may not enjoy buying from you, but plenty of them will do it anyway if you keep prices low enough.

In service industries, succeeding at the expense of employees and at the expense of customers often go together. If employees can’t do their work properly, they can’t provide good customer service. That’s why our experiences with restaurants, airlines, hotels, hospitals, call centers, and retail stores are often disappointing, frustrating, and needlessly time-consuming.

Many people in the business world assume that bad jobs are necessary to keep costs down and prices low. But I give this approach a name— the bad jobs strategy— to emphasize that it is not a necessity, it is a choice.

There are companies in business today that have made a different choice, which I call the good jobs strategy. These companies provide jobs with decent pay, decent benefits, and stable work schedules. But more than that, these companies design jobs so that their employees can perform well and find meaning and dignity in their work. These companies— despite spending much more on labor than their competitors do in order to have a well-paid, well-trained, well-motivated workforce— enjoy great success. Some are even spending all that extra money on labor while competing to offer the lowest prices— and they pull it off with excellent profits and growth.

Ton’s research focuses on the retail industry, notorious for its millions of bad jobs. Its median hourly wage in 2011 was $10.88; 40% of the jobs are only part-time; and unpredictable work schedules often make it hard to care for a family, go to school, or take a second job. Ton reasons that if better jobs can be created in retail, they can be created just about anywhere.

Ton highlights four companies that are succeeding with a good jobs strategy: Costco, the wholesale buying club; Mercadona, the biggest chain of supermarkets in Spain; QuikTrip, a convenience store chain; and Trader Joes, an American supermarket chain. They manage to make good profits, offer good value in prices and service to customers, and also create good jobs. Costco pays its hourly workers 40% more than Sam’s Club. In addition to better pay, these model employers provide their workers greater “opportunity for success and growth” by giving them adequate training, time and resources to do the job well. They are places where people generally like to work.

Investing in employees

Ton describes two main ingredients for success using a good jobs strategy: investment in employees and operational choices. Both are essential. The strategy requires an adequate quantity and quality of labor, but it also requires an efficient operation to make that labor productive and justify its high cost.

One could say that the company puts itself in its employees’ hands, then does its best to make sure those hands are strong, skilled, and caring. This is not a matter of happy talk, PR, and employee-of-the-month awards. This is concrete policy, manifested not only in wages and benefits but also in recruitment, training, scheduling, equipment, in-store operations, head count, and promotion.

Ton points out that not all tasks are simple enough to be reduced to standardized routines that the least skilled and trained worker can complete. Retail operations have actually become more complex over the years, but the investment in workers has declined. (The ratio of retail wages to average U.S. wages declined from 91% to 65% between 1948 and 2011.)

Ton found that in many cases retail stores can increase profitability by adding workers rather than cutting them. The relationship between employees and profits can be described by an inverted-U-shaped curve (with employees on the horizontal axis and profits on the vertical axis). Profits are highest at a theoretical sweet spot where stores are neither understaffed nor overstaffed. But businesses often have a bias toward understaffing because they think of labor as an expense to be minimized. Whenever sales are lagging, managers may be under pressure to cut staff in order to hold payroll to a fixed percentage of sales. Businesses fail to weigh the short-term gain against the long-term harm to their operation. They have few models of companies that sustain a high commitment to their workforce.

Companies without that commitment easily fall into a “vicious downward cycle”: Low expenditure on labor leads to a low quality and/or quantity of labor, which leads to poor operational execution, which leads to low sales and profits, which leads back to low expenditure on labor.

There are many effects of failing to invest enough in one’s employees, including— but by no means limited to— phantom stockouts; promotions that are executed incorrectly or not executed at all; data corruption that undermines inventory and strategic planning; and loss of products due to theft, spoilage, and faulty paperwork. [Phantom stockouts are situations where what the customer wants is actually in stock, but nobody can find it.]

Investing in employees can create a more virtuous cycle in which higher expenditures on labor justify and sustain themselves by supporting better operational execution and higher sales and profits.

The operational choices that support the good jobs strategy will be the topic of the next post.

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Posted by Ed Steffes

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