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Higher wages and employee turnover

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Summary, "Turnover costs money, raising wages reduces turnover, solve for the local minimum with respect to costs."

It is useful to understand that this is a 'natural' floor on wages.

My brother started and runs 3 small pizza restaurants. He starts employees at double minimum wage and gives his employees ok health insurance. It's pure capitalism: you get an entirely different class of workers when you pay more. They have cars that work and tend to show up when scheduled able to work, ie not so hungover, drunk, or stoned they can't do shit. I'd like to think he'd do it because it's the right thing to do, but it's nice when morality and financial incentives align.

>you get an entirely different class of workers when you pay more.

I dont think its just different groups of workers but also workers who would normally not give a shit wanting to keep their decent paying job

If the workers are the same, but their class is upgraded, it's even better.

How much does he charge for a pie and what is his margins?

"How much does he charge for a pie"

It's a pizza business, not a pie business. Pizzas aren't pies.

And a hamburger isn't a "sandwich", it's a "burger".

But these distinctions aren't universal. It's easy to see why some people call pizzas pies if you look at variants like "deep pizza" (or "Chicago style pizza").

Essentially you might as well argue whether it's "soda" or "pop".

When referring to a pizza, Americans often use the word "pie".

"Pizza" is just Italian for "pie".

http://www.etymonline.com/index.php?term=pizza http://dictionary.reference.com/help/faq/language/e02.html

Well, he has 3 restaurants so I think it's safe to assume he isn't struggling to turn a profit.

He and his partner locate restaurants by concentrated student population / bar areas. By the slice -- $3 to $4. By the pizza: $16 to $26, ranging from plain cheese to steak or various types of chicken.

Margins are quite good (I'd rather not disclose w/o permission), but remember demand varies quite a lot by day and hour, plus plummets during the summer when students aren't around.

Well, when your employer respects you, you want to respect them. When they don't respect you, and paying only minimum wage can be a large sign of disrespect, then you don't respect them back.

An economist would call this "efficiency wages."

Reminds me of something I saw on the news here in Colorado just yesterday: Somebody who runs a haunted house supply company is leaving the state "because of legalized marijuana" – apparently he can't find and keep employees who don't come to work stoned. You get what you pay for!

I would bet the same is true of John Lewis vs Lidl in the UK especially as John Lewis is a pseudo coop

It is only a floor to the extent that employers pay attention and/or care about this link. For every farsighted employer who does this calculation, there are plenty of others who:

* don't track turnover

* are too small for turnover statistics to be valid

* don't bother to do the math

* know the link but are culturally and/or structurally disinclined to change their pay structure

Edit: formatting

They don't have to know about this link for it to be valid. They only have to be susceptible to its effects by, say, having a competitor who is aware.

I once worked somewhere that took it as a given that developers left after 18 months. They were susceptible to the effects (developers leaving for higher salaries) but their response was to accept the turnover rather than to change.

Their primary offering was not software and their profits grew almost every year, so they had little incentive to make changes: especially ones whose pain is immediate and payoff is harder to quantify.

The fun thing about the "invisible hand of the market" is that it smacks you upside the face even if you don't believe in it :-). In this specific case turnover costs are operational costs that reduce profitability, so companies that minimize those costs will be more profitable and be able to either compete more effectively (better product at the same price) or more money to re-invest given the same product and the same price.

Except, due to internal organization of those companies, it's entirely possible that one person is getting a bonus for cutting the costs of 'resources' while another is berated for a variety of seemingly unrelated quality issues.

Economically, that doesn't matter at all. Wages are set "at the margin" by the most competitive players[1] and everyone is just living in their world. Ignorance on the part of employers (and employees) might cause them to be surprised by outcomes instead of creating them but doesn't change the situation.

[1] in the efficient frontier sense, not necessarily the most skilled workers or the best jobs.

My favourite department in my favourite state school is trying to slow turnover by extending the contract length for non-tenure-track teaching staff - it's now renewal every three years instead of every year. Payment is still the same - USD 40000 for a full load in a high-tax state in the Northeast.

When you have a stream of qualified and sufficiently desperate applicants you don't have to offer more money than the competition; there are other ways of not being just as awful as the rest of them. Academia is still busy finding out where the wage floor lies.

It may not be more cash compensation; but having a greater degree of certainty definitely has value as far as trying to plan your life.

Costco has known about this for years. They've consistently resisted shareholder demands to reduce payroll spend while paying nearly double industry average.

The result? A 5% turnover rate after a year, not to mention happier and better employees. Pay attention to their name tags next time you visit, they list their starting year.

This is the first article I could find on Google, there's a lot more out there.

http://www.businessinsider.com/costco-pays-retail-employees-...

For point of comparison, from the article:

Turnover in the retail sector has been steadily rising and now stands 5 percent a month.

I think the costco article is saying 5%/yr, and the original article is saying saying that walmart's 60% turnover is consistent with retail average of 5%/mo

Here's an interesting article on the right way to measure turnover: http://www.ere.net/2003/10/06/the-right-way-to-measure-turno...

Tl;dr: provide context.

The Walmart in my town seems to be irregularly staffed. On some days the store looks like a dump, nothing is clean, nothing is fronted and faced, I don't like to be there because it feels like the kind of place where you'd be the victim of a crime. On other days the store is in pretty good condition.

The Target, on the other hand, seems crowded with workers around 9 in the morning. It's a much more consistently pleasant to go there.

I agree. The walmart in my town is always dirty. I don't like shopping there because of dirty the floor is.

Obligatory: http://imgur.com/gallery/HaKzuYU

Here in Canada, Walmarts are okay. It's the American experience anyway, so we take it for granted.

Target, on the other hand, seems very empty these day. My local Target look like an abandoned building and I can't seem to find any products.

Target is closing all of its stores in Canada.

http://www.cbsnews.com/news/target-pulling-out-of-canada/

That was the joke, sorry.

It's highly dependent on the store if the Walmart is okay. My mother used to work at Walmart (various stores in different cities). What she's seen is that Walmarts that were old K-Mart stores tend to be bad as the stores are small for the amount of merchandise so they end up cramped. The purpose-built stores don't have that problem so they're cleaner and laid out better. There's some exceptions, but that's the trend.

That said, Target pays shit wages too. I think they are bumping it up to 9 an hour starting but several years ago it was 8.75 for stockers (less for some positions) a good raise was .25 and that was once a year, and you topped out at 12.50.

Target benefits tremendously from Walmart by being 'not Walmart'

I wonder how much this relationship also holds in the tech industry. I'd love to see more companies emphasizing things like work life balance instead of free food or gym memberships.

I don't even really feel as though working more hours necessarily makes me more productive.

I usually don't even work 8 hours, I just stay in the office.

I worked for an electronics/computer retailer for 18 months, making about $8 per hour, in California, in 2001. Miserable job: two days opening at 7 am; two days closing at 11 pm; one day starting at 9am. I was working Sat-Mon-Tues-Thurs-Fri. I was off on Sunday and Wed. Look how miserable was it: low pay, odd timings, odd days off.

Then I found another job that was paying $13 per hour in 2002. It was a security guard job. I could read books at work, and walk around. Sure, it is a miserable job compared to a programmar gig; but better than my retail job.

If you are a student, working part time in retail or in any service job, your experience is not miserable: you are getting pocket money, after all. But service sector employs more full time adults. If you are an adult working in these places, you see people without health insurance, working two jobs, lack of sleep, unhealthy people.

Psychological impact is tremendous. And journalists, researchers don't compute the cost of psychological impact, as individuals bear the cost.

When I was working as a security guard, one day a colleague did not show up for work. A week later, we found that he died of cardiac arrest. This guy was a weightlifting champion in his younger days. He was paying child support, working two jobs: working 80 hours a week, in odd time schedules.

This working model is exported to other countries, to other industries from the service sector. Welcome to the new World!!

My best argument so far for the (mostly symbolic) raising of the minimum wage had been that going from ~$7 to ~$10-15 is approximately doubling the purchasing power of individuals who need it most (and will use it), at a low cost to everyone involved. It's an amazingly good return on a relatively tiny social investment. The best argument against it that I've seen is that black-teen unemployment goes up dramatically every time the minimum wage increases. However, it turns out that those scary data points (promoted usually by libertarian thinktanks) exactly correlate with general economic recession periods.

Never once did I imagine that employee turn-over would have such a huge economic impact, but it makes total sense. I've definitely known that happy employees prefer to keep working, but I never connected the dots to dollars spent on boarding new employees. And now I have a talking point that the hardest "show me the money" opponent can wrap her head around without accusing me of appealing to emotion or morality.

I welcome more talking points (pro and con) since I'm not formally educated in economics.

Some thoughts:

1) McDonalds and other large minimum wage employers know what a minimum-skilled employee is worth to their bottom line, and they set prices accordingly. They know that after a wage bump they'll have reduced turnover of their better employees, but they also know that when they do have turnover, that new unskilled employee is worth 1.6 big macs per hour, so they'll raise prices as quickly as they can to compensate. The net result is inflation, and inflation destroys any purchasing-power increase the minimum wage creates. (My own research suggests this takes about 2 years to fully play out.)

2) Increased unemployment right after minimum wage increases might be one of the sources of "general economic recession", rather than (as you imply) one of the consequences. Based on my own research, the unemployment bump actually tends to start about 3 months prior to a minimum-wage bump (as companies slow new hiring), peaks 3-6 months after, and then decreases inverse to price increases/inflation.

3) when people are unemployed, taxpayers pay 100% of their expenses. When they work for the minimum wage, they earn N% and taxpayers pay 100-NxS% (where S is the scaling factor for how quickly benefits are lost in relation to outside income; S should be less than 1.) But in light of points 1 and 2, someone can only get a job if N < their value to some company. So if the minimum wage N is set high enough, it forces people out of the economy long term (because if they're unemployed, they're not gaining work experience, and therefore they're not increasing their value.)

I'm of the opinion that setting the minimum too low is self-correcting (because of turnover and the existence of systems like welfare), while setting the minimum too high is the cause of significant unemployment. So I'd rather err on the low side, pairing a low minimum wage with strong welfare and related benefits.

Maybe turnover partially explains Walmart's willingness to raise wages. But above all, I think the modest wage hike is a response to worker's demands.

There's a growing nationwide movement for $15/hour and a union in the service economy. Walmart is making a meager concession today to try to stave off bigger demands in the future.

the money behind that push is the unions because government contracts are tied to minimum wage, hence if they can push the idea that 15 is fair; I think its excessive in the extreme for unskilled labor; then that in turn boosts what government contract pay out.

32k for unskilled???

I can't but help think the high turnover is caused by more than just the low wage. If the workplace is miserable, doesn't challenge you and doesn't offer much opportunity for growth, the turnover is going to be high regardless if you increase rates by a couple of bucks.

We have turned into a service force where it is easy enough to jump from one service job to the next. There isn't a lot of loyalty from employees in these jobs because they are not rewarding.

What can we do to change that? Honest question. I am not concerned about finding ways to lower the turnover and keep people in dead end jobs. I would much rather see more jobs being offered that give people opportunities.

Just my 2 cents.

This sounds like great news for low-wage workers, but the article seems to punt on the Why. Since so many people have been under-employed the last 8 years, I wonder if the increased turnover is due to over-qualified employees who were just working a Walmart gig until they could find something better, e.g. college graduates or folks laid off from a higher-paying job. I wouldn't be surprised if this were a large part of the effect, and in that case I'd figure that:

- raising wages would not help retain these people.

- the increased turnover will subside as the underemployment problem fixes itself.

I'm curious what other folks think about that theory?

I would naively assume that the market forces of high unemployment would be more powerful than over-qualified employees would account for unless they sought them specifically.

Given all the mechanisms they already have in place to control the impact of turn-over it doesn't surprise me that they realized it would be cheaper just to pay people a little more.

The bosses of Indian IT services companies need to read this.

They have ridiculously high attrition rates of upto 30 - 40 %.

75 % of the people hired leave within 3-4 years.

So basically they're the tech equivalent of Walmart.

Would raising the minimum wage reduce turnover too?

If you raise the minimum wage, people that are earning more will also have a increase in salary in medium term. This solution only move the bell graph of salary to the right.

It can move things to the right, but more so for the rich than the poor. That is, unless you are assuming minimum wage services are primarily consumed by minimum wage workers.

It would make it more attractive to work, but thats it. Since you cannot legally pay less than minimum wage the kind of people who work for minimum today would be the kind who work for it tomorrow too.

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