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02/28/2014

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Hello Jake, I hope you are doing well.

I am a bit puzzled by your comments on CostCo. The only thing one can say based on those numbers is that they are a more productive company that pays higher wages. If you want to make that a point of criticism, you should explain (1) how do you know that they "traded" wages for jobs, and (2) how do you know it's a bad thing.

Maybe they just train their employees better, or have more efficient processes - so it's good news. Or maybe they just hire more productive employees, or they outsource low-paying jobs, or they have fewer customers who buy bigger boxes - so it's no news at all but just sample selection. Or maybe, they employ more capital per unit of labor - so they literally traded, and it might be bad news, if you are a Luddite; or good news, if you are a turbo-capitalist like me, because I'd rather have three CostCos than two Sams in my economy :)

I have never been at Sam's so I can't really say, but I always thought CostCo was a good company. I always joked that CostCo is the proof that the Soviet system would work, if it were run by Americans. (Because you have really little choice of brands, but there are never shortages, and you wind up satisfied).

Thanks for your comment, Mattia...

I don't mean to say that Costco's business plan is a bad thing. I'm a Costco member myself and am happy that the store exists. Whatever their business model is, it works well for our family.

Facile comparisons between Costco wages and Sam's Club wages, however, are implicitly making the argument that Sam's could raise their wages to Costco levels and still earn a profit.

The truth is that if Sam's replicated the Costco business model, part of the shift would involve laying off nearly half their workforce. As you suggest, Costco's model is relatively more capital-intensive and less labor-intensive, which naturally raises labor productivity on the margin.

So, yes, more businesses could be like Costco and pay fewer employees higher wages, but the consequence would be a dramatic loss of jobs. This is nothing more than an Economics 101-level insight.

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