The End of 'More'

. . . I have always been a supporter of the labor movement. Unions have a proud legacy of improving the lives of millions of workers over the last century.

But lately I have seen developments that have me worried. And I have been reminded of legendary union leader John L. Lewis, who was once asked what his miners were after. His answer? "More."

It was a funny answer, and perhaps it was honest too. But these days, it's not a very effective strategy . . .

"More" has, unfortunately, become "too much" in a global and far more competitive economy.

Many of my friends will consider this view heretical. But it is based on stark reality. . . . It's very difficult to turn around and say that "more" is not always possible.

It sounds to me that ol' George was paid by his local Chamber of Commerce to write this piece. Or maybe by Walmart:

The chief executive of Wal-Mart earns $27 million a year, while the company's average worker takes home only about $10 an hour. But let's assume that the chief executive got 27 cents instead of $27 million, and that Wal-Mart distributed the savings to its hourly workers. They would each receive a bonus of less than $20. It's not executive pay that has created this new world. . . .

The current frenzy over Wal-Mart is instructive. Its size is unprecedented. Yet for all its billions in profit, it still amounts to less than four cents on the dollar. Raise the cost of employing people, and the company will eliminate jobs. Its business model only works on low prices, which require low labor costs. Whether that is fair or not is a debate for another time. It is instructive, however, that consumers continue to enjoy these low prices and that thousands of applicants continue to apply for those jobs.

My response to this was along the lines of "there's more than one way to skin a cat." Is the Walmart model the only economically efficient one? Are there alternatives that are just as, or even more productive and manage to treat workers better? Perhaps irresponsibly, I think so:

Costco's model is paying dividends

After five years on the job, Eva Wasicke makes $20 an hour - about as much as an experienced computer-controlled machine operator working under a union contract in a southeastern Wisconsin factory.

Her employer offers excellent benefits - dental insurance, vision coverage and health insurance for which employees pay about 10% of the premiums, or less than half the average American worker's share.

Wasicke isn't management, and she isn't represented by a union. In fact, she works in one of the lowest-paying sectors of the American economy - retail.

What she has going for her is that she works for Costco.

Even some business types think that the Costco model is a viable one:

Costco's high-wage policy has won praise in many quarters . . . [some] on Wall Street see benefits in a long-range strategy that fosters productivity and minimizes costly turnover.

"I'd say, on balance, the world would be a better place if everybody had Costco's attitude toward labor," HSBC Securities analyst Mark Husson said. . . .

. . . The firm's employees are productive - payroll as a percentage of sales continues to decline slightly - and they stick around, Chief Financial Officer Richard Galanti said. He said annual turnover was about 20%. The U.S. average for full-time retail employees, according to the National Retail Federation, is three times as high.

Said Ivan Feinseth, a stock analyst who is bullish on Costco: "While everybody else is trying to figure out how to pay their employees less, Costco is trying to figure out how to pay their employees more, because the more you pay, the more you get."

Driving this philosophy is James Sinegal, Costco's chief executive officer and one of its founders. Sinegal, said analyst Judson Brooks, subscribes to the largely out-of-favor view that companies thrive when they serve not just stockholders but also such constituencies as communities and employees.

"He really does believe that, ultimately, the best business results are when you serve all those stakeholders well, and he considers the employee an important stakeholder," said Brooks, of Harris Associates, a Chicago money management firm that owns Costco stock.

Not everybody is happy, though:

Critics have argued that Costco could boost its profits - and thus benefit shareholders - by paying employees less.

Indeed, over the last three years, income at Costco's U.S. operations has averaged 2.7% of revenue. Sam's Club averaged 3.3%. Matching its rival's margin would have given Costco another $258 million in income last year.

. . .

One analyst said two years ago that it was better to be a Costco employee than a shareholder.

Imagine that -- a company run for the benefit of its shareholders and its employees! How absolutely irresponsible of them.

Now, I'm not totally irresponsible -- I don't imagine for a moment that Walmart could pay its workers the same high wages that Costco does:

Costco targets higher-income shoppers and, on the whole, sells pricier merchandise, said Patricia Edwards, a managing director for Seattle investment firm Wentworth, Hauser and Violich, which holds Costco shares.

Higher-priced goods carry more profit, so stores selling them can afford to pay their employees more, said David Keuler, who follows retail for Milwaukee's Mason Street Advisors, where he is managing director.

"For a company like Wal-Mart, which tries to work on very thin margins . . . it would be very difficult to have that sort of labor cost structure, and even a company like Kohl's," Keuler said.

But, if paying workers more and treating them with respect raises labor productivity, then Walmart could afford to pay higher wage without putting their margins at risk. Maybe not as high as Costco, but higher than what they pay now. Every little bit helps.

So I made a version this argument over at Mark Thoma's place. I argued that firms' choices between the "low-road" model of Walmart and the "high-road" approach of Costco is not just a question of economic necessity, but also a question of what used to be called "political economy." Within limits, Walmart could choose to treat its workers better and reap the gains in higher productivity, but its executives choose not to in favor of allocating more enterprise resources toward themselves.  

As you might imagine, I was immediately slapped with the label - "irresponsible" (actually, "illiterate," but whatever).

So...George McGovern advocates an economically literate liberalism, and heads explode all over the internet. Sigh. . . .

I am very pleased to see more liberals . . . being willing to at least discuss strategies for attaining our values and goals . . . without needlessly -- and harmfully -- distorting the markets themselves.

. . . there are right choices and wrong choices. And measured by return on equity, WalMart makes better choices than competitors like CostCo. And over time, investors in other firms are going to require them to improve their choices -- either by doing what WalMart does, or by finding some other way to make themselves as profitable as WalMart.

Sigh.

I guess if return on equity is your sole criterion for efficiency, you have a point. But that is exactly what makes the Costco approach fundamentally different from the economic conventional wisdom. It contains the seeds of a different way of running firms and the economy:

. . . a new principle should guide corporate governance: Employees who invest and put at risk their human capital should have the same rights to information and voice in corporate governance as do investors who put at risk their financial capital.

-- Thomas Kochan, MIT Workplace Center, Regaining Control of Our Destiny: A Working Families' Agenda for America

If that makes me an irresponsible liberal, well then two cheers for irresponsibility.