The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. The Role of Job Turnover in the Low-Wage Labor Market . Three Roles for Policy Makers

02/17/2000

High and pervasive turnover is a characteristic of the U.S. labor market.  The discussions above have indicated that while turnover may be an efficient way of reallocating workers from one part of the economy to another, or from one job to another, less-educated workers are disproportionately affected, and they may not be well placed to bear the costs.  Certain types of firms, particularly new and small firms, also have disproportionately high turnover, possibly because of inefficient management, and this may affect their survival probabilities.  This suggests three roles for policy: one aimed at changing worker characteristics, another at changing job characteristics, and the third at job placement strategies.

The Role of Education

A major role for policy makers is to improve training, both prior to and during employment.  The results of every study point directly to the importance of education — high school dropouts are much more likely to be churned through the labor market than college graduates.  Since it is clearly not feasible to turn all dropouts into college graduates, it may be more useful to look directly at what employers want.  This would reduce turnover by making the employees more valuable and more costly to fire.  A study using matched surveys of employers and employees suggests that workers want employees to be able to read, do arithmetic, deal with customers, possess motivation, and be polite.(33)

Classroom-based training programs have had mixed success, but there is some evidence in both the U.S. and Germany that job-based training programs help reduce turnover and teach basic skills.(34)  Although it is difficult to identify the direction of causality between turnover and training, low-turnover firms have a much higher incidence of training, particularly formal training, than do high-turnover firms.(35)  The average annual expenditure on training could be as high as $1,433 per worker; clearly expenditures at this level would provide a strong disincentive to shed workers in economic downturns.

The Role of the Firm and Job Characteristics

There is also a role for policy makers in changing job characteristics.  Some suggest that U.S. policy has a "clear pro-layoff bias" and recommend policy to encourage companies to reduce hours, rely on attrition, and look at other alternatives to layoff.(36)  In particular, they recommend expanding the use of short-time compensation programs, encourage work sharing, provide incentives for workplace training, and adjust the unemployment insurance tax schemes in different states.

The use of short-time compensation and work-time sharing schemes are possibly the most interesting of these ideas.  The essential concept is relatively clear.  If a firm needs to lay off the equivalent of 100 full-time workers, it could either shed 100 workers, forcing them to bear the full cost of layoff, or it could reduce the work time of 200 workers by half.  The advantage of the latter situation is both that the cost of job loss is not concentrated on just a few workers, and that workers have the time to look for another job if the downturn in demand is temporary.

How can policy makers encourage such programs?  Abraham and Houseman suggest that there are three major impediments to encouraging such work sharing plans in the U.S.  The first is the structure of the unemployment insurance system, which effectively subsidizes some of the cost of job loss.  The second is the fact that employers are likely to continue to pay fringe benefits to workers on short-time compensation schemes, which is extremely costly.  The third is that there is a great deal of red tape associated with instituting a short-term compensation scheme, which effectively discourages employer participation.

The role of placement services

Policy makers can also use placement services to help reduce turnover — by using administrative data to identify low-turnover employers.  Despite the fact that some note that state employment offices are viewed with some suspicion by employers, who regard referees as "lemons" and prefer to rely on word of mouth,(37) placement services can provide a valuable information function in either helping workers retain jobs or choose jobs that have a higher probability of retention.  Clearly, high-turnover employers are the ones most likely to be hiring workers, everything else equal, and these are exactly the kind of employers who are likely to churn workers back out into nonemployment.  If placement services can identify these firms, there are several options.  Program counselors can warn workers about the firm's track record (if permitted by law); they can investigate the source of such high-turnover strategies; they can counsel workers about how to use these jobs as steps to better jobs; or they can avoid placing workers in these types of firms.  Identification is feasible at the state level, by means of administrative unemployment insurance record data.  Indeed, this was the focus of a Joint Center for Poverty Research conference, "Evaluating State Policy: The Effective Use of Administrative Data," which was held at Northwestern University in June 16-17, 1997.

This approach can be effective.  Welfare recipients who are placed in low-turnover firms are much less likely to leave those firms and return to welfare.(38)  They also develop in some detail ways to identify firms that offer welfare recipients jobs with "successful" outcomes — jobs where workers stay for at least four quarters and do not return to welfare.  Placement of welfare recipients in some industries (notably, health services and professional services) increases the probability of the worker still being employed in the subsequent year, in contrast to those placed in retail trade.(39)  The characteristics of the job, particularly the wage and industry, matter.