Why retailers are suddenly desperate to keep their least-valuable workers (2024)

By KYLE STOCK and KIM BHASINBloomberg News

If the ability to throw a 100 mph fastball sits at one end of the human-capital spectrum, stocking shelves and swiping bar codes is at the opposite. But the U.S. economy gets on quite nicely with just a few dozen ace pitchers, while it takes vast stadiums of cashiers — and no small amount of investment in human capital — to keep things humming.

A modest bidding war has broken out among the retailers who hire from the bottom of the labor pool, buoyed in part by improving sales. Wal-Mart moved to raise the pay for its lowest-level workers to at least $9 an hour, a decision quickly matched by TJX, the parent company of TJ Maxx and Marshalls. Gap, Starbucks and Ikea had already joined the growing list of service sectors now committed to higher starting wages, with tens of thousands of low-paid workers affected by recent changes.

These rising wages are sure to be costly for employers: Wal-Mart, for example, warned that its mass raise would chew up an additional $1 billion a year, a figure that spooked investors. From a labor-market perspective, meanwhile, the U.S. economy would still appear to have plenty of would-be cashiers and clerks sitting on the sidelines.

So why are these big employers risking the wrath of investors by forking over more money to their least-valuable employees? Better wages can be understood, in part, as an effort to keep workers from leaving — or at least leaving quite so soon.

“It’s hard to see, on a general basis, that this is from a lack of people,” says David Blanchflower, an economics professor at Dartmouth University. “But let’s say it costs you two days to train people and they stay for six weeks. If they stay for 12 weeks, you’ve halved the cost of training.”

Turnover in the retail sector has been steadily rising and now stands 5 percent a month. At that rate, if Wal-Mart’s workforce were to hold to the national average, over a full year it would be losing 60 percent of its sales staff. Employee churn at fast-food chains is even worse: Almost 6 percent of all fast-food workers left or were laid off in December, according to federal data.

An individual worker won’t ever command anything like the salary-bargaining powers of a baseball player, of course, but service economy employers tend to notice a rising tide of worker defections. Plugging all those gaps in the workforce is hugely expensive. Here’s how the math breaks down:

• The average retail sales employee in the U.S. earns an annual income of about $21,140, or $10.16 an hour, according to the Bureau of Labor Statistics.

• The cost of replacing an employee earning less than $30,000 per year is about 16 percent of that person’s annual wage, according to the Center for American Progress, a left-leaning think tank.

• A retail employer would therefore need to spend almost $3,400 every time a worker defects.

That adds up quickly. Wal-Mart has about 500,000 low-wage employees. The cost of replacing each one, using the rough estimate from above, comes to roughly $1 billion — the cost of the just-announced wage increase to $9 per hour.

Boosting wages at the bottom won’t stop turnover entirely, but it can help reduce training and recruitment costs. Giant retailers also have to consider intangibles. New workers, for example, generally aren’t as productive as seasoned employees, creating an efficiency cost that goes beyond the expense of finding and training a rookie. Plus, many retailers — Wal-Mart in particular — have long paid a reputational cost for poor pay.

‘GOOD BUSINESS’

Some retailers have long been out to prove that front-line workers can make higher salaries without sapping profits. Workers at the Container Store earn $48,000 a year on average — about twice the industry average — and the company enjoys a 10 percent annual turnover rate, which is extremely low for a retailer. At Costco, meanwhile, the average hourly worker starts at $11.50, and those who stay for more than five years can make more than $20 per hour. The company’s pay practices are “not altruistic,” Costco co-founder Jim Sinegal said. “This is good business.”

The retailers that recently elevated their low-end wages seem to have that same rationale: Pay workers more, make them happier and keep them from leaving.

Gap, which is bumping its minimum wage to $10 an hour this year, has seen a double-digit percentage increase in job applicants since it made the announcement a year ago, according to Dan Henkle, senior vice president of human resources at the apparel retailer.

Still, some of the biggest retailers haven’t budged on pay — most notably Target. But as more retailers ratchet up their lowest hourly wages to $9 or more, it will become tougher to reduce employee turnover with pay alone. If retailers really want to reduce churn, the next frontier will probably be promising more predictable schedules, rather than higher wages. Indeed, Wal-Mart says that early next year it will begin offering fixed schedules 2.5 weeks in advance.

Blanchflower, the Dartmouth economist, points to surveys that find most retail employees are happy to work longer hours for the same wage, providing they get more predictable hours.