Sunday, January 14, 2007

Minimum Wage|Costco-ization of America

Minimum wage tends to do two things when it rises above the market clearing price (equilibrium) of supply and demand. One is that it tends to increase non-tradeable jobs for a loss in tradeable jobs. And secondly a reduction in labor intensive service jobs for an increase in less labor intensive jobs.

And this I call the Costco-ization. It is the transfer of labor from service in stores to a self serve retail environment. I think for me it started in the 1970s when I noticed the first effect. That was when Fred Meyer's stopped taking the items out of the cart and ringing it up. They set up a conveyor system and the customer would place the items on that conveyor. Then during the 1980s FM implemented a bag your own groceries. And now they have the self-checkout where the customer does the whole transaction including coupons. Now for small purchases, it actually is very fast and convenient.

So how does this relate to Costco where there is less than zero customer service, and they don't even give you bags? It is another process of shifting from labor intensive retail outlets to a capital intensive bulk out-lets. I think it is funny the way they ask if we (my wife and me) want a box for our stuff. My wife says yes, but I see this more as a way to get rid of their industrial waste. Since recycled cardboard costs are relatively low now then they want to dump the waste on the customers. If it was truly a value then they would recycle it and sell it to bulk wholesalers.

Instead of The Long Tail as Walmart can be interpreted as, Costco is a broad range of products but very shallow depth on any product line-up. The store is designed that it takes very little labor for any given amount of sales.

Now liberals think this model is great because it tends to have a higher wage rate than other retail outlets. But for every extra dollar it gives to some employees, it could be used to hire more employees. Of course there tends to be positive effects of higher wage rates, so the question is the positives greater than the increased costs?

I have had several discussions with libs and pointed out that Costco and WalMart are different business models and markets and thus even their labor markets they compete in are different.

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