Understaffing in Retail Stores: Drivers and Consequences

In this paper we study the drivers and consequences of understaffing in retail stores by examining the longitudinal data on traffic flow, sales and store managers’ labor planning decisions of 41 stores in a large retail chain. Assuming store managers are profit-maximizing agents, we use a structural estimation technique to estimate the contribution of labor to sales and impute the cost of labor for each store in our sample. We find significant heterogeneities in the contribution of labor to sales as well as imputed cost of labor across these stores. Using the estimated parameters, we establish the presence of systematic understaffing during peak hours. In addition, we explore the effects of forecast errors and lack of scheduling flexibility on the inability of store managers to staff optimally. Finally, we run counterfactual experiments to quantify the impact of understaffing on this retailer’s profitability.