A Cheap Employee Is … a Cheap Employee: A New Marketplace Podcast

(Photo: Alan Cleaver)

Our latest Freakonomics Radio on Marketplace podcast is called “A Cheap Employee Is … a Cheap Employee.” 

(You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.)

It’s about the question of whether low-paid employees are indeed a good deal for a retailer’s bottom line as the conventional wisdom states.

The piece begins with a couple of stories from blog readers, Eric M. Jones and Jamie Crouthamel, which were solicited earlier here. (One of the true pleasures of operating this blog is having a channel by which to turn readers into radio guests — thanks!)

We then hear from Zeynep Ton, who teaches management at MIT’s Sloan School. Ton did a study (related blog post here) which looked at successful low-cost retailers including Costco, Trader Joe’s and the QuikTrip convenience stores. She found that while these companies spent more on labor than their competitors – higher wages and more training – they were in fact more profitable:

“When a retailer doesn’t invest in his people then execution at the stores suffers.  You often find products in the wrong locations, sometimes in the back rooms as opposed to the selling floor. promotions not carried out on time, or at all, or mistakes at the checkout. So these operational problems — what was surprising to me was how frequent these problems and how expensive these problems were.”

We also touch on another retailing study which found that customers don’t really care about all those in-your-face niceties that some retailers seem to think are important. As co-author Nicholas Toman tells us:

“It was not the pleases, the thank yous, the flowery language … that didn’t matter so much. Making things simply easier for customers, getting a question answered, returning an item, making the burden as low as we can on the customer results in the greatest initial economic benefit for the company itself.”

In the podcast, you’ll also hear Kai Ryssdal deal with some pretty bad Freakonomics Radio customer service.

Have a nice day!

If you’ve come to this post looking to vote for Freakonomics Radio in the iTunes “edutainment” contest, here’s the link.

Audio Transcript

Kai Ryssdal: Time now for a little Freakonomics Radio. It's that moment every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog of the same name -- it is the hidden side of everything. Dubner, how are you?

Hold music: Thank you for holding. Stephen Dubner is currently assisting other radio hosts. Your call will be answered in the order it was received.

First of all, you're two-timing me? All right, all right. Come on, come on.

Stephen Dubner: Hello Kai? Kai, yes.

Ryssdal: Yes, what?

Dubner: I am sorry for that inconvenience. I really do appreciate your patience. How can I help you today?

Ryssdal: Well one, you can answer the doggone phone when I call, but what? What's your stick this week?

Dubner: Well Kai, as you may have guessed, our topic today is about customer service -- how we are treated when we have some kind of retail experience.

Ryssdal: You, by the way? You give lousy customer service. Can we just say that right up front?

Dubner: I'm working on it. Thanks for the feedback. I do appreciate that. We started by asking our blog readers about their experiences with customer service -- good or bad, mostly bad. Here's Eric Jones, a guy who found himself in one of those ridiculously long lines at the phone company.

Eric Jones: And remembering my life as a hippie in the '60s, I decided that the right way to do this, instead of throwing the phone display through the store window, was to simply lay down on the floor. And I did that, and I was astonished how well it worked.

Ryssdal: Occupy Ma Bell, right?

Dubner: That's exactly right. Now, it's no dream scenario on the other side of the counter, as we know as well. So here's Jamie Crouthamel, who worked at a phone store in Charleston, S.C. She had to tell a customer that he couldn't return a bag of crushed phone parts.

Jamie Crouthamel: He pushed back from the table and pushed his stool out from under him and slammed his fists on the table and just started cursing. And then he threw the phone at me.

Ryssdal: People never cease to amaze me. But here's the thing about retail, right? I mean, it's all about low-wage jobs in pursuit of low-cost products that Americans buy until they don't want to buy them anymore, right?

Dubner: That is the conventional wisdom. But this wisdom may not be so wise, it turns out. So Zeynep Ton teaches management at M.I.T.'s Sloan School. And she did a study that looked at successful, low-cost retailers like Costco, Trader Joe's, the Quik Trip convenience stores. And what she found is that these companies spent more on labor than their competitors with higher wages and more money for training -- and these companies were more profitable.

Zeynep Ton: If you pay your employees more, you attract a better group of employees and you retain them longer.

Ryssdal: Connect the dots for me here: If you pay people more, you make more money? How does that work?

Dubner: Retail isn't necessarily a complicated enterprise, but there's a lot of room for things to go wrong when you hire the cheapest possible employees.

Ton: When a retailer doesn't invest in its people, then execution at the stores suffer. You often find products in the wrong locations, promotions not carried out on time or at all, or mistakes at the checkout -- so these operational problems. What was surprising to me was how frequent these problems and how expensive these problems were.

Ryssdal: All right Dubner, help me out here: If spending more money on labor is good for a company's bottom line, why aren't more companies doing it?

Dubner: Well because most retailers think of labor as purely a cost, as opposed to a way to make more money. And if you're trying to control costs -- which every business is trying to do -- one thing about cutting costs is that you immediately see it as a benefit to your bottom line. Whereas investing more on employees, well that doesn't pay off until later.

Ryssdal: Let me ask you my customer service bugaboo: You know, you walk into a store -- usually it's clothing but it can be anything -- and you're like accosted by 'May I help you?' and this and that. And I'm like, 'No man, I just want to look around, all right?'

Dubner: Well I've got good news for you: That really doesn't seem to work. So a recent surveyof 75,000 people found that customers don't really care about all those niceties. Here's Nick Toman, one of the authors of that study.

Nick Toman: The 'pleases,' the 'thank yous,' the flowery language -- that didn't matter so much. Making things simply easy for customers -- getting a question answered, returning an item, making the burden as low as we can on the customer -- results in the greatest initial economic benefit for the company.

Now Kai, let me add what I think is the most important point: What you really want to do for retail is -- oh, Kai, I'm going to have to get back to you, just hold on.

Hold music

Ryssdal: Don't you -- oh, you know what? First of all, I don't like this music very much.

Hold music: Thank you for waiting. Your call is very important to us.

No it's not.

Hold music: Stephen Dubner will be with you in just a moment.

No he won't.

Hold music: This call may be recorded for quality assurance.

Stephen Dubner, Freakonomics.com is the website. He may or may not be back in a couple of weeks, depending on, you know, customer service.

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  1. Enter your name... says:

    So it sounds like paying more makes it possible to attract and retain good workers (obvious enough), but simply paying more won’t turn a mediocre employee into a good one. Your goal, therefore, must be to have the good employee work for you and the weak employee work for your direct competitor. That suggests that you don’t actually need to pay “well”, so long as it’s just enough more than your competitor’s that the job applicants notice.

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    • Travis says:

      This logic only works on a few assumptions. First, that you have an essential service with no easy substitutes. Might work for say, a grocer or a cable company, but probably wouldn’t work for a clothing retailer or jeweler. If people can just stop buying your product altogether, then the relative quality between you and your competitor will be less important. If both you and your competitor provide poor service, people can just skip both, making both companies suffer.

      The other assumption is that simply paying slightly more will be enough to attract more skilled / attentive employees. If you aren’t in a particularly skilled labor market, it doesn’t really matter if you pay more than your competitor. For example, if you are a grocer that pays 10% more than your competing grocer, your employees can still leave you to work at a clothing retailer. In the labor market, your “direct” competitor becomes everyone who employs the same skill level of labor.

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      • Joe Dokes says:

        Travis,

        You’re right an employee might leave and go work for another retailer that requires similar skills but in a different industry and higher wages.

        But June is largely correct. For example, In-n-Out Burger (West Coast Burger Chain) pays nearly two dollars an hour above minimum wage. Jobs are highly coveted by high school students for their higher pay and the “cool factor” lacking at say McDonalds. As a result the service is excellent, the stores are clean, and the food is good, (Debate: In-n-Out Burger vs. Five Guys, discuss) some argue they have the best fast food burger. In-n-Out is able to demand the best teenagers because they offer the best wages.

        That being said, the workers at In-n-Out being largely teens, means they eventually leave the job. Is it for higher wages in other retail establishment? Perhaps? It could also be that the skills they acquire like a good work ethic and customer service oriented attitude that make them attractive employees for a number of firms besides retail.

        Thus, In-n-Out is building human capital and harvesting the reward. Although privately held it is arguably highly profitable in spite, though quite clearly, as a result of paying a 20% premium for its workers.

        Finally consider this, would you rather higher a twenty-year-old with two years of experience at Walmart or In-n-Out Burger?

        Regards,

        Joe Dokes

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      • Travis says:

        Joe,

        I think the difference may be in semantics. June 14 suggested that you don’t need to pay well, just enough more than your competitor that your applicants notice.

        I don’t know where you are writing from, but I do remember when I was in high school. When I was in high school, the difference between a $7.00 an hour job, and a $9.00 job was very big. In fact, in the labor market I was in I would say that the 2 dollar difference was enough to make one job well paid and another not well paid.

        So I don’t disagree with you. But I don’t think that simply paying slightly more than your competitor is enough to ensure you are more successful than them. You have to provide some level of compensation that people actually feel is “well paid” on an objective level, not just relative to your competitors.

        For example, if in-n-out switched their practice from paying $2.00 more to paying $.25 more, would they still get the same caliber of employees? Probably for a little while, but there would be even more pressure on employees to go and seek out better jobs earlier, because despite paying more than their competition, 25 cents over minimum wage is probably not what their labor force would think of as well compensated. And over time, the workforce would probably be virtually the same as what you see at McDonalds or Taco Bell or wherever.

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      • Enter your name... says:

        Note that I didn’t say “slightly more”. I said “just enough more than your competitor’s that the job applicants notice”. For fast food, that might be $1 an hour. For a coder in Silicon Valley, that might be $10 an hour.

        If you’re paying only “slightly more”, then applicants will start taking intangibles into account, like location, choice of hours, management’s attitude, etc. For $1 an hour, you might put up with a longer commute to a fast-food job; for 25¢ an hour, you probably won’t.

        I disagree with your belief that the pay has to seem “objectively” good. It really only needs to feel like it’s the best that I’m personally able to get. If I’m bagging groceries or stocking shelves or doing some other uncreative, heavy-lifting kind of job, it’s because I don’t have the option of working in a better job. Even if the grocery store paid $30 an hour, most of us wouldn’t quit an office job that pays $30 an hour for the privilege of carrying groceries out to the customers’ cars in the rain.

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    • Dave says:

      I dunno, sometimes paying people a wage that seems like you respect them actually will turn a mediocre employee into a good one. Or, even more plausible, an employee that feels his or her contribution to the company is valued instead of exploited will often cease to take the lazy way out if one is possible. I know I’ve been in that situation before – work your tail off for a company, and never get a raise or even any respect for it. Eventually one starts putting in less effort because it just becomes about making it through the shift instead of doing a good job.

      Workplace morale is important, and wages are only a piece of that.

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  2. Joe Dokes says:

    They needed a study to show this?

    The irony is that today’s American corporate structure is focussed on driving down employee wages and benefits while disinvesting in employee training and then the same companies are surprised by the poor skills and low morale of their employees.

    All segments of society need to take ownership of human capital, and human development.

    Regards,

    Joe Dokes

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  3. Dhruba says:

    Well this is a microeconomics theory called “No Shirking constraint” and talks about a wage equilibrium called efficiency wage. Example (from an economics text book) In 1913 turnover at Ford was 380% only to reach 1000% the next year. In 1914 Henry Ford increased the wages to $5 a day (the industry average was between $2 and 3). Productivity increased by 51% and profitability rose 100% in 2 years…

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  4. Travis says:

    Again, long term stability is always sacrificed for short term profits in this quarterly reporting driven marketplace.

    Haven’t there been recent studies done regarding the current employment crisis, there are plenty of jobs “out there” but people are simply not willing to do the types of labor / work or relocate for the pay and instability being offered by the company.

    But it seems like the fact that unemployment is so high makes companies feel justified in offering minimal wages, while on the other hand potential employees don’t think of the general labor market as what their skills are worth, they think of one thing primarily: their former job. People are notoriously unwilling to accept employment for significantly less than their former position. (I believe there is a chapter about this in Thinking, Fast and Slow). Combine that with the availability of unemployment insurance, and you end up with the current mess we’re in now. Underemployment on the human capital side, and suffering companies due to lack of quality employees.

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  5. Luterinho says:

    If that is true, how is WallMart so profitable? WallMart plays much less than Costco but still very profitable. Or is it possible that WallMart profitability isn’t ‘real’ profitability, but profitability b/c WallMart has such low labor cost. That is, WallMart profitability comes from cut costing and not from the retailing side of WallMart. Just curious!

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    • Jason says:

      Not all truths are universal – there are always other ways to succeed. While they have changed some practices in recent years, Wal-Mart has traditionally thrived on being the absolute cheapest place to buy things. So, customers don’t expect good service or a clean store or anything else, just low prices.

      Additionally, I believe Wal-Mart is at the cutting edge of eliminating employees from the retail process. Almost everything is automated. I haven’t shopped at Wal-Mart in a while, but I certainly don’t remember having much interaction with employees beyond the checkout counter.

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    • caleb b says:

      WalMart generates more total profits because they have so many stores, but their margins are thinner per store than Costco. Costco is much more profitable per square foot.

      WalMart’s main profits are driven by reducing the prices suppliers charge them, through a variety of methods.

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  6. Saru says:

    Does this only apply to businesses? Many public services jobs pay well, have good benefits, and are secure–yet how many people find that DMVs offer good service? I remember commuting on BART where wages were very good (and they were always threatening to strike for even better pay) and the service was abysmal.

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    • Michael says:

      This kind of thing makes me nervous that people will hear it and use it as a reason to claim that all companies should pay their workers more, and all service everywhere will be better. Instead of the more nuanced idea that companies that offer higher wages will have more people wanting to work there, so can select higher quality workers.

      It’s important to emphasize that paying a bad/unproductive worker more than they merit won’t turn them into a more a productive worker.

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      • Joshuabee says:

        Honestly if that’s what you’re worried about, you need some perspective.

        Yes, “people” (whoever they are – labor, media, gov’t, etc) may hear it and use it as a reason to say all companies should raise wages, however the sticking point is this-

        How many companies will actually *DO* anything about it? I can’t honestly imagine any businesses in my sector making any changes whatsoever based on this. The thing is – anyone with half a brain has felt this way for yeaaaaaaaaaaaars. This only confirms it. So no real surprise. But how many big companies do you see that are willing to radically alter entrenched structure based on this?

        The problem is the same as it has always been – businesses that didn’t start out prioritizing a skilled, productive workforce won’t suddenly become a business that does, no matter how much “people” ask for it or how many studies are released. Asking for something doesn’t get you squat, because it means you don’t have the power to make it happen.

        The only thing people can do is vote with their feet and refuse to be part of it (which means leaving a paying job – a LOT to risk in the current economic climate).

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    • Travis says:

      I think that unions come into this at some point. When wages are “artificially” inflated due to union bargaining and negotiating power, then the effect isn’t as pronounced as when wages are naturally high because the employer is simply paying more money.

      The same way that giving teachers of k-12 schools ‘tenure’ can have a negative impact on the ability of a school district to keep the performance of teachers high.

      It would be interesting if someone would do a service based analysis comparing unionized workforces to non-union, and public sector to private sector.

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    • James says:

      I have to say that the Nevada DMV does give good service, at least in the case of registration renewal. What used to take at least an afternoon of waiting in line can now be done in seconds on line. (And from anywhere in the world: I did one renewal while travelling in Europe.) Of course this improvement comes through having almost entirely removed public service employees from the process.

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  7. Christoph Micklon says:

    At the end of this particular show it asked listeners to vote for Freakonomics Radio podcast on the iTunes Facebook page. I spent go good half hour trying to find where to vote.

    Any way of providing a link so I can vote?

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  8. Rishi B says:

    Banana Republic, at the least two I’ve worked at Metro Detroit, could learn a lesson from this. The Sommerset Mall location allows workers to take a 15 minute break on top of their lunch break, they pay a different company to clean the bathrooms, and they take employees out for drinks after work. Almost everyone I used to work with there is still there a year later. The Partridge Creek mall location does none of those things and no one I used to work with there is still there, minus the general manager.

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