http://www.nytimes.com/2016/10/16/upsho ... p=cur&_r=0
But in early 2015, Walmart announced it would actually pay its workers more.
That set in motion the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less?
It is an idea that flies in the face of the prevailing ethos on Wall Street and in many executive suites the last few decades. But there is sound economic theory behind the idea. “Efficiency wages” is the term that economists — who excel at giving complex names to obvious ideas — use for the notion that employers who pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.
Walmart’s experiment holds some surprising lessons for the American economy as a whole. Productivity gains have been slow for years; could fatter paychecks reverse that? Demand for goods and services has remained stubbornly low ever since the 2008 economic crisis. If companies paid people more, would it bring out more shoppers — benefiting workers and shareholders alike?
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An employee making more than the market rate, after all, is likely to work harder and show greater loyalty. Workers who see opportunities to get promoted have an incentive not to mess up, compared with people who feel they are in a dead-end job. A person has more incentive to work hard, even when the boss isn’t watching, when the job pays better than what you could make down the street.
Economists have found evidence of this in practice in many real-world settings. Higher pay at New Jersey police departments, for example, led to better rates of clearing cases. At the San Francisco airport, higher pay led to shorter lines for passengers. Among British home care providers, higher pay meant less oversight was needed.
What is interesting about this is that, if you look at what’s ailing the broader United States economy, it looks a lot like what you would expect if employers were, en masse, failing to understand the possibility of efficiency wages.
Employers have succeeded at holding down labor costs. The “labor share” of national income — the portion of the national economic pie that goes to workers’ pay, as opposed to corporate profits and elsewhere — has fallen. And average pay for nonmanagerial workers has grown more slowly than the overall economy.
This has coincided with disappointing results for the economy. Worker productivity has been rising slowly for the last decade, and prime working-age Americans are staying out of the work force in droves. This implies that plenty of people don’t see jobs out there that offer sufficient pay or opportunity to make the jobs worth doing.
Individually, employers may think they are making rational decisions to pay people as little as possible. But that may be collectively shortsighted, if the unintended result is less demand for the goods and services they are all trying to sell to these same people.
Just maybe, in other words, employers across the country are pushing down labor costs like Walmart, circa 2014 — and this is one of the major culprits behind disappointing economic results since the start of the 21st century.
“The management philosophy that became popular in the 1980s that led companies to cut pay for low-wage workers, fight unions and contract out work may have been profitable for the companies that practiced it in the short run,” said Alan Krueger, a Princeton economist and leading scholar of labor markets. “But in the long run it has raised inequality, reduced aggregate consumption and hurt overall business profitability.”
If you buy that theory — and, to be clear, it is more theory than settled fact — it means that the results of the Walmart experiment matter a great deal. That implies that if large companies were to spend more to pay and train their workers, it could create gains for the economy as a whole. And it would ultimately be better for those same businesses.
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Still, here is one other nugget the company has found. The extra wages it is paying its workers don’t all go out the door on payday, executives said. Spending at the stores by employees has risen — offering a possible metaphor for what those efficiency-wage economists argue might happen across the economy, if wages were to climb.
