It’s the Productivity, Stupid (or Why Rising Wages Drive Economic Growth)
I agree 100 percent with Forbes blogger Tim Worstall. No, not with his blind faith in the divine wisdom of the free market, or with his pioneering use of intra-word semicolons. I simply agree with Worstall’s belated acknowledgement that higher wages lead to higher productivity:
Costco pays very much higher wages than Walmart. It also employs about half the amount of labor per volume of sales. Costco is therefore simply in a different model along that same spectrum of trading off hourly productivity against hourly wages. And note the obvious point here: Costco pays much better but also uses many fewer labor hours. And as Walmart moves along that same spectrum of possible labor models it is facing exactly the same calculation. Raise the wages in order to get more productive staff and the very point and purpose of what you’re doing is to reduce the number of labor hours you must purchase.
Of course, this is part of what we’ve always argued when we’ve insisted that a higher minimum wage won’t inevitably lead to some combination of higher prices, lower profits, worse service, and/or shuttered businesses. There are real benefits that accrue to employers in moving toward a higher wage business model, two of which include lower rates of turnover and higher rates of productivity.
Higher productivity—even according to traditional economics, that’s a good thing, right? Indeed, throughout the course of US history (if in fits and starts), the steadily rising productivity of the American worker has helped to lift living standards for us all.
And yet, from his headline—”Of Course Walmart Cut Hours After Raising Pay–What Did You Expect?”—Worstall seems to imply that rising productivity is actually bad for Walmart workers? Weird.
The implied threat is that if workers are more productive, Walmart will need less of them, meaning a higher wage will at least indirectly cost some Walmart workers their jobs. It’s a more nuanced argument than the old “if the cost of labor rises businesses will purchase less of it” meme that minimum wage opponents usually put forth, but it still oversimplifies what is actually happening on the ground at companies like Costco and Walmart.
You see, Costco’s higher-wage model doesn’t just deliver substantially higher sales per employee than Walmart, it also delivers substantially higher sales per store and sales per square foot. But more importantly for the purpose of this discussion, year after year, Costco’s same-store sales growth is consistently higher than Walmart’s—7 percent versus 3.5 percent in the most recent quarter. And even though Costco requires fewer employees per unit of sales, the faster Costco grows sales, the faster it adds workers. And the same dynamic should hold true for Walmart, at least once it fully realizes the productivity enhancements that naturally come from employing a more experienced, loyal, and competitively compensated workforce.
Thus when Worstall concludes that “the very point and purpose” of what Walmart is doing is “to reduce the number of labor hours you must purchase,” he’s actually missing the point entirely. Yes, a more productive workforce means Walmart will need fewer labor hours per unit of sales. But sales are not static. In fact, rather than lowering labor costs, the very point and purpose of what Walmart is doing is to increase same-store sales.
Worstall describes the wage/productivity calculation as a “trad[e] off” between wages and jobs, but this isn’t a zero-sum game at either the micro- or macroeconomic level. After all, there’s a reason why Republicans are running on economic growth: because economic growth is how we generate jobs. “That will be my goal as president,” Jeb!™ absurdly promised back in June, “4 percent growth, and the 19 million new jobs that come with it.” Okay, whatever. Still, GDP growth is mostly a function of change in the size of the workforce plus change in productivity. The more we increase productivity, the more the economy grows. And the bigger the economy, the more jobs.
So if (as Worstall correctly argues) higher wages drives higher productivity, and higher productivity drives economic growth, and economic growth drives the creation of new jobs—then logically, higher wages must drive the creation of new jobs. Worstall can’t have it both ways. Rising productivity can’t simultaneously increase and decrease net employment. And since over the history of market capitalism rising productivity has generally led to more jobs, higher wages, and higher living standards, I’m guessing it’s the former.
Interestingly, the whole implied threat in Worstall’s wages argument is identical to the threat at the heart of the “robots are coming for your jobs” meme: rising productivity is somehow bad for workers. (That is the whole point of automation, after all—to increase productivity.) But in the long term, at the macroeconomic level, this dystopian vision of productivity as a job-killer simply cannot come true… at least not in any economic, social, or political system remotely similar to the one we live in today.
In our current economy, productivity drives growth, and growth creates jobs. That’s how it works at Costco. That’s how it works at Walmart. And that’s how it works in the economy at large.