Long term, however, the effects of many companies following the low road are worrisome. First of all, low-road management tends to be associated with low productivity and low productivity growth. This undermines the foundation of long-run improvements in living standards over time. Second, workers with less money in their pockets have less to spend. Many employers adopting low-road management can lead to overall wage stagnation. Wage stagnation that persists long enough can undermine consumer buying power and stall overall economic growth. (Some economists believe the Great Depression resulted from a downward spiral of wages, leading to the collapse of economywide aggregate demand.)

Companies like Circuit City argue that they have no choice but to adopt low-road policies. The pressures of competition force them to behave as they do. But in industry after industry, including retail, other companies make different choices--to take the high-road to profitability. Take the example of the warehouse-retailer Costco.

On March 8th Costco announced its own wage management initiative. Under the initiative, entry-level wages would rise by by 10 percent to $10.50 an hour and its top pay range by 4.3 percent to $20.00. Two years ago, a New York Times reporter Steven Greenhouse found that:

"Costco's average pay...is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder. Mr. Sinegal [Costco CEO] begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands. Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers' expense. "This is not altruistic," he said. "This is good business.""

From the Academy of Management Perspectives here is Professor of Management, Wayne F. Cascio, on the costs of turnover at Costco and its closest competitor Sam's club:

"One important effect of high-versus-low wages is on employee turnover, and the financial effects of such turnover. These effects are quite different at Costco and Sam's Club. The fully loaded cost of replacing a worker who leaves (separation, replacement, and training costs), depending on the level of the job, typically varies from 1.5 to 2.5 times the annual salary paid for that job, excluding lost productivity (Cascio 2000). To be extremely conservative, let us assume that the fully loaded cost to replace an hourly employee at Costco or Sam's Club costs only 60 percent of his or her annual salary. If a Costco employee quits voluntarily, the fully loaded cost to replace him or her is therefore $21,216. If a Sam's Club employee leaves, the cost is $12,617. At first glance it may look like the low-wage strategy at Sam's Club yields greater savings in turnover. But wait. Employee turnover at Costco is 17 percent per year (11,492 employees), excluding seasonal workers (Coleman-Lochner 2006). At Sam's Club it is more than 2.5 times higher, 44 percent a year (48,488 employees) (Frontline 2004)...[Thus]the per-employee cost at Sam's Club is...$5,274.41 versus $3,628.11 at Costco. High employee-turnover rates are expensive..."

It turns out that Costco's high-road approach is highly profitable. The company converts its low turnover costs, and its committed, experienced, and productivity workforce, into high profits. Here is Business Week's analysis:

"Surprisingly,...Costco's high-wage approach actually beats Wal-Mart at its own game on many measures. Business Week ran through the numbers from each company to compare Costco and Sam's Club, the Wal-Mart warehouse unit that competes directly with Costco. We found that by compensating employees generously to motivate and retain good workers, one-fifth of whom are unionized, Costco gets lower turnover and higher productivity. Combined with a smart business strategy that sells a mix of higher-margin products to more affluent customers, Costco actually keeps its labor costs lower than Wal-Mart's as a percentage of sales, and its 68,000 hourly workers in the U.S. sell more per square foot. Put another way, the 102,000 Sam's employees in the U.S. generated some $35 billion in sales last year, while Costco did $34 billion with one-third fewer employees. Bottom line: Costco pulled in $13,647 in U.S. operating profit per hourly employee last year, vs. $11,039 at Sam's. Over the past five years, Costco's operating income grew at an average of 10.1% annually, slightly besting Sam's 9.8%. Most of Wall Street doesn't see the broader picture, though, and only focuses on the up-front savings Costco would gain if it paid workers less."

Not only does Costco treat workers better than other retailers is also manages to treat its customers to low prices. The Seattle Weekly reports that Costco is a ruthless price cutter with a cap on its profit margin per item of 14 percent which means when Costco finds a lower price on its merchandise so do its customers.

In virtually every industry, research demonstrates, companies can be found that compete in more high-road and more low-road ways. The 21st century challenge for state economic policy is how do you grow the number of companies taking the high road. One of the ways, now being implemented through Pennsylvania's investment in industry training partnerships, is to help more companies realize what Costco already knows: there is an alternative to the low road.