The New York Times: How Did Walmart Get Cleaner Stores and Higher Sales? It Paid Its People More

That set in motion the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less?

It is an idea that flies in the face of the prevailing ethos on Wall Street and in many executive suites the last few decades. But there is sound economic theory behind the idea. “Efficiency wages” is the term that economists — who excel at giving complex names to obvious ideas — use for the notion that employers who pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.

Walmart’s experiment holds some surprising lessons for the American economy as a whole. Productivity gains have been slow for years; could fatter paychecks reverse that? Demand for goods and services has remained stubbornly low ever since the 2008 economic crisis. If companies paid people more, would it bring out more shoppers — benefiting workers and shareholders alike? [...]

The idea is that, sometimes, it is in an employer’s best interest to pay more than necessary to get a worker into a job. The 18th-century economic thinker Adam Smith described the need to pay a goldsmith particularly well to dissuade him from stealing from you. More recently, economists (including Janet L. Yellen, the Federal Reserve chairwoman, who worked on these topics as an academic economist in the 1980s) have found evidence that people are more productive when they are paid above the market rate.

An employee making more than the market rate, after all, is likely to work harder and show greater loyalty. Workers who see opportunities to get promoted have an incentive not to mess up, compared with people who feel they are in a dead-end job. A person has more incentive to work hard, even when the boss isn’t watching, when the job pays better than what you could make down the street.

Economists have found evidence of this in practice in many real-world settings. Higher pay at New Jersey police departments, for example, led to better rates of clearing cases. At the San Francisco airport, higher pay led to shorter lines for passengers. Among British home care providers, higher pay meant less oversight was needed.

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