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It's been a subtle change, one that has almost gone unnoticed in the business press. Never has there been a time when retail sales rose and retail employment fell, and yet that is just what has happened over the past year. This fundamental shift in the retail business model means that retailing has gone from a labor-driven to a technologically driven industry. This shift in resource drivers implies that the future labor market crunch which many retailers had feared may not become a problem at all.

Retail Productivity and Employment Growth
% Change, Year-to-Year

Source: U.S. Department of Labor, U.S. Bureau of Economic Analysis

In the 1970s and 1980s, the retail industry was a great source of employment growth for the economy. Even during periods of severe recession, retailers did little to pare back their work force. In boom times, retail employment often grew at twice the rate of economy-wide job growth. As a result of all this employment growth, retailing was able to generate very little in the way of productivity growth. For a 25-year period from the early 1970s to the mid-1990s, the overall level of retail productivity was essentially unchanged. This heavy dependence on employment growth as a necessary component of growth meant that when the labor market tightened, retail costs would soar at the expense of retail profitability.

During the recession of 1990-91, retail employment fell sharply for the first time in the post-World War II period. The decline in employment, however, did not reflect a change in the business model of retailers, nor was the decline an across-the-board experience. One of the chief characteristics of the 1990-91 recession was the widespread experience of bankruptcy, including those of such venerable retail names as Allied Stores, Ames Department Stores, Merry-Go-Round and Carter Hawley Hale. In many cases, these companies were unable to emerge from bankruptcy, resulting in a loss of retail employment.

The recession of 2000-01 did mark a change in how retailers operated and was particularly hard on retail employment, even as it was not particularly hard on retail sales. Total retail employment peaked in December 2000 and declined for the next 31 months — the longest post-Depression decline in retail employment.

In all, retailers shed nearly half a million workers even as retail sales growth averaged a modest 2.8 percent over the same period. Even with a recovery in retail employment and sales growth, the total level of retail employment is still below the December 2000 level. Even more surprising is the retail employment drop of more than 100,000 over the past year while hourly retail wages are up a very modest 1.8 percent. That decline in employment came as overall retail sales rose 5.9 percent. The combination of declining employment and modest gains in sales has produced the strongest productivity growth in the history of the retail industry.

Implications for Retailers
The focus on productivity has changed the business model for retailing. The introduction of technology at all levels of the business has allowed retailers to grow their business without having to grow employment. This new business model for retail is not without its risks.

Back in the days when growing the number of employees was key to growing the business, just about any worker would do. In a business that is technology driven, that will no longer be the case. Having the right mix of associates will now be more important than the total number of workers.

Customer experience is increasingly an important factor in driving store choice. Technology can only go so far in facilitating a good customer experience. At some point in the customer's interaction with the store, there needs to be a human contact. The reduction in retail head count has the potential of reducing the opportunities that retailers have of making this human interaction a positive experience.

And finally, over 100 years ago, Henry Ford paid his workers an astonishing wage of $5 dollars a day, which was well above the prevailing wage of the day. He did it because he wanted workers who could buy his product. Retailers, through their own drive for efficiency, run the risk of reducing the purchasing power of the very consumers they depend upon for future sales growth.