Can Businesses Make More Money by Paying their Workers More?

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We spend a lot time around here worrying about rising profits and stagnant wages, but that doesn't mean we don't want businesses to earn profits. Broadly shared prosperity means growth in productivity, which translates into growth in wages and profits. In short, it means we all prosper together.

The CBS Sunday Morning program ran a great story on The Container Store's employee-focused culture which you can watch below.

The Container Store appears to be following a business model quite similar to the discount retailer Costco. Costco and The Container Store demonstrate that even in retailing, it is possible to build a business model that pays good wages and provides a good work environment, all while still delivering the best prices.

But as Paul Krugman's column Degrees and Dollars points out, politicians of both political parties tend not to talk about the need for more business models that pay high wages and instead treat education as the ultimate solution for all that ails the economy. As Krugman writes, education is a good thing in and of itself, but it is not sufficient to restore the link between productivity growth and wages (see the figure below).

There are things education can’t do. In particular, the notion that putting more kids through college can restore the middle-class society we used to have is wishful thinking. It’s no longer true that having a college degree guarantees that you’ll get a good job, and it’s becoming less true with each passing decade.

So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages.

The Container Stores and Costcos of the world are all too rare phenomena. We need policies like a higher minimum wage and greater unionization to take away the ability of retailers and other employers to compete based on low wages.

Winning the future means getting more and more employers to embrace a business model that combines high productivity and high wages as the best path to higher profits. The great thing about this path, as The Container Store story illustrates, is that it requires more training and education. But it is training and education targeted to employer needs! You can't just train and educate people and hope for better jobs. You have to have an economy that routinely produces good jobs.

No matter how you slice it, compensation is not keeping up with productivity chart


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