Adequate Minimum Wage Helps Businesses, Workers, Economy

June 16, 2004

The Journal News

Wednesday, June 16, 2004

Adequate Minimum Wage Helps Businesses, Workers, Economy

By Paul Lightfoot

The minimum wage in the United States, adjusted for inflation, has decreased by about 40 percent since 1968. As the New York state Senate considers a bill to raise the minimum wage, some claim that the business community opposes an increase. As a CEO, I believe it worth considering that many of the savviest business leaders in America have recognized that an adequate minimum wage actually helps businesses and workers, and promotes economic growth.

In the early 20th century, Henry Ford’s assembly line was causing a problem: The work was not challenging, and wages were low, resulting in high rates of turnover, heavy training costs and too much absenteeism.

In a contrarian and controversial move in 1914, Ford doubled his minimum wage to $5 a day and cut daily working hours from nine to eight. Production surged, profits skyrocketed. “The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made,” Ford said.

Nine decades later, the corporate behemoth dominating the U.S. economy is Wal-Mart, recently voted America’s most-admired company in a Fortune magazine survey of CEOs. Wal-Mart boasts the world’s most efficient tools, technology and practices for getting merchandise from manufacturers into the hands of20its customers. So why hasn’t Wal-Mart learned last century’s lesson about enlightened wage policies and profits?

A comparison between Wal-Mart’s Sam’s Club and a competitor, Costco, suggests that Wal-Mart is paying a steep price for ignoring the wisdom of Henry Ford.

Costco’s workers make an average of $15.97 per hour, a full 38 percent more than the $11.52 per hour average paid by Sam’s Club. Costco also pays thousands more for workers’ health and retirement and includes more of its employees in its health care, 401(k), and profit-sharing plans. Is Costco leaving money on the table? To the contrary: Costco’s labor and overhead costs are 9.8 percent of sales vs. 17 percent of sales for Sam’s Club/Wal-Mart. Profits per employee are $13,647 for Costco vs. $11,039 for Sam’s. Sales per square foot are $795 for Costco vs. $516 for Sam’s Club. Employee turnover is considerably less: 6 percent for Costco, 21 percent for Sam’s.

James Sinegal, Costco’s CEO, explains that employees who are paid a fair wage are more productive.

As a productivity adviser to major retailers, I see first hand how low wages can create a vicious cycle of high turnover and low productivity. Insufficiently paid workers will readily quit for minor pay increases and do not care enough to take steps to increase productivity. Instead of running their business, managers spend a disproportionate amount of time hiring, training and managing new workers20and temps.

Why don’t all companies appreciate the lesson of Costco and Henry Ford? Unfortunately, businesses often make decisions contrary to their long-term profits, in this case driven by misplaced fears of competitive disadvantage. Shortsighted managers often can’t resist the mirage that paying lower wages is an easy and obvious tactic to lower costs. It requires more vision and better management skills to be like Henry Ford and invest in new technologies, modern management practices, better training and better ways of delivering services to raise productivity and profits.

Compounding this problem, efforts to legislate increases in the minimum wage have been stymied by false claims about harm to economic growth and employment. In 1999, the President’s Council of Economic Advisors rejected these arguments, concluding that “the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment.”

This country’s labor policies need to go back to the future to rediscover Henry Ford’s insight about wages and costs. Here in the 21st century it seems only fair that full-time employees at for-profit companies should be paid a wage sufficient to live above poverty. By increasing the floor on minimum wages, the playing field can be leveled, eliminating the mirage that currently seduces managers.

Under such a policy, workers win with higher wages and stable employment. Employers20win with higher productivity, lower turnover and a more robust consumer base for their products. And society wins when working families can provide for themselves and don’t have to resort to public benefits. Everyone wins with the higher economic growth that comes from a larger middle class and fewer poor.

Frustrated with the federal government’s failure to act, 12 states plus the District of Columbia already have raised their minimum wages above the national level. New York should follow their lead.

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ABOUT THE AUTHOR

Paul Lightfoot is CEO of AL Systems, and Program Advisory Board Member for the Brennan Center for Justice.