Does Costco Follow The Efficiency Wage Theory?

See He Earns $33 an Hour as a Costco Cashier, Now He’s a Millionaire: Long-tenured workers like cashier Tony Barzar are reliable, experienced and able to speed shoppers through a checkout line-Costco is willing to pay to keep them around by Sarah Nassauer of The WSJ. 

I explain The Efficiency Wage Theory below after article excerpts:

"Costco has long paid more than most U.S. retailers to help keep turnover low, a strategy the company’s founders believed would reduce costs associated with training new hires and lead to better customer service. Turnover after one year of employment at Costco is around 7%, a fraction of industry averages."

"It has also boosted the maximum pay hourly workers can earn from $31.90 to $32.90, increased its annual bonus and added an extra week of vacation for workers who have been with the company at least 30 years."

"The company’s investments in workers means that they stay for a long time, then ultimately retire, but “you have a pipeline of employees coming behind that group that also are building that level of experience,” he said. It’s also cheaper long term, he added (Gary Millerchip, the retailer’s chief financial officer)."

The Keynesians have come up with theories to explain why wages might be slow to fall in a recession. Here is one of them:

Efficiency Wage Theory-Companies set wages above competitive (that is, market determined) levels to increase labor productivity. This does two things:

1. It reduces worker turnover, since workers will want to keep this high paying job. This in turn reduces training and hiring costs. When that happens, productivity rises.

2. It reduces slacking since no worker will want to get caught not putting forth their best effort because the job pays so well. They would not want to get fired from a job that pays so well. The company cannot constantly monitor its employees, so the high wage prevents slacking.

The idea is that it was too costly to constantly monitor what all the workers were doing. But maybe things are changing now (see related posts on this). 

Related post:

 

Bosses Don’t Need a ‘What Did You Do’ Email. They’re Already Tracking You. (and how this might be related to Keynes' theory of sticky wages): Elon Musk’s email to federal employees prompted angst, but lots of employers use technology for continuous feedback on worker performance (2025) 

 

With technology that can more closely monitor worker activity, will wages fall or not rise as much? (2019)