Higher wages can boost retailers’ bottom lines
While wage hikes amid a tight labor market are expected to contribute to higher prices for consumers, a new study finds a favorable tradeoff in higher levels of customer service.
Researchers from Cornell SC Johnson College of Business mined data from more than 97,000 online reviews of restaurants in California’s Santa Clara County where the minimum wage increased versus those where the wage was unchanged. Improvement in perceived service quality was found in those restaurants where the wage rose, including a reduction of negative discussion about the courtesy and friendliness of workers.
One caveat was that minimum wage hikes were found to especially affect consumer experiences at independent restaurants, which can control experiences and quality more than national chains where procedures are standardized.
“The discussion around minimum wage has been all around how prices will go up, and consumers will be worse off,” said Vrinda Kadiyali, a Cornell SC Johnson professor. “But we find, in our research, that consumers are happier with the overall quality.”
The findings fall in line with what economists refer to as the “efficiency-wage” theory that argues that wages increased to above market level can effectively pay for themselves through increased worker motivation and retention. Beyond the benefit of growing sales with improved productivity, lower turnover tends to reduce the costs of recruiting and training new employees.
“There is increasing evidence that efficiency-wage proponents may be right: Higher wages can at times boost the bottom line,” wrote economists Ray Fisman of Boston University and Michael Luca at Harvard Business School in a Wall Street Journal article from earlier this year.
Last week, Walgreens became the latest retailer or food establishment to boost minimum pay to $15 an hour starting in October in the fiercely competitive job market. Walmart announced its third raise for frontline workers over the last twelve months, increasing its U.S. average hourly wage to $16.40.
The wage hikes come as retailers of all stripes have been strategically raising prices to offset rising freight, commodity and wage costs.
- Minimum wage hike boosts customer experience – Cornell
- How Higher Wages Can Increase Profits – The Wall Street Journal
- Walgreens Increases Starting Wage for Hourly Team Members – Walgreens
- Walmart will raise hourly pay for 565,000 workers. – The New York Times
- Understanding the Global Price-Sensitive Consumer – Boston Consulting Group
- Wages Are Going Up — And So Is Inflation. Consumer Prices Have Hit A 13-Year High – NPR
- How the delta variant stole Christmas: Empty shelves, long waits — and yes, higher prices – The Washington Post
- Labor Market Will Play Increasing Role in Economic Outlook but Rising Wages Could Lead to More Inflation – National Retail Federation
DISCUSSION QUESTIONS: Do you see the productivity gains resulting from higher wages largely offsetting the related expenses for many retailers? What advice would you have for retailers about managing wages and other inflationary pressures?