Wal-Mart made waves last month when it announced that it would increase the starting wages of its workers so that all of its associates would make at least $9.00 per hour. That’s not exactly the kind of pay that makes you rich, but it is 24% higher than the federal minimum wage of $7.25 per hour. TJX followed Wal-Mart’s lead and announced a similar wage policy.
But why should these large firms be upping their pay? That is the question examined in a recent Bloomberg article (Why Retailers Are Suddenly Desperate to Keep Their Least-Valuable Workers, Mar 6). As the article notes, it is not clear that firms need to be paying more. Yes, labor markets have been firming up, but the unemployment rate went up last month because a number of workers returned to the labor force. So there are still a good number of workers available. Why then make a move that’s going to increase costs by a billion dollars per year?
The article’s answer to that question? Turnover!
Turnover in the retail sector has been steadily rising and now stands 5 percent a month. At that rate, if Walmart’s workforce were to hold to the national average, over a full year it would be losing 60 percent of its sales staff. Employee churn at fast-food chains is even worse: Almost 6 percent of all fast-food workers left or were laid off in December, according to federal data. An individual worker won’t ever command anything like the salary-bargaining powers of a baseball player, of course, but service economy employers tend to notice a rising tide of worker defections. Plugging all those gaps in the workforce is hugely expensive. Here’s how the math breaks down:
- The average retail sales employee in the U.S. earns an annual income of about $21,140, or $10.16 an hour, according to the Bureau of Labor Statistics.
- The cost of replacing an employee earning less than $30,000 per year is about 16 percent of that person’s annual wage, according to the Center for American Progress, a left-leaning think tank.
- A retail employer would therefore need to spend almost $3,400 every time a worker defects.
That adds up quickly. Walmart has about 500,000 low-wage employees. The cost of replacing each one, using the rough estimate from above, comes to roughly $1 billion—the cost of the just-announced wage increase to $9 per hour.
This is an interesting take on this question. Reducing turnover is one of paying for those extra employee wages. Now, an extra buck or two an hour is not going to completely eliminate turnover. As the article notes, the Container Stores pays its employees on average $48,000 per year but still has 10% turnover. However, Wal-Mart doesn’t have to go that far to see a demonstrable benefit from reducing turnover. There are two issues in play here. The first follows from the numbers above. If Wal-Mart’s turnover drops from an industry average of 60% to, say, 45%, then their annual recruiting and training cost drop by around a quarter of a million dollars. More generally, half a million employees means any reduction in turnover has a pretty big impact. Indeed, dropping Wal-Mart’s turnover by one percentage point lowers its costs by around $17 million. (Note that this is using the estimated cost of $3,400 for every worker who leaves. Wal-Mart’s actual cost is not given so I could be over- or under-estimating the true impact.)
The second factor is that there should be benefits to having more experienced staff. A turnover rate of 60% implies that the average retail employee lasts about 1.67 years. If the turnover rate drops to 45%, tenure at the firm goes up to 2.2 years. That’s an extra six or seven months. Assuming that more experienced workers are more productive workers (and there is a lot of evidence that this is so), then customers and the firm should benefit from having better staff in the stores.
Note that not every firm at the low end of retail is rushing to raise wages. Dollar General, for example, has said that it is not planning on upping its hourly wages but it planning on spending more on labor (Dollar General Plans to Spend More On Labor This Year, Wall Street Journal, Mar 12).
The retailer plans to increase the hours allocated to employees to help improve the quality of a “large group” of its 11,800 stores. Dollar General Operating Chief Todd Vasos said the retailer had run a test in select locations where employees worked more to ensure shelves were stocked well, and that new labor model will be expanded this year.
So it turns out that there is research on this point. (See, for example, this article.) Essentially, retailers systematically underestimate the impact of retailer staffing on sales. It is fairly routine to find that small increases in staffing can have a significant impact on sales.
A final point, staff turnover has been in the news for other reasons. Turns out, if you have enough data, you can find some peculiar relationships between employee turnover and seemingly random data — like web browser people use (People Who Use Firefox or Chrome Are Better Employees, The Atlantic, Mar 16).
Cornerstone OnDemand, a company that sells software that helps employers recruit and retain workers, analyzed data on about 50,000 people who took its 45-minute online job assessment (which is like a thorough personality test) and then were successfully hired at a firm using its software. These candidates ended up working customer-service and sales jobs for companies in industries such as telecommunications, retail, and hospitality.
Cornerstone’s researchers found that people who took the test on a non-default browser, such as Firefox or Chrome, ended up staying at their jobs about 15 percent longer than those who stuck with Safari or Internet Explorer. They performed better on the job as well. (These statistics were roughly the same for both Mac and PC users.)
For what it’s worth, Cornerstone’s clients are not currently using browser choice as a selection criteria.