The Costco Effect: Why Good Jobs Are Smart Economics

When Costco opened a warehouse in rural Meiwa, Japan in 2023, a nearby noodle shop called Yamada-udon faced a crisis. Costco was offering starting wages of 1,500 yen per hour- 60% above the local minimum wage. For a business selling $2.48 bowls of noodles, even a 10-yen wage increase was “extremely challenging.”

So Yamada-udon did something almost unthinkable: they raised wages by a third to compete. And then something unexpected happened. Their revenues jumped 40-50%. This is the Costco effect – and it’s the opposite of what happens when a Walmart moves in.

Two Models, Two Outcomes

Research has documented what’s called the Walmart effect: when big box retailers open, they force out smaller local competitors through their pricing power, and when they become the only employer in town, they push local wages down.

Costco operates differently. The warehouse club pays its workers an average of $26 an hour in the U.S., far more than the average $17 paid by other retailers. Their turnover rate is about 8%, compared to a whopping 60% at other retailers.

In March 2025, they raised their minimum wage to $20 per hour with an average wage exceeding $31.

But here’s what makes this economically fascinating: when Costco opened in Meiwa, local businesses had to raise wages to compete, forcing businesses like Yamada-udon to increase hourly pay. Within three months of Costco’s opening, local businesses reported paying staff 40% more than before.

Those higher wages didn’t crush local businesses. They strengthened them. Costco became a destination that attracted shoppers from across the region. Once people drove an hour to get there, many grabbed lunch at local restaurants or stopped at nearby shops. The influx of customers with higher purchasing power meant local businesses could charge more and still thrive.

The Research Backs This Up

MIT Sloan Professor Zeynep Ton has spent 15 years studying what she calls the “good jobs strategy.” Companies that implement her framework – combining strategic investment in employees with operational decisions that increase productivity – have seen drops in employee turnover between 25% and 52%, along with significant increases in productivity and sales.

When Sam’s Club CEO John Furner raised wages despite pushback from HR and finance, productivity increased 16%, turnover dropped 25%, and sales rose 25% in just two years. The struggling chain became a growth engine for Walmart.

Costco’s turnover rate of 8% saves them more on training and hiring expenses than they lose through higher wages.

The cost of constantly replacing workers – the mistakes, operational problems, and lost institutional knowledge – vastly exceeds the cost of paying people well.

Why This Matters for Canadian Businesses

Business owners often hear they need to minimize labor costs to stay competitive. But that creates what Ton calls a “vicious cycle”: low pay leads to high turnover, which creates operational problems, which reduces profitability, which means you can’t invest in people, which perpetuates the cycle.

The alternative is a virtuous cycle: invest heavily in people, get low turnover and strong operational execution, achieve higher profitability and sales, then reinvest in your people.

Canada needs this model. When wages stagnate and workers struggle to make ends meet, they can’t spend locally. Money doesn’t recirculate through communities. Local businesses suffer from lack of foot traffic and purchasing power.

When workers earn fair wages, they spend more locally. They support neighboring businesses. They stay in their jobs longer, becoming more skilled and productive. The entire local economy strengthens.

What Does This Mean for Your Business?

The good jobs strategy is a complete operating system. It means:

• Investing in people: Competitive wages, strong benefits, and genuine career pathways
• Focusing operations: Offering less variety but doing it exceptionally well
• Cross-training staff: Making employees more productive and valuable
• Operating with slack: Giving workers time to actually serve customers well
• Empowering frontline workers: The most important work happens where customers meet your company

Not every business can become Costco. But every business can ask: are we treating labor as a cost to minimize, or as an asset to maximize? Companies that view their workforce as drivers of growth and profitability – not expenses to be cut – end up with happier workers, more loyal customers, and better financial results.

And that’s smart economics.

Want to see where your business stands on retention and productivity? Take our Good Jobs Scorecard – a 3-minute assessment that shows you where you are and identifies opportunities to build a more resilient, productive workplace.