The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. The Role of Job Turnover in the Low-Wage Labor Market . Why Does Turnover Occur?


Turnover is a result of both worker and firm decisions.  Thus, the answer depends on separating out not only turnover driven by job reallocation and by "churning" (worker turnover over and above job reallocation) but also, within the churning component, understanding the contribution made by the worker and by the firm.

Job Reallocation and Turnover

The job reallocation part of turnover is a result of job creation and destruction across firms and industries.  This is clearly part of the market reallocation process — indeed, job creation and destruction rates have been used by the Organization for Economic Cooperation and Development (OECD) as an index of the flexibility of the labor market.

While job reallocation may be necessary in an efficient economy, this does not mean that there are no underlying costs.  In particular, older, long-tenured individuals who are displaced suffer quite large and permanent earnings losses.  One study estimates that earnings on new jobs are 25 percent lower even five years after job loss, and that the present discounted value of these losses can be as high as $80,000.(7)  Furthermore, workers who have been displaced often suffer multiple job losses in the years after being displaced, with all the concomitant negative effects.(8)  The dual labor market literature suggests that shocks to product demand are borne by a buffer, secondary labor market, comprised primarily of less-educated, less-tenured minority workers, who are easier to shed and rehire than workers in the primary labor market.  The employment ratio for nonwhite men is almost three times as responsive to the prime-age male unemployment rate as for white men, and teenagers and young women bear 50 percent of the cyclical variation in employment.(9)

Turnover as a Firm Strategy

Why do firms churn workers — why do some firms explicitly have high turnover policies? Firms make different management decisions in setting an employment contract because there are different costs associated with hiring and firing workers.  The hiring costs include advertising, screening, and training; the firing costs include work disruption, loss of the worker's firm-specific knowledge, and severance benefits.  These costs clearly vary greatly depending on the type of worker and the nature of the production process.  Consequently, we would expect to see quite different levels of turnover across firms, industries, and types of workers.

Adjustment costs are high if production processes are complex.  Thus, turnover in retail trade is higher than in manufacturing — and turnover should increase economy wide as the economy moves from manufacturing and toward services.  Similarly, if the task is complex and difficult to monitor, it may make economic sense to pay a higher efficiency wage to get the worker to work harder — which has the additional effect of reducing turnover.  Firms may also offer implicit contracts to those workers who are averse to wage variability in order to guard against economic downturns.  Wages may be set high and turnover lower for "insider" workers who possess valuable amounts of firm-specific human capital.  These factors all have consequences for workers — turnover should be higher for those workers performing simple, easily monitored tasks, junior workers who have little firm-specific human capital, and younger workers who are less averse to wage variation.

Different firms have different production processes and different turnover rates.  Even within the retail trade industry, a coffee franchise like Starbucks has explicitly chosen a relatively high-wage, high-benefit, low- turnover strategy to sell its coffee, while other shops will produce a different type of product with a different personnel strategy.(10)

Turnover as a Worker Choice

Why might workers have different turnover rates? Different types of workers may also have different levels of attachment to the job, and hence have different quit rates.  Young workers are more likely to search for new jobs than old; unmarried workers are less attached than married; on average, women are less attached than men.  Clearly, if job search is the motive, we would expect quits to be cyclical — higher in a boom period, where there are more jobs available, and lower in a recession.

Turnover as a Joint Worker-Firm Decision

Turnover can also be seen as a joint decision.  The discussion above has essentially dichotomized the worker and firm decisions.  If one thinks of the job match process as being a little like a marriage, undertaken by two consenting parties, then the separation process can be seen as a divorce initiated by one side as a result of the dissatisfaction with the returns from the match.  If this is the view of the world, then many simple matches will dissolve quickly — turnover will be high — because it will be evident to both sides that it is not working.  It is also possible that workers in low-wage jobs are less likely to be equal partners in the marriage, and are therefore subject to more decisions decided by the more powerful partner, the employer.(11)  For very complex matches, such as baseball managers, lawyers, or accountants, it may take a long time for this to become evident.(12)  Again, the end result is that workers who are less educated, or who engage in tasks that are less complex are more likely to have high turnover and have short-tenure jobs.