Tuesday, February 27, 2007

Efficiency Wages at Costco

In AP Micro, we discussed efficiency wages, where a company pays wages that are above the market wage as a way of reducing turnover and because happy, appreciated workers are more productive. Here is an article that suggests that Costco pays efficiency wages relative to other warehouse stores:

And Sinegal says he's also built a loyal work force. In fact, Costco has the lowest employee turnover rate in retailing. Its turnover is five times lower than its chief rival, Wal-Mart. And Costco pays higher than average wages — $17 an hour — 40 percent more than Sam's Club, the warehouse chain owned by Wal-Mart. And it offers better-than-average benefits, including health care coverage to more than 90 percent of its work force.

Costco doesn't have a P.R. department and it doesn't spend a dime on advertising. There's a real business advantage to treating employees well, Sinegal said. "Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you," he explained.

(Source: Greg Mankiw's Blog)


Anonymous said...

I think that this would help costco, because they would always have their happy employes doing the eadvertising for them. Their employees would constaantly be saying positive things to all of their friends and relatives about the store. The store would also get first pick at the available employees because of the higher. The combination of pleasing teir workers and getting the best workers would lead to a more efficient work environment. The increase in efficiency would probably cover all of the costs of paying the higher wages and benefits, so everybody is happy.
-Chris g.

Anonymous said...

In the short run, paying higher than average wages may produce a profit that doesn't pass their average total cost, but in the long run, the company would at least break even or make a profit that would surpass the average total cost. Higher wages would mean an increase in production of goods as the workers would have incentives to work hard. Other incentives would be promotions. Costco rewards its loyal employees with promotions which would mean a pay raise. An increase in the producers happines and loyalty to the company means that production rates will increase, thus making money.
-Gautam Rao

Anonymous said...

Paying higher than average wages is a good strategy for a younger company (I think Costco is a lot newer than Wal-Mart) to get the word around about their good quality products. If they pay their workers 40% more money than other chains then their products must also be superior. In my experience being paid a little bit more money does not always increase worker morale but 40% is large enough to make a widespread benefit for Costco. A counter strategy for Sam's Club would be to raise their wages enough so Costos' wages are comparable and workers would be more indifferent to their job choices.


Anonymous said...

This is a great idea on Costcos part. They can spend less on advertising by using word of mouth of their happy employees. Even just reading about the fact that Costco pays its employees better makes me want to shop there more. This also makes for a happier work environment like Chris said and this happier work place will rub off on the people shopping there. I think Wal-Mart could benefit from this strategy by cutting down on advertising and trying the same strategy since everyone already knows what Wal-mart is, how cheap their prices are, and what market they are catering to. Wal-Mart could also gain better qualified workers if it raised its wages because more people would be interested in working there. By paying employees a little bit more, Costco has figured out for to boost worker morale, make a happier work place, spend less on advertising, and gain worker and consumer loyalty.
--Natalie H.--