Counterintuitive…and Interesting

The most recent issue of The New Yorker has an interesting article about retail establishments and staffing levels.

The conventional wisdom is that in order to profit, retailers must keep costs low, and the most effective way to do that is to have as few employees as possible. As the article points out, however, “Although leanness is generally a good thing in business, too much cost-cutting turns out to be a bad strategy, not only for workers and customers, but for businesses themselves.”

The author quotes from a recent Harvard Business Review study of four large low-price retailers with much higher employee costs than their competitors. These are stores, like Costco, that pay their employees more, provide benefits, and provide more training. They also employ a lot more people.

And–counterintuitively–they make more money. They have higher sales per square foot than similar businesses with thinner staffs, and they experience much less (costly) turnover.

The article doesn’t just look at the successful retailers with larger sales staffs; it also notes examples of the reverse. When Home Depot and Circuit City slashed employees to cut costs, sales plummeted.

I’m sure there are other business practices that contribute to both the positive and negative results. But assuming the Harvard folks are right, assuming they have controlled for other factors and that they have produced sound, compelling evidence that hiring more employees (to a point, obviously) translates into greater profits, I wonder if that evidence would be enough to overcome the conventional wisdom that favors “lean and mean.”

Somehow, I doubt it.

After all, we have years and years of compelling evidence that tax cuts don’t create jobs–but politicians continue to insist otherwise.