Costco and Henry Ford Prove that Living Wages Are Perfectly Feasible

The story goes that part of Henry Ford’s success ought to be credited to his decision to pay his workers enough that they could afford the cars they were manufacturing. It’s true that Ford payed his employees $5 a day (about $15 an hour in current day buying power), which everyone considered to be quite generous. Certainly he could’ve found people to work for less. It is unclear, though, whether or not Ford raised his wages out of direct concern for the well being of his employees. The $5 a day wage may have made Ford’s business more profitable as a result of lowering the cost of employee turnover, in which case the improved condition of his employees should be thought of as a convenient side-effect rather than a motivating factor in and of itself.

In any case, the story about Henry Ford and the $5 day used to be a regularly-invoked part of our country’s economic mythology. The thinking was that it’s good for an economy when workers can afford to buy things.

But that idea is dead for the most part. And if you don’t believe me, just check out a recent NYTimes article about the wholesaling supermarket giant Costco.

It is more or less conventional wisdom that any viable company needs to drive down their labor costs to an absolute minimum. Otherwise, the company won’t be profitable enough to attract investors. Call it the Wal-Mart model. Lower your costs to an absolute minimum at every possible step and the rest will take care of itself. Costumers will love the low prices and investors will fawn over the profit margins. Your workers will survive, maybe.

Costco lowers the cost of their goods as much as possible, but they pay their employees about $17 dollars an hour, which is considerably more than their direct competitors. And guess what? The conventional Wall Street economic wisdom is that Costco is foolish.

Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco’s workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

“He has been too benevolent,” she said. “He’s right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden.”

Another analyst complains that, at Costco, “it’s better to be an employee or a customer than a shareholder.” Because if shareholders aren’t happy, then no one can be happy, or something.

Jim Sinegal–Costco’s CEO–stakes out a heterodox business position as compared to the true and orthodox Wall Street doctrines. 

He rejects Wall Street’s assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street’s profit demands.

Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco’s customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers’ expense. “This is not altruistic,” he said. “This is good business.”

Notice the similar rationale of Costco and Henry Ford. Happier employees = better business. And, at least as of late, it’s paying off. “Costco’s stock price has risen more than 10 percent in the last 12 months, while Wal-Mart’s has slipped 5 percent,” author Steven Greenhouse tells us. We might need to revisit the conventional wisdom.

It’s pretty widely assumed that the United States’ economy would slip into some sort of dystopian apocalyptic scenario if employers were required to pay their workers a living wage. There’s maybe a kernel of truth to that. Pretty basic economic theory suggests that an increase in the minimum wage will likely lead to increased unemployment in the aggregate, and Casey Mulligan confirmed the conventional wisdom a couple of years ago with some real-world analysis of a minimum wage increase.

So while it’s true that an across the board minimum wage increase would probably cause more unemployment, Costco shows us that some companies can more than afford to offer their employees a living wage while still remaining profitable. It’s not all the time necessary to crush labor. People will still invest. You’ll still make money. And your full time employees won’t need to rely on public assistance to subsidize their poverty wages enough to make ends meet. Wal-Mart, for example, could very easily pay their employees a living wage. But tens of billions of dollars is not enough for the Walton family, apparently.

We’re in a bit of a tough place, then, as relates to wages and public policy. It’s probably unrealistic to expect corporations like Wal-mart to willingly pay their employees a decent wage. And an across the board minimum wage hike would likely create both increased unemployment and a more expansive under-the-table labor market.

A solution: we could let employers pay their employees whatever they want and then raise the wages of low-income earners to an appropriate level through something similar to the Earned Income Tax Credit.

But that, of course, would be socialism. And, in America, the only thing worse than millions of people busting their humps for poverty wages would be a functioning socialist society.



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