Why It Doesn't Pay to Cut Wages
This week, corporate giants McDonalds and Walmart have attracted media attention toward their less-than-desirable employee wages--for the umpteenth time.
McDonalds was criticized for providing its employees with a sample budget that alotted $30 a month for health insurance, no money at all for heat or groceries, and ultimately required a secondary salary to make the budget feasible.
Walmart, on the other hand, retracted plans to build three of its six intended stores in Washington, D.C. after the city passed a living wage law requiring the retailer to pay a minimum hourly wage of $12.50.
Why should you care? Well, for starters, at least one expert thinks you shouldn't be using these big companies as role models.
"It's becoming clear that pay levels aren't entirely set by the market. They are also affected by custom, by the balance of power between workers and employers, and by government regulation," wrote Justin Fox, editorial director of the Harvard Business Review, on Thursday.
The problem with the Walmart Effect is that below-market wages ultimately hurt businesses--in damages to productivity and rapid employee turnover--as well as the overall economy, Fox wrote.
It's not that minimum wage laws work miracles, but they also don't have nearly the downward effect on employment levels that a pure supply-demand model would predict. Not to mention that decades of research at the organizational and individual level have shown the link between pay and on-the-job performance to be extremely tenuous.
Fox also cited Henry Ford's deft maneuver to double his employees' wages in 1914, so that workers could afford the very cars they produced.
"By that standard, McDonald's and Walmart are doing okay--their workers can afford to buy their (remarkably inexpensive) products," wrote Fox. "But Ford's workers could buy a lot of other things, too, and...other automakers went on to form the bulwark of a giant new American middle class that helped drive economic growth for decades."
Which could be something to consider when determining how valuable human capital is to your business--and to your surrounding ecosystem.