The Business Case for Paying Service Workers More

MIT's Zeynep Ton explains the theory behind the Good Jobs Strategy.

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AP

Last month, the fashion retailer Gap, Inc. pledged to raise wages for 65,000 of its lowest-paid employees, to $10 an hour, by 2015. As the company explained on its website, the decision wasn't a mere publicity stunt. It was motivated by an underlying economic driver: Higher wages will allow their stores to “attract and retain great talent,” ultimately leading to a far better experience for customers.

For Zeynep Ton, a leading scholar on the connection between wages and profits at retail and service companies, the Gap’s decision to increase wages came as no surprise. Ton has spent the last few years studying how upgrading traditionally low-prestige, low-pay service-class jobs can benefit workers, the businesses that employ them, and even customers.

In her new book The Good Jobs Strategy, Ton draws from more than a decade of detailed research at Harvard Business School and MIT’s Sloan School of Management to show the links between higher wages and higher profits in the service economy. Too many service companies — and too many Americans, for that matter — buy into the line of thinking that the only way for restaurants, retail, and other service companies to profit is to pay the lowest possible wages. As she explains, “in service industries, succeeding at the expense of employees and at the expense of customers often go together.”

But it doesn’t have to be that way. The world’s leading high-performance manufacturing companies already pay their workers more in return for tapping their knowledge and ideas to improve processes. Ton shows that even in supposedly low-skill service sector work, higher wages are the key to greater employee engagement, better customer service, higher productivity, and a better bottom line.

I chatted with Ton about how the “good jobs strategy” can benefit workers, employers, customers, and the economy as a whole, and what the U.S. can do to put itself on this higher-wage, higher-reward path.

Most people assume that the more than 60 million service jobs in the United States (45 percent of all jobs) are doomed to be unfulfilling, low-paying, insecure work. You call this the "bad jobs strategy" and argue in your book that it is not only bad for workers but also bad for the companies that employ them. Tell us why.

When companies offer bad jobs, they can find themselves in a vicious downward cycle. Take supermarkets, for example. That’s an industry full of bad jobs—low pay, unpredictable hours, and work that is not meaningful. But it’s also a very complex working environment. In a typical supermarket, employees manage thousands of products, serve more than 2,000 customers a day, and carry out hundreds of sales promotions a week. When you operate such a complex environment with employees who are unmotivated, poorly trained, or overworked because the store is understaffed, the result is operational problems. Products are misplaced or mispriced. Promotions are advertised but not carried out. Employees can't answer customers' questions—they may not know or have time. Those problems reduce sales and profits, so sales decline, so labor budgets shrink, so companies invest even less in their people. That’s the vicious cycle. Companies can still make money operating in this cycle, but they are leaving a lot on the table. Customers come as long as there are good deals, but they have no loyalty.

You contrast this with what you call the "good jobs strategy." How can such a strategy be part of producing higher returns for businesses while helping engage employees and improve service?

Take standardization and empowerment, a powerful combination in job design that reduces costs and increases customer service and sales. Employees can work faster and more accurately if they perform the routine tasks in the best way—that is, according to standards. Customer service is more consistent with standardization. On the other hand, employees can play a bigger role in improving customer service and sales if they are empowered to make decisions that work best for their local customers. Empowered employees are also more engaged and motivated.

But both standardization and empowerment requires investment in people. Just having standards is not enough. Companies need motivated, capable people who are given enough time to follow the standards. Empowerment works only if employees can consistently make the right decisions for customers and companies.

It’s the same with the other three operational choices. They all reduce costs, improve labor productivity, and give employees a greater role in driving sales and lowering costs. And they all require investment in people. 

This combination of high investment in people and the four choices allows companies to operate in a virtuous cycle. Investment in people drives sales and profits, which then drive more investment in people—onward and upward.

You name four employers — Costco, Trader Joe’s, the QuikTrip convenience store chain, and the Spanish supermarket chain, Mercadona — as "model retailers" that have been able to raise wages, treat employees better, and increase profits. What are the basic things they do that make this work? How would you contrast the strategy of a store like Walmart?

I named those four companies precisely because they are great exemplars of the good jobs strategy. I did not think up the good jobs strategy. I learned that those four companies were paying their employees more, treating them better and yet beating out their competitors. I wondered how they did it. I spent time studying them and found that they were doing certain rather unusual things in common. That's what I ended up calling the good jobs strategy and that’s why I recommend it confidently. It’s already been proven very successful.

Can the good jobs strategy become more than just a niche for some advanced and or high-priced companies? Can it scale across the economy and be embraced by many more service companies?

A lot of people think that the good jobs strategy requires charging customers more—but that’s not true at all. Companies that follow the good jobs strategy offer low prices. A lot of people also think that companies offering good jobs in low-cost industries must have unique characteristics that allow them to do so. That’s also not true. Any firm can follow the good jobs strategy because what makes it work is smart operational choices along with investment in people.

In my earlier research, I found the vicious cycle so common that I wondered if operational excellence and a virtuous cycle were even possible in low-cost retail. But when I went to Spain to study Mercadona, I found out that they certainly are possible. I had finally found the “Toyota Production System” of retailing. Mercadona is hardly a niche business; it’s Spain’s largest supermarket chain. People go there to buy meat and potatoes to make dinner. But then what really excited me was studying QuikTrip after Mercadona. Here were two completely different companies—a Spanish supermarket chain and a convenience store chain with gas stations based in Tulsa, Oklahoma. Yet both were beating out their competitors by offering low prices and great service, and both did it by offering much better jobs than their competitors did.

When I looked into what allowed them to do all this I saw that they were both making the four operational choices that reduced costs, increased employee productivity, and gave employees a big role in driving profits. Then when I looked at Costco and Trader Joe’s, I saw they were making these same choices.  

There’s nothing idiosyncratic about these companies that allows the good jobs strategy to work. They aren’t flukes or special cases. But they do work hard at it and their managements have stood by the good jobs strategy even at tough moments when it would have been convenient to save some money at the employees’ expense. And when they do that, they come out even stronger and more competitive.

What are some key things that mayors and governors can do, as well as the president and Congress, to make service jobs better jobs?

The policy side is not my area of expertise, but I hope that The Good Jobs Strategy will give some policy experts a few interesting ideas. Bad jobs are not inevitable and don’t make as much business sense as is usually taken for granted—even in industries like low-cost retail.  We don’t have to live in a society where almost one in four working adults doesn’t make enough to support a family. 

Leaders could bring more attention to companies that are providing good jobs, as President Obama just did when he gave a shout-out to Costco in his State of the Union address. Policy makers—and the business leaders who are always trying to influence them—could encourage more companies to adopt the good jobs strategy and more universities, especially business schools, to focus on creating long-term value in their curriculum.  

This interview has been edited and condensed for clarity and length. Top Image via AP/Paul Sakuma

About the Author

  • Richard Florida is Co-founder and Editor at Large of CityLab.com and Senior Editor at The Atlantic. He is director of the Martin Prosperity Institute at the University of Toronto and Global Research Professor at NYU. More
    Florida is author of The Rise of the Creative ClassWho's Your City?, and The Great Reset. He's also the founder of the Creative Class Group, and a list of his current clients can be found here