MIT Sloan Senior Lecturer and Visiting Scientist Barbara Dyer
Last week, Aetna, Inc., one of the largest healthcare insurers in America, made news when it announced it would boost its minimum wage base to $16 an hour for its lowest-earning employees. Aetna AET 0.35% also pledged to cover more of its employee’s health costs. In a Wall Street Journal interview, CEO Mark Bertolini said the company hopes to reduce its $120 million annual turnover costs and will monitor how this investment plays out.
While a firm’s decision to increase pay for lower-wage workers should certainly be applauded, it also begs the question: Why is the decision to pay workers $16 per hour breaking news?
My answer: because of the message it sends to investors and shareholders.
Nearly one fifth of American workers work in retail and fast food, and they have bad jobs. They earn poverty-level wages, have unpredictable schedules that make it hard to hold on to a second job, and have few opportunities for success and growth. These are not just people who are uneducated or unskilled. In 2010 more than a third of all working adults with jobs that did not pay a living wage had at least some college education or a degree.
The conventional wisdom in business is that bad jobs like this are necessary to keep prices low and profits high. If a low-cost retail chain were to pay its cashiers more, then it would either make less money or have to raise its prices. Implicit in this logic is the seemingly self-evident tradeoff between low prices and good jobs. But that is a false tradeoff. Even in highly competitive industries like low-cost retail, it is possible to pay employees decent wages and treat them well while giving customers the low prices they demand.
I studied four retail chains that manage to do this: Costco, Trader Joe’s, QuikTrip (a U.S. chain of convenience stores with gas stations), and Mercadona (Spain’s largest supermarket chain). They offer their employees much better jobs than their competitors, all the while keeping their prices low and performing well in all the ways that matter to any business. They have high productivity, great customer service, healthy growth, and excellent returns to their investors. They compete head-on with companies that spend far less on their employees, and they win.
Gap announced last week that it would increase its hourly minimum wage to $9 this year and $10 next year. Naturally, President Obama applauded the decision, which was in line with his own push to raise the minimum wage. But what Gap is after is not greater fairness or less income inequality. According to the chain’s CEO, Glenn Murphy, the reason for this move is that Gap implemented a“reserve-in-store” program 18 months ago, meaning that customers can order a product online and then pick it up at a particular store. Gap realizes that this program won’t work without skilled, motivated, and loyal employees.
This is hardly a surprise to me. Remember Borders bookstores? Almost 15 years ago, I studied Borders as it was trying to integrate its online store with its physical stores. Borders had great technology to tell online customers which book was available at which store. But there was a fatal hitch: the inventory data was not reliable. The system would tell a customer a book was in the store, but no one could find it. This happened 18% of the time! That’s way too many customers to let down and, in fact, Borders had to give up on the idea. Eventually, it went out of business.
Why were so many products not where they belonged? I found that stores that had fewer employees, less training, and more turnover had more of this problem. By going cheap on labor expenses, Borders made it hard to act on a strategic opportunity.
President Obama’s job plan has triggered lots of talk if not action. With the economy struggling, any conversation about job creation is good news. But from the President on down, we sometimes pay too much attention to the number of jobs being produced and not nearly enough attention to the quality of those jobs.
In Good Jobs America: Making Work Better for Everyone (Russell Sage Foundation), a book co-authored by me and Beth Shulman being released this month, we document how a very large percentage of American adults today work in jobs that pay at levels below what is needed for a decent standard of living.
The main focus of our book is to show how bad jobs can be made into good ones. We show that education is a necessary but not sufficient element in the solution, that the persistence of low wage work cannot be laid at the door of immigration, and that it is possible to improve job quality without negatively impacting economic growth.