ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.
Walk around any American city or town today, and you’ll see help wanted signs everywhere. There are currently 10 million jobs unfilled in the United States and lots of businesses are struggling to operate at full capacity. Western Europe is also seeing record breaking job vacancies, with companies reporting that they lack skilled workers. And it’s a similar story in Asia, troubling turnover.
Why are so many people leaving their jobs or not going back to the ones they had pre pandemic? And why do we see some who have stayed employed now striking or trying to unionize?
Our guest today would say it’s because they’re sick of working long, inflexible and sometimes unpredictable hours for not nearly enough pay and benefits. They’re leaving bad jobs. She argues that the only way to fix the problem is to start offering good jobs. She wants more companies to realize that people at any level deserve good pay and benefits, security, flexibility, and work that feels engaging. And she’s designed a strategy to help employers make that happen.
Zeynep Ton is a professor at the MIT Sloan School of Management. Zeynep, welcome.
ZEYNEP TON: Thank you so much for having me Alison.
ALISON BEARD: Okay. So lots of companies have been guilty of offering bad jobs for a while. Who are some of the worst offenders and what have they been doing wrong?
ZEYNEP TON: Well, we can find the worst offenders in lower wage sectors. Retail, food, fast food, restaurants, call centers, senior living. These are the places where recently we have called many of these workers, essential workers, and sadly, most companies in these sectors tend to offer bad jobs with poverty level wages, unstable schedules, and very few opportunities for success and growth.
ALISON BEARD: And which demographic groups are hardest hit by this phenomenon of bad employment?
ZEYNEP TON: It’s so interesting because after the brutal killing of George Floyd, we’ve seen so many efforts. People have been on the streets. So many companies have been having DEI efforts, right, diversity, equity, and inclusion. And oftentimes when I talk to these company leaders, I say, “Look at the lowest paid workers in your organization.” Because when you look at them, you will see that they are disproportionately people of color, black workers, Latino workers, immigrants, women, and find out how much are they paid? What percentage of them are being promoted? But I see disproportionate amount of, not I, but this is the data that shows that people in these low wage jobs tend to be disproportionately black or Latin workers.
ALISON BEARD: And so much has been made in recent years about the increasing gap between what those at the highest level of a specific organization and people at the lowest level have paid. Why has that widened so much over the years, where the CEO is making not just 10X but a 100X of what his frontline workers are?
ZEYNEP TON: I think part of it has to do with our obsession with paying the market. So most companies, when they set pay for all sorts of different levels, from CEOs to the lowest paid workers, they look at the market to determine how much to pay their workers. And what I have found in my research is that paying the market might work for certain job titles, but for the bottom of the economy, where we see 46 and a half million workers being in occupations where the median wage has been less than $15 an hour, market wages don’t work so well because what you’re benchmarking is poorly paid other companies. And similarly on the highest end, when companies decide the CEO pay, they benchmark other CEOs and they tend to pay the market in that levels as well. So, I think part of it is our obsession with paying market wages.
ALISON BEARD: So it’s free market capitalists’ thinking.
ZEYNEP TON: Yes. And when you look at labor, labor is not just like any other input, right? We think about free markets, we think about supply and demand working in this particular setting, but labor is not just any other input. First of all, in a perfect market, you would expect when there’s a decrease or increase in either demand or supply, prices to reflect that change. But as we’re seeing right now, there’s a lower supply of people and more demand for people, right, as they were seeing right now. You mentioned, you opened the segment with 10 million job openings. But companies are not willing to raise pay quite as dramatically as the market would dictate because wages are sticky. Once you raise them, it’s very hard to go back.
So, the fact that wages are sticky suggests that labor is not just like any other input. The other thing is, and anyone knows, people have different levels of productivity. Some people are more productive than others, and so that’s different. And then third, when pay is very low and it’s below subsistence level that people can’t make ends meet, then the level of pay ends up affecting the quality of work.
There’s so much research that shows that when pay is so low that you can’t make ends meet, then you have more health problems. You have obesity problems. You have mental health problems. Your cognitive capacity is declined, is equal unto losing 13 IQ points. Which means that now that worker is not going to be able to show up on time. That worker is not going to be able to focus on the job. That worker is not going to be able to display great behavior because of all the other problems in their lives. So, wages end up affecting the quality and people’s productive value to the organization.
ALISON BEARD: When you said labor is different than any other input, my first thought was, “Right, because we’re talking about human beings. Of course, it’s different than machinery that you’re buying, or real estate or any other cost you might have. It’s human beings we’re talking about.”
ZEYNEP TON: It’s human beings we are talking about, but it’s so easy for us to use the market, right, for human beings, and we don’t even think about it.
ALISON BEARD: What role does government have to play in fixing this problem or do you think that businesses should really take the lead?
ZEYNEP TON: I think everyone should do their part on this problem. First, let me just say this is not just a worker problem, it’s also a business problem because when pay is very low, when working conditions are bad, there’s high turnover. We work with companies in retail, in call centers, in fast food where the turnover levels could be over 60%, over 100%. And when turnover is high, then there are all sorts of problems. They lose money on inventory related issues. They lose money because their customers are frustrated because there’s a long line at the checkout and they can’t sell merchandise and that ends up lowering their performance and puts companies on a vicious cycle. So, first of all, there are clear cost to businesses to operate this way and there are competitive cost to operating this way as well.
When you have a workforce that is high turnover and not able to focus on the job, then you end up making lots of other decisions and end up creating an inhumane operating system. And in the service businesses, if you don’t have a productive, motivated, capable workforce, how can you offer good customer service? How can you differentiate yourself in the eyes of your customers if your workers are changing all the time and they can’t focus on the job and their job is not designed to create high value?
And these companies also find it very difficult to adapt to changes in the market too. We’re seeing it right now. You mentioned some stores are closed, some cafes have shorter hours, so there are competitive and financial cost to businesses. And that’s why business leaders should care about this. Now, of course, governments should care about this and minimum wage in the United States, the federal minimum wage is $7.25. There is no place in the United States that I’m aware of where $7.25 is a subsistence wage for even a single person, right? So, this is something that the policy makers have to do work on and business leaders should do work on it because it’s good for them and it’s good for their organizations and for their customers.
ALISON BEARD: Yeah. So we’ve talked a lot about pay, but this is about much more than wages, right? What other aspects of work make up a good job?
ZEYNEP TON: Absolutely. If you go to 1900s, if you remember Henry Ford, the assembly line, the Ford factory and the Ford factory had very high levels of turnover, and then Henry Ford raised the pay to $5 a day. That was a big deal, right? That was a big deal. That changed lives of workers. But the job was still the mind-numbing assembly line job. The work was designed in a way that re-minimize people’s ability to contribute and to be motivated. So, pay is important, of course, but as important as pay is designing the work so that people can be motivated. They can be productive. They can contribute to creating value for the customer.
ALISON BEARD: This idea of stakeholder capitalism versus shareholder capitalism has really taken hold I would say over the last decade. There are companies talking about providing more value for their employees, even frontline, blue collar workers. Are you pleased with the progress that you’ve seen so far?
ZEYNEP TON: You know, I am pleased, I guess, one silver lining of this horrible pandemic has been that for the first time, we are seeing some wage increases in the lower segment of the economy. But the stakeholder capitalism, yes I am pleased that the purpose of a corporation has changed to include different stakeholders, I am pleased that more companies and CEOs are talking about this, but there’s not quite as much action as words.
One of the things that we encourage all companies to do is to look at their lowest paid workers and say, “What percentage of them, especially the full-timers, make a living wage.” And surprisingly, very few companies have made it important to even examine what percentage of their workers are paying a living wage. We ask them, “What percentage of your frontline managers are promoted from within.” Because career paths are super important for people’s ability to move up in the organization and look at it by race and gender. But there is not enough talk about these important issues like career paths, or pay, or turnover. And I would like to see a lot more progress faster on these issues.
ALISON BEARD: Yeah, and wider spread benefits, predictable hours, but then also the flexibility around those hours.
ZEYNEP TON: Oh, absolutely. And Alison, we need, especially in the service sector, we need predictable hours. We need consistent hours and adequate hours. One of the companies we work with, we looked at all their workers in the stores and we found that the median hours per week was less than 15 hours. So, a typical worker work less than 15 hours a week.
So, even if you pay them $15 an hour, it doesn’t go so far. And their schedules are provided to them two weeks in advance and they can change in the last minute. So, imagine having a life where your schedule is so unpredictable, you find out about it just two weeks in advance. Your hours change from week to week and you’re not given enough hours. Imagine what it would be like to live that way. And oftentimes when we talk about $15 an hour and I always ask people, “Consider $15 an hour along with the number of hours.” But $15 an hour is seen as the objective, right, “We should pay $15 an hour.” But if you work at a job 40 hours a week, every s ingle week, you end up making $31,200, right. That’s $15 an hour. That’s not enough to take care of your family across the United States for different household size.
ALISON BEARD: So you mentioned that the COVID-19 crisis has changed things a little bit. Do you think that those changes will last, this respect for essential workers, this acknowledgement that we need to pay them more?
ZEYNEP TON: I would like to hope they will last, but the honest answer is, I don’t know if they will last. For them to last, we need leaders to start thinking differently about their people. Not as inputs, but as human beings who can drive performance, who can drive sales, who can lower costs. And unless leaders change the way they think about people, for as long as they think about people as just a cost to be minimized, I don’t think that the changes would last.
ALISON BEARD: Yeah. It is hard for people who are having to look at a P&L, having to hit monthly targets, having to answer to shareholders every quarter. It’s hard to say, “Right, we’re going to add this huge expense, and make up for it in the future with enhanced productivity, better customer retention, better employee retention, et cetera.”
ZEYNEP TON: But look at a company like Costco which does not see its labor as an expense, where the median wage is more than $24 an hour, where the median wage in retail is about $13 an hour. And at the same time, Costco offers the lowest prices to customers. And at the same time, it performs extraordinarily for its shareholders. Why is Costco able to do that? By the way, Costco is a membership-based model. You might make the case that they are different, but there are other companies that I’ve studied that are exactly like Costco. QuikTrip, a convenience store chain with gas stations, Mercadona is a supermarket chain in Spain. So, why is it that they’re able to pay their workers so much more and offer lower prices to their customers and create great returns to their shareholders? Because they leverage their investment in people. Because they empower their employees to be able to make decisions for their customers. Because they empower their employees to cut costs everywhere else. Because they design the work so that employees can be extremely productive.
You go to a Costco store, there’s a long line of people at the checkout and that line goes so fast because people are just really fast at their jobs and Costco offers fewer products, so they are able to be faster at their jobs. So, I think the key is to see the power of investing in people in a way that leverages that investment. And those are the companies that are going to win. As we think about the future, where the demographics, if you look at the demographics in the United States, the problem in the future may be that we won’t have enough people for all the jobs that we have.
ALISON BEARD: Yeah. When you have this gap between there are many job vacancies, but then there are also a large number of people unemployed, a lot of people say, “well, that’s due to a skills’ gap. The people who are unemployed can’t fill those jobs that are vacant.” Is that true right now around the world? And if so, what should employers be doing about it?
ZEYNEP TON: When you look at the job growth in the United States and where it’s coming from, it’s expected largely in low wage jobs like health aids, food and cleaning services, and labor occupations. The problem that we have in the United States, it’s not that we don’t have enough skilled people for skilled jobs, it is that we have too many bad jobs. And I think about, I think about the United States economy as a huge ship that has a hole in its hall and those who are in the lower decks are at risk of drowning. And we say, “Okay, let’s upskill workers.”
Well, if you upskill them, you may move some of them to a dry deck, but there isn’t enough room for everyone and the ship is still sinking, so what we need to do is to fix the hole right now so that no one drowns. But I think the easy answer is to find the fault in workers versus in jobs and say, “What we need to do is just upskill workers or train them.” Who could argue against training or upskilling or investing in education. But it seems like the easy and convenient way out, rather than looking at the bigger problem and solving the bigger problem, we just don’t have enough good jobs in the United States.
ALISON BEARD: Yeah. So what is the first step for a business leader who wants to make sure that every job in his or her or their organization is a good one, especially if it means a big strategy change and a lot of conversations with shareholders.
ZEYNEP TON: Yeah. I think the first one is awareness and recognizing the problem and putting it in the context of competitive, financial, and moral forces. Once you create awareness, I think the next step is to frame this in the context of winning in the market. You need to make people essential to winning in your business. That’s what we learned in manufacturing 100 years ago. Henry Ford’s assembly line, where people were used as interchangeable parts, that was okay for decades until it wasn’t, until competition came.
And, I think, many service companies find themselves in this vicious cycle of high turnover, poor performance, but they are profitable. And they say, “Well, we are profitable, so why should we change?” But you are profitable until you’re not. Look at Borders. Look at Circuit City. Look at Toys R Us. Look at Sears. These are all the companies that are either no longer with us or about to be no longer with us.
So, I think putting it in the context of, “Good jobs are essential for us to win with our customers and to adapt to changes.” Is a second important step because when a company changes into a good job system, there are many changes that they will have to make. It’s not just paying workers more, but it’s also designing the work differently. And for them to be able to prioritize this change, they need to make it important for them.
ALISON BEARD: Do individual managers have any power here or does it really need to be a top-down strategy decision?
ZEYNEP TON: To be perfectly honest, when I look at middle managers in these organizations that have been providing bad jobs, I feel just as bad for them. And we’ve seen, especially right now, during the pandemic, where companies have been difficulty attracting people and retaining people, managers have been working overtime. They have physical health issues. They have mental health issues, so they are firefighters. And when they’re firefighters, it’s hard for them to make any changes and to even have time to think. So, unless there’s effort from the top and in an effort to win with customers through a more motivated, capable workforce, I am doubtful that middle managers or frontline managers can make much of a difference.
ALISON BEARD: Right. Unless they all band together and walk up to the CEO’s office and say, “Hey, we got to do this.” I do think though, C-level executives understanding what it actually is like to be in a store, in a call center, in a factory, I think that has to be a really important step too. It’s like, “No, this is actually what happens when people are doing these jobs that you’re not paying them enough to do. They’re getting yelled at by customers. They’re dealing with bureaucracy. They have these inflexible hours. They have coworkers who are off sick, so they have to make up for that productivity.” I do wish there was just more understanding, walking a mile on their shoes.
ZEYNEP TON: I’m 100% with you and leaders who have made substantial changes, I am thinking about, for example, Mark Bertolini at Aetna in 2015, 2016. He told me that he spent close to 200 days in the front lines finding out what was happening to workers. And he said he was shocked to hear how many of them were worried about pocketbook issues and how many of them they didn’t have time, or they didn’t have the ability to serve their customers. I see the same things in retail. Jim Sinegal, the co-founder of Costco, he comes to my class every year and he tells my students, “When I was running Costco, I would spend 200 days in the stores because that’s where we meet the customers.” So, for leaders to spend time in the stores, in the call centers, in the factories, is extremely important.
And so many leaders are out of touch. So, I’ll give you one example. We were working with a large healthcare organization where their frontline caregivers were making close to minimum wage. Many of them had two jobs, that were a lot of single parents, and they were barely getting by. And the leadership met and they were talking about how to create different benefits for the frontline workers. And one benefit that they considered was a discount on ski-lifts. Now, it sounds funny and it sounds unbelievable, but-
ALISON BEARD: It’s sad funny.
ZEYNEP TON: I think this just shows how disconnected we can be from people who are counting pennies every day. Today, I talk to a COO from a large organization and he said how his mother said how when you make so little, money is everything. And when you make enough, money is nothing. But when you make so little, money is everything and so many leaders are so disconnected that they just underemphasize money. I see companies saying, “We just got our engagement scores. We’re doing a great job.” Well, your engagement scores are high and then you have 80% turnover,
ALISON BEARD: Right. The people that stay might be happy, but they’re not the people making minimum wage. Have you seen companies who had been in the bad jobs’ category really turn it around?
ZEYNEP TON: I have. Yes, I have. And I have cases that I bring into my classroom. There’s a case about Quest Diagnostics, what they have done in their call centers. But one of my favorite recent examples is Sam’s Club. At Sam’s Club in 2018, 2019, this is before COVID, they raise pay for thousands of people, meat cutters, bakery specialists, team leaders, $5 to $7 an hour from an average of $15 an hour. That’s a lot of wage increase and they did that along with all the other operational changes that enable their employees to be more productive.
They use automation to take out the unwanted tasks. They simplified the work and the result has been outstanding for Sam’s Club. It wasn’t just pay. It was a holistic effort and their whole team understood the whole system that was required to change, including the changes in the supply chains. But that’s a fantastic example about a company that has changed, and that is now doing a great job with their customers, with their members. They have membership growth, their same store sales growth has been fantastic, and it didn’t cost them at the end. It ended up being a driver of their performance.
ALISON BEARD: Terrific. Well, that is a very positive note to end on. I hope more companies can follow their lead. Zeynep, thanks so much for being on the show.
ZEYNEP TON: Thank you so much for having me.
ALISON BEARD: That’s Zeynep Ton, professor at the MIT Sloan School of Management. She wrote the book, The Good Job Strategy: How The Smartest Companies Invest In Employees To Lower Costs And Boost Profits.
If you like this episode and want to hear more, like my chat with Harvard economist, Claudia Goldin, on greedy work and the gender pay gap, go to hbr.org/podcasts, or listen and subscribe wherever you get your shows.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Thanks for listening to the HBR IdeaCast. I’m Alison Beard.