The Retail Battleground: The Convergence of Automation, Outsourcing, and Labor Laws

A couple of weeks ago, Amazon announced the termination of its “Just Walk Out” checkouts in its grocery stores. 

But if you’re thinking that this is a sign of reprieve for the human worker… well … maybe you’re right… but not for the local human worker, as indicated by the following tweet:

On April 1st, California increased the minimum wage for fast-food workers to $20.

At first glance, this information may seem disconnected. However, upon closer inspection, these events are closely intertwined by the evolving dynamics of labor laws, wage standards, and technology integration in the workplace. 

I’m not about to debate the merits of minimum wage, but there is value in a broader discussion on the relationship between labor laws, in general, and technology. 

The Drive Behind the Change

Two primary factors are reshaping the business approach to labor and operations. First, the shift toward automation, touted as the future of retail and service industries, has hit a reality check. The termination of Amazon’s “Just Walk Out” stores, an ambitious project aimed at eliminating checkouts and streamlining shopping, signifies that technology might not be ready to replace human labor entirely. At least not yet. Technical challenges, consumer resistance, and unforeseen operational hurdles illustrate the complexities this endeavor is facing for the time being.

Second, labor is becoming more expensive due to wage increases, and more protected through stringent labor laws. While increases in minimum wage such as the hike observed in California are a factor that directly influences labor costs, it’s imperative to delve deeper into the broader spectrum of the laws around labor as well as their impact on the business world.

In recent years, numerous cities and states have passed legislation increasing minimum wages to improve earnings and workplace standards, especially for hourly employees in sectors like retail and hospitality. While intended to improve workers’ quality of life, these new labor laws put additional pressure on businesses already operating with tight profit margins.

A 2023 study by the California Retailers Association found that over 20% of large Los Angeles retailers had to lay off staff after the city passed a $16.78 minimum wage for non-union companies. Another 15% raised consumer prices to offset the inflated labor costs. In Philadelphia, several major chains opted to shut down underperforming urban locations when hit with a new $15 minimum rather than absorb the added overhead.

Considering that employee wages represent 30-40% of operating expenses for many restaurants and retailers, the financial strain from abrupt increases to this major cost is driving some businesses to make difficult decisions around staffing levels, pricing, and even store viability. While fair worker compensation is a laudable goal, critics argue that policymakers must carefully weigh potential impacts that could diminish an industry's competitiveness or operational flexibility.

This is not just about minimum wage. This is also about “​​Fair Workweek Laws.” Fair Workweek Laws (FWL), also known as Predictable Scheduling Laws or Secure Scheduling Laws, are legislative measures designed to provide more stable and predictable work schedules for employees, particularly those in part-time, hourly, or shift-based roles. The laws have been implemented in several cities and states across the United States, targeting industries known for unpredictable scheduling practices, such as retail, fast food, and hospitality. The core objective behind these laws is to improve the quality of life for workers who have historically faced erratic work schedules, making it difficult for them to plan for personal needs, family care, education, or managing a second job.

While the specific requirements of FWL can vary by jurisdiction, common provisions include:

1. Advance Notice of Work Schedules: Employers must provide employees with their work schedules at least two weeks in advance. This provision allows workers to better plan their lives around their work schedules.

2. Predictability Pay: If employers make any last-minute changes to the schedule (e.g., canceling, adding, or altering shifts without sufficient notice), they must compensate employees with additional pay, known as “predictability pay.”

3. Consent to Hours: Employees can decline work hours added to their schedules without adequate notice. In some jurisdictions, employees must consent to work shifts scheduled or changed with less than the required notice.

4. Rest Between Shifts: Often called “clopening” protections, these rules require employers to provide a minimum rest period (usually 10-11 hours) between closing one day and opening the next. Employees working during this rest period must be compensated at a higher pay rate.

5. Offer of Additional Hours to Existing Employees: Before hiring new workers, employers may be required to offer available extra hours to current part-time employees, helping them access additional work hours and potential benefits associated with full-time employment.

The primary goals of Fair Workweek Laws are to:

- Increase stability and predictability in workers’ schedules and enhance their ability to manage personal and family commitments.

- Reduce the unpredictability and financial instability caused by fluctuating work hours.

- Promote fairer labor practices and discourage last-minute scheduling changes that can disrupt workers’ lives.

While Fair Workweek Laws are designed to protect workers, they also present challenges for employers, especially those operating in industries with variable customer demand. Critics argue that these laws can reduce businesses’ flexibility to adapt to unforeseen changes, potentially leading to increased operational costs. Additionally, there are concerns about the administrative burden of complying with these laws, particularly for small businesses.

Fair Workweek Laws: Insights from Academic Perspectives

As usual, we’re not content with the general discussion and would like to delve deeper.

One of the most exciting doctoral studies this year was research done by Caleb Kwon, who studied the impact of these labor laws. 

The paper “The Real Effects of Fair Workweek Laws on Work Schedules: Evidence from Chicago, Los Angeles, and Philadelphia” by Caleb and his advisor Ananth Raman, explores the impact of FWLs on the predictability and stability of work schedules in these cities. The paper investigates whether FWLs, designed to enhance work schedule predictability and stability by penalizing employers for last-minute schedule changes without adequate notice, achieve these objectives.

The authors employ a comprehensive analysis using administrative shift-level data from multiple Chicago, Los Angeles, and Philadelphia retailers. The study uses a difference-in-differences approach to compare changes in work schedules before and after implementing FWLs, focusing on variables capturing schedule predictability and stability.

The analysis finds significant increases in the advanced notice provided to employees for their shifts across all studied cities, indicating that FWLs have successfully enhanced schedule predictability. At the same time, however, the paper suggests that while FWLs have made schedules more predictable, they haven’t necessarily made them more stable.

Policymakers should consider the findings to inform future legislative adjustments to target and improve this aspect of worker scheduling more directly.

So while businesses adapt to comply with these regulations by providing more advanced scheduling notices, the expected stabilization of work hours has not materialized. The research implies that businesses might continue seeking flexibility in scheduling practices within the constraints of FWLs, potentially through innovative labor models or technology, which we will look at next 

The research also addresses several concerns associated with FWLs, such as potential reductions in scheduled work hours, increased employee turnover, decreased hiring, and a shift toward more part-time employment. It finds little evidence supporting these concerns, except for a noted decrease in hiring within Philadelphia post-FWL implementation.

But if you’re wondering whether these laws had any performance impact, the paper “The Effects of Fair Workweek Laws on Store Performance: Evidence from Chicago” by Caleb and Ananth provides a comprehensive analysis of the impact of Fair Workweek Laws (FWLs) on the performance of retail stores, focusing on the specific case of Chicago’s Fair Workweek Ordinance. The paper investigates how FWLs affect retail store performance.

The study utilizes a difference-in-differences strategy around implementing the Fair Workweek Ordinance in Chicago, and analyzes data from over 3,000 retail stores, including over 7 million shift observations covering more than 65,000 workers, to examine the effects of the FWL on store transactions, labor utilization, and labor productivity.

The analysis reveals a substantial and persistent decline in store output (transactions) by 13.9% in Chicago stores, with no significant effect on aggregate labor utilization. This suggests a reduction in labor productivity by 11.0% due to the FWL. The decline in in-store performance is attributed to the scheduling adjustment costs imposed by the law, which likely restrict managers’ flexibility to adjust labor schedules in response to changes in demand or staffing needs.

Despite FWLs, managerial engagement in scheduling didn’t decrease. Managers adjusted their scheduling practices but spent the same amount of time on scheduling activities, shifting their focus to scheduling shifts with more than ten days’ notice.

The study highlights the trade-offs associated with FWLs, which while intended to improve worker well-being, may harm store performance by imposing scheduling adjustment costs that limit operational flexibility. Retailers will need to adapt their scheduling practices to comply with FWLs while minimizing the negative impact on store performance. 

In my opinion, policymakers, while not their main concern, should also consider the potential negative impacts of FWLs on businesses when designing and implementing such laws. 

Navigating the Crossroads of Innovation and Labor Protection

With these results as context, a new labor model is emerging: Instead of employing all customer-facing staff on-site at the mandated local wage rates, with the different labor restrictions, some retailers and restaurateurs are turning to technology - and overseas workers - for a cost-saving solution.

Services like New York City-based Happy Cashier enable businesses to have remote cashiers in the Philippines handle duties like greeting guests, answering questions, and taking orders via Zoom. The firm’s founder, Chi Zhang, estimates his video cashiers make around $2.50 hourly and receive a portion of tips. While significantly below U.S. standards, Zhang claims this is 150% more than the average cashier job in the Philippines.

The use of such services, however, has generated controversy, with critics arguing that it’s a way for companies to skirt the intent of higher minimum wage policies aimed at lifting local workers. At the same time, outsourcing models have existed for years across various industries as companies leverage globalization to reduce overheads.

From a business perspective, virtual cashiers can provide much-needed financial relief to retailers grappling with new labor laws and costs. It allows them to maintain lower overhead without raising prices, shed staff, or close physical stores. 

And you may say: “Who cares about the retailers? We must protect employees.” 

But if you’re constantly buying from Amazon and Temu, what do you think will happen to all those brick-and-mortar retailers?

Over the last few years, as inflation increased, and with it wages, retailers’ net profit margins have trended down:

In other words, thinking about these businesses’ viability is also interesting.

But the long-term societal impacts remain unclear. If the practice of remote cashiers proliferates, it could lead to fewer worker opportunities, exacerbating inequalities. There are also challenging regulatory questions around whether such arrangements violate the spirit of local labor laws, even if they may technically comply based on employment locations.

Bottom Line

The juxtaposition of advancing automation and strengthening labor laws presents a complex business scenario. 

On one hand, the limitations of current technology necessitate a continued reliance on human labor. On the other hand, the increasing cost and protection around labor compel businesses to seek innovative solutions, be it through automation, outsourcing, or a combination of the two. 

This dynamic underscores a critical consideration for policymakers and businesses: embracing technological advancements and safeguarding workers’ rights and livelihoods need to be balanced. As we venture further into this era of transformation (there isn’t a single mention of “AI” throughout the article), it becomes increasingly important to foster dialogue and collaboration among all stakeholders to ensure that the future of work benefits both businesses and the workforce.

I think Caleb’s papers provide a valuable lens through which we can view the current shifts in the labor market, offering predictions on how businesses, workers, and technology will interact in the coming years. As companies strive for efficiency and profitability, the role of policymakers in crafting laws that foster both innovation and labor protection cannot be overstated. The future of work, as these studies suggest, will depend on finding the right balance between embracing technological advancements and upholding the dignity and rights of every worker. 

In the end, it comes down to us, the consumers. If we are unwilling to pay more, we can only demand that much more from the retailers we choose. If we buy a $6 tortilla-looking blanket, what do we expect regarding the labor used to make it? It’s not enough to vote on the ballot. Sometimes we must vote with our wallets.