The PA Policy Blog continues to impress me with their in-depth, cogent analysis of issues facing Pennsylvania. Today they’re tackling wage issues and business decision-making, using as an example Circuit City’s recent decision to lay off higher-paid workers:
...Circuit City’s wage management initiative is an example of what we at the Pennsylvania Policy Blog call “low-road” management. Low-road management responds to competitive pressures by slashing costs through cuts in wages and employee benefits. In the short term, wage cuts can aid a company’s bottom line, at least long enough to impress the Wall Street analysts who will then bid up the price of the company’s stock.Long term, however, the effects of many companies following the low road are worrisome. First of all, low-road management tends to be associated with low productivity and low productivity growth. This undermines the foundation of long-run improvements in living standards over time. Second, workers with less money in their pockets have less to spend. Many employers adopting low-road management can lead to overall wage stagnation. Wage stagnation that persists long enough can undermine consumer buying power and stall overall economic growth. (Some economists believe the Great Depression resulted from a downward spiral of wages, leading to the collapse of economywide aggregate demand.)
Yes, but...
The single largest ongoing cost for a retailer is labor. Once you have inventory in place it will pay for itself by sales to make the money to buy more inventory. But in the long run the market will decide whether this was a smart move. The question is, will customers continue to buy from a store when the sales staff can’t answer the questions or give wrong answers. To use a very old cliche, time will tell. On the other hand, if they didn’t make some changes like this, would the chain go broke and put all the workers on the street? Low road management may be better than dead-end everyone unemployed management.
ha
If labor is your largest on going cost then you must not have a retail establishment (you can argue it’s a sunk cost, but if you have an inventory that isn’t meant to run out, it’s an ongoing cost… gotta put more supplies on the shelf somehow). In retail, the inventory is by far the largest ongoing cost, but that’s only based on my experience in retail. The inventory doesn’t make the sale. That’s where workers come in.
No matter: I will never shop there again. I’m willing to pay a couple extra bucks knowing that I support a business that doesn’t crap on it’s workers. I prefer my businesses to value workers not as a budget line, but as people. It’s sad commentary when we view people as dollar signs instead of contributing members of society. You could also read their recent commentary about Costco to see how a real employer treats workers.
I’m glad Keystone Research has that value in mind.
Accounting for costs
Inventory is normally not a major ongoing cost, because you use the proceeds from the sale of an item to replace it. The startup capital can be huge, but once you have it the only money that should be needed is to replace damaged or stolen goods, and stuff that never sells. That’s why closeouts are discounted heavily: it’s better to get some cash out of the stuff to buy different stock than let it sit taking up room. This is how a well-run restaurant can be very profitable, because if you manage the food well the main ongoing cost are just overhead and labor. The food replaces itself through the sales.
You are right that this is often just prolonging the agony, but it at least gives the folks there some paychecks while they look for other jobs.
Here's how retail pay really works
It’s entirely based on current sales. If you sell a lot of stuff, that translates into more hours available to work for the individual store and its employees. It doesn’t matter what last year’s sales are or even if they are higher each year, hours are still only available based on a “what have you done for me lately” business model.
What is going to happen at Circuit City is that it will end up with workers who have little or no commitment to the company or its products. That will probably result in poorer customer service and fewer sales. Lower sales will result in fewer hours to distribute to employees and thus few or no new hires with the burden increasing on the remaining staff leading to low morale and high turnover and the cycle starts all over. This is a death spiral and not a blueprint for success.
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