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The Effect of Labor on Profitability: The Role of Quality

33 Pages Posted: 19 Sep 2008 Last revised: 27 Jul 2009

Zeynep Ton

Independent

Date Written: July 27, 2009

Abstract

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. 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.

Keywords: Labor Capacity Management, Quality, Retail Operations

Suggested Citation

Ton, Zeynep, The Effect of Labor on Profitability: The Role of Quality (July 27, 2009). Harvard Business School Technology & Operations Mgt. Unit Research Paper No. 09-040. Available at SSRN: https://ssrn.com/abstract=1269523 or http://dx.doi.org/10.2139/ssrn.1269523

Zeynep Ton (Contact Author)

Independent ( email )

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