We blogged a while back about how some retail firms succeed by hiring more, not fewer, floor employees, and by treating them particularly well. Among the examples: Trader Joe's and Whole Foods; among the counterexamples: Michael's.
This prompted an e-mail from Hal Varian, Google's chief economist. (If you don't know of Hal you should, as he's an impressive and fascinating guy -- check out the Q&A he did here a few years back.) His e-mail reads:
Saw your piece about Trader Joe's et al. Here's one reason to pay people more than their market wage (from my textbook):
Gabor Varszegi has made millions by providing high-quality service in his photo developing shops in Budapest. (See Steven Greenhouse, "A New Formula in Hungary: Speed Service and Grow Rich," New York Times, June 5, 1990, A1.)
Varszegi says that he got his start as a businessman in the mid-sixties by playing bass guitar and managing a rock group. "Back then," he says, "the only private businessmen in Eastern Europe were rock musicians." He introduced one-hour film developing to Hungary in 1985; the next best alternative to his one-hour developing shops was the state-run agency that took one month.