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The Effect of Labor on Profitability: The Role of Quality

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  • Zeynep Ton

    (Harvard Business School, Technology and Operations Management Unit)

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.

Suggested Citation

  • Zeynep Ton, 2008. "The Effect of Labor on Profitability: The Role of Quality," Harvard Business School Working Papers 09-040, Harvard Business School, revised Jul 2009.
  • Handle: RePEc:hbs:wpaper:09-040
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    Cited by:

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    2. Ruyi Shi & Shengbao Ji & Xiaozhen Wang & Fan Li, 2016. "Impacts of star-rated hotel expansion on inbound tourism development: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 48(32), pages 3033-3048, July.
    3. Olga Perdikaki & Saravanan Kesavan & Jayashankar M. Swaminathan, 2012. "Effect of Traffic on Sales and Conversion Rates of Retail Stores," Manufacturing & Service Operations Management, INFORMS, vol. 14(1), pages 145-162, January.
    4. Dragana VOJTESKI & Kljenak Lukic RADOJKO & Dragica JOVANCEVIC, 2015. "Labor Costs Analysis In The Trade Market Of Serbia," Management Research and Practice, Research Centre in Public Administration and Public Services, Bucharest, Romania, vol. 7(3), pages 59-79, September.
    5. Mou, Shandong & Robb, David J. & DeHoratius, Nicole, 2018. "Retail store operations: Literature review and research directions," European Journal of Operational Research, Elsevier, vol. 265(2), pages 399-422.

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    Keywords

    Labor Capacity Management; Quality; Retail Operations;
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