The service industry has recently taken interest in increasing low-level worker’s wages. Wal-Mart increased base wages to $9, which was quickly reciprocated by competing TJ Maxx and Marshalls. Similarly, Starbucks, Gap, and IKEA have committed to higher wages for their least specialized employees. These increased wages may even be responsible for the rise in jobless rate for February: as base wages increase, discouraged workers become more inclined to return to the job hunt.
These companies have been criticized for increasing base wages, as it eats away at company profits (some companies more than others – apparently Wal-Mart’s wage increase incurred $1 billion costs). However, increasing wages is a means to decrease job turnover. The service industry exhibits a much higher turnover rate than private sector – the retail market especially has shown increased turnover and currently stands at about 5%. By comparison, the average private sector sees about 3.5% of its employees leave in a year.
Decreasing employee turnover effectively lowers the costs associated with training employees. This is no small feat: replacing an employee who earns less than $30,000 per year costs about 16% of that person’s annual wage. Further, newly hired employees are less effective than more tenured workers, which creates an efficiency cost as well. Retail stores are also looking to minimize turnover through other means as well. Specifically, Wal-Mart will begin implementing a fixed schedule for its employees, in order to make work schedules more predictable. Essentially, retailers are hoping that employees will be more loyal if they are happier.
This is interesting when considering that the service industry is expanding as a percentage of GDP while the manufacturing industry’s contribution to GDP has been declining. In the 1970’s, manufacturing contributed to 60% of GDP while the service industry was responsible for 40%; today manufacturing accounts for 18% of GDP and services 82%. This is resulting from higher level of technological progress in manufacturing and low technological progress in the service industry, which means that the cost of manufacturing relative to services is low. Despite the low levels of technological progress in the service industry, companies still have to pay wages commensurate to the wages in manufacturing, or else employees will be tempted to switch job markets (this is called the Baumol Effect, which we just discussed in another econ class on Thursday). Considering this, it behooves firms in the service industry to reduce their high retention rates in order to lower labor costs – which is their chief input.
Source: Bloomberg Business