The effect of labor on profitability

Description

Determining staffing levels is an important decision in retail operations. While the costs of increasing labor are obvious and easy to measure, the benefits are often indirect and not immediately felt. One benefit of increased labor is improved quality. The objective of this paper is to examine the effect of labor on profitability through its impact on quality. Since employees at retail stores perform both production-related activities and customer-service activities, I examine both conformance quality and service quality. Using longitudinal data from stores of a large retailer, I find that increasing the amount of labor at a store is associated with an increase in profitability through its impact on conformance quality but not its impact on service quality. While increasing labor is associated with an increase in service quality, in this setting there is no significant relationship between service quality and profitability. My findings highlight the importance of attending to process discipline in certain service settings. They also show that too much corporate emphasis on payroll management may motivate managers to operate with insufficient labor levels, which, in turn, degrades profitability.

Subjects

Series Statement

• Working paper / Harvard Business School -- 09-040

Other Editions

• The effect of labor on profitability: the role of qualityHarvard Business School2008-01-01
• The effect of labor on profitabilityHarvard Business School]2008