Is Elevated Pay a Core Driver of Costco’s Success?

Costco recently announced plans to give its associates another raise, with the highest tier of hourly U.S. associates set to earn just over $30 an hour.

In a memo to staff attained by Reuters, Costco said top-of-the-scale “assistants” —  typically cashiers, stockers, food court staff, and warehouse workers, but also some management roles — will see their hourly pay increase $1 to $30.20. As part of the new three-year employee agreement, additional one-dollar increases will also arrive in each of the next two years.

As for associates at the bottom of the pay scale, they will receive 50-cent hourly increases, bumping their hourly starting pay to $20 an hour.

The warehouse club is also adding vacation time for new employees during their first year and giving workers with 30 years of employment an additional week of time off, providing six weeks in all.

In the memo, Costco’s CEO Ron Vachris stated, “We believe our hourly wages and benefits will continue to far outpace others in the retail industry.”

News of the pay increase came amid contract talks with union members with the powerful International Brotherhood of Teamsters representing about 18,000 Costco employees, or roughly 8% of the retailer’s U.S. workers. On Feb. 1, Costco and the union reached a tentative agreement on a new contract.

Last year, Costco had similarly increased wages by $1 at the top of the pay scale and 50 cents for others, the company said in its end-of-the-year report. The chain’s pay is among the highest in retail, which has helped Costco maintain a lower turnover rate than most rivals.

Costco’s turnover rate is about 8%, a sharp contrast to a whopping 60% at other retailers, according to research from The Economist.

Costco’s pay hikes come as competitors have also raised their pay in recent years amid a tighter labor market during the pandemic as well as due to inflationary pressures.

In March 2023, Walmart raised its starting wage to a range of $14 to $19 an hour, up from $12 to $18 previously, bringing its average hourly wage to more than $17.50. In September 2024, ALDI set a new starting wage for store employees at $18 an hour, with starting hourly wages for warehouse workers at $23, based on market and position.

Target in July 2020 raised its minimum wage for hourly workers by $2 to $15 and in February 2022 set a broad starting range between $15 and $24, depending on the location.

In September 2024, Amazon said that with increases every year, the average pay for customer fulfillment and operations roles was currently over $22 per hour.

Increased wages can drive up overhead costs, which may result in higher prices being passed along to consumers. Higher wages have also been blamed for creating a “wage-inflation spiral,” where higher wages cause prices to rise, which then leads to pushes for raises again.

Some studies show the favorable tradeoff of increased wages elevating customer service levels. According to a Wall Street Journal article, the “efficiency-wage” economic theory argues that wages increased to above market level can effectively pay for themselves through increased worker motivation and retention.

News of pay raises at retail and elsewhere have become less common over the last two years amid a looser labor market and declining rates of inflation.