Can Higher Wages Drive a Virtuous Cycle of Profit?

Suddenly faced with time for some free reading, I’ve decided to occasionally write a post on a topic outside of my usual focus. As such, I plan to structure these posts are shorter blurbs, offering more conjuncture than conclusion, and hoping to garner your thoughts and opinions. I hope these can lead to some interesting discussions.

Can Higher Wages Drive a Virtuous Cycle of Profit?

An article this week in The Atlantic makes the argument that companies like Costco, QuikTrip, and Trader Joe’s prospered through the recession because they viewed employees as assets and paid higher wages–in direct contrast to conventional business notions to cut costs (read: layoffs and lower wages) during a recession. It’s this philosophy, the author argues, that will allow companies to flourish in the future.

Perhaps. It’s certainly an enticingly paradoxical notion–that paying higher wages will actually lead to a virtuous cycle of more growth. I was drawn to the title precisely because of the beloved TJ’s located a block from my office, where staff seem constantly energetic, engaged, and all around happy to be there. But does it actually play out in practice? Three example companies make a very measly sample size (n=3), in a narrative that could easily confuse correlation for causation. Is there documented rigorous evidence that treating workers as assets (whatever that may mean in practice) actually leads to positive growth for companies?

It may turn out to hold true for the vast majority of companies, in which case we would be facing huge opportunities by changing companies’ ingrained sense of cost-cutting. I could also see it hold true only for certain types of companies–for example, ones that target a more socially conscious consumer willing to pay a premium for better service (TJ’s I’m looking at you!). “Treating workers as assets” is also a fairly vague term–does this mean higher wages, greater voice in sharing ideas, better benefit plans, or something else? I’m sure there’s already a growing management literature on this. The article quotes Dr. Zeynep Ton of MIT’s Sloan School of Management; that may be a good beginning place to look.

For Employee Health Benefits, “Cost Control” May be the Wrong Approach

This issue becomes most interesting for me when we look through the lens of health benefits. As the poorly portrayed CVS-demanding-workers’-weight story indicated, companies are becoming increasing interested in ways to manage their workers’ health through benefit plan design and wellness incentives. And the conventional wisdom is that when I write, “workers’ health”, I really mean “workers’ health costs”. Facing spiraling health care costs that parallel our nation’s terror over the future of Medicare, companies have been trying to find creative ways to rein in those costs, through euphemisms such as “consumer-driven health care” that make employees pay a greater share of health care costs to “get their skin in the game”.

The problem is, if the argument that better-treated employees contribute to increased productivity and a better bottom line, then offering employees skimpier health care benefits may paradoxically ruin productivity (greater absenteeism, less energy at the workplace, etc.) and hurt the bottom line. As employers increasingly recognize this, they may start looking beyond the health benefit price tag to see what plans, providers, and services can help increase worker productivity and well-being, even if they cost a little extra.

I have a hunch that research in this area is still a murky black box. How do we distinguish effective programs from trumpeted snake oils? What services actually translate into bottom line benefits? What metrics should we even look at to measure the “value” of a health benefit package?

What do you think?

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