The False Dichotomy of Wages vs Profits

Business lobbying groups sometimes argue that increases in the federal minimum wage lead to lower profits because large companies cannot afford to pay thousands of employees more money. Firms argue that added expenses reduce profits, affect stock prices and create undue burdens. However, a new wages versus profits paradigm for large companies has emerged.

Zeynep Ton, MIT professor of operations management, reveals how good jobs and higher wages can lead to greater profits and investment stability. Ton believes the standard wages versus profits argument no longer applies, because bad jobs with low wages in the retail sector create an unending cycle of subsistence earnings, poverty and reliance on taxpayer-funded government assistance. Ton argues that companies treat low-wage earners as expenses and not assets.

Employees perform poorly when companies reduce hours, keep training to a minimum and expect workers to have different schedules every week. Low-wage earners cannot build stable family lives or create a viable source of income, and as a result of the low incentive that their wages represent, they create poor service within the company. In turn, minimum-wage employees reduce productivity, have smaller sales per square foot and create less inventory turnover.

You get what you pay for in the normal wages versus profits model. Customers have come to expect lower standards of customer service at these types of retailers. Taxpayers, in turn, foot the bill for people who cannot earn enough money to pay for food, housing or health insurance. Americans pay up to $4 billion per year in taxes to fund assistance to fast-food workers who do not make enough money.

Ton discovered a few key aspects that ideal retailers Trader Joe's, Costco and QuikTrip use to boost employee wages, increase morale and maintain consistent profits with good jobs. These companies offer fewer products, standardization and cross-training of employees, and they intentionally overstaff stores. Fewer products means less inventory waste, and employees get to know products better. Standardizing and empowering employees gives companies a chance to adapt more readily to customer needs. Cross-training employees to work in different departments makes them more valuable to more managers. Having more employees than normal reduces costs and improves customer service, because these stores are more adaptable to employees' schedules, sicknesses and holidays.

Wages versus profits used to mean higher wages and lower profits. Higher wages correlate to more profits in Ton's research, because employees with better job security provide better customer service. This good customer service increases sales, which leads to more profits, more reinvestment and better conditions for everyone at the company.

Another aspect of the wages versus profits model involves loyal employees with extra cash on hand. When someone has more spending money at the end of the day, employees may use their discount to buy products where they work. This means large companies earn even more sales revenue and profit from employees in a continuous cycle of earnings.

The notion that lower wages creates more profits can be misleading. At the same time, retailers must balance higher wages with profits so that the added expenses do not erode firms' financial standing. Wages versus profits should be a carefully orchestrated dance that maintains workers' faith in the company while prioritizing steady growth.

Photo courtesy of Kool Cats Photography at Flickr.com