Chapter Study Outline

25.1 Turnover: Evidence and Interpretation

  • In recent years there has been a decline in the degree of job stability.
  • A substantial increase in churning, the fraction of jobs with less than a year of tenure, among workers from ages 20 to 30 has occurred over the last two decades.
  • Four main theoretical approaches explain the observed negative relationship between tenure and turnover.
    • The theory of firm-specific human capital stresses that the strength of the tie between workers and firms strengthens over time, making turnover less likely.
    • The mover-stayer approach stresses that the observed tenure-turnover correlation is spurious because it is driven by innate heterogeneity in turnover rates among workers.
    • The on-the-job search argument claims that, over time, workers progressively move to better jobs, and thus the likelihood of turnover declines
    • The job-shopping model emphasizes that workers and firms gradually acquire information about the quality of the match and only high-quality matches survive in the long term.
  • Farber (1999) posits three central facts that describe inter-firm worker mobility.
    • Long-term employment relationships are common.
    • Most new jobs end early.
    • The probability of turnover declines with tenure.
      • Turnover rates initially increase during the early stages of employment but eventually only good matches, which are associated with lower turnover rates, survive.
      • The turnover tenure profile is ∩-shaped.

25.2 Efficient Separations

  • The economic surplus generated by a worker-firm match equals the value of output produced if both parties remain together minus the value of the options the worker and firm must give up if they choose to stay together.
    • If the economic surplus of a match is greater than or equal to zero, it is efficient for the match to continue.
    • Turnover is less likely to occur with increases in the value of current specific human-capital investments, the random match-specific shock, and the moving cost.
    • Turnover is less likely to occur with decreases in the values of the expected profits from a replacement worker and the random shock to a worker’s baseline productivity.
  • According to the efficient-separation hypothesis, the subsequent economic outcomes do not depend on the identity of the party that initiates the breakup.
    • Quits and layoffs are merely helpful labels to indicate the cause of the breakup.
  • Recently, the job-lock hypothesis has attracted considerable attention.
    • Workers who separate from their current employer may forgo valuable benefits, which makes turnover less likely.
    • One common example of these benefits is health insurance.

25.3 Displaced Workers: The Evidence

  • The layoff category refers to those who are experiencing a temporary layoff because of slack working conditions and who anticipate being recalled in the near future.
    • The number of temporary layoffs is highly countercyclical.
  • The terminated category represents permanent separations that were initiated by the employer.
    • Workers are often terminated because of a plant closure or mass layoffs
    • Terminated employees have little prospect of being recalled by their employer.
  • Voluntary separations tend to improve workers’ labor-market prospects while involuntary terminations tend to worsen them.
  • There is remarkable heterogeneity in post-involuntary displacement earnings levels.
    • The typical worker suffers an initial earnings loss of about 30 percent following involuntary displacement.
    • The typical worker’s earnings losses are still about 20 percent at 10 years after the job loss
    • Kletzer (1998) found that 30 to 40 percent of workers reported that their earnings increased after being displaced.
  • Involuntary terminations also increase other worker outcomes, including mortality risk.

25.4 Displaced Workers: Theory

  • One possible explanation for the dramatic earnings losses suffered by displaced workers is based on the loss of firm-specific human capital
  • The adverse selection hypothesis attempts to explain the considerable earnings losses suffered by displaced workers.
    • It is assumed that the firm has complete discretion in deciding whom to lay off, so accordingly, it will release those workers with the lowest abilities.
    • Although other employers cannot directly see a given worker’s ability, they can observe the number of layoffs at the firm.
    • The number of layoffs carried out by the firm provides a signal to alternative employers concerning the average abilities of both those workers it lays off and those it retains.
  • In order to avoid having other firms poach its best workers, who are revealed to have relatively higher abilities post-layoff, a firm may implement a seniority rule
    • Such a rule protects workers by insuring them against costly random income fluctuations based on whether they are revealed to have low or high ability.
    • As a result, the firm might find itself in the position of releasing some of the most talented members of its workforce.
  • A growing body of evidence points to the real-world importance of the adverse selection of laid-off workers.

25.5 Easing the Burden of Worker Displacements

  • The private sector attempts to ease the burden of unemployment through the provision of severance payments to laid-off workers.
  • The Unemployment Insurance (UI) program was established as part of the 1935 Social Security Act to ease the hardships faced by those workers who suffered involuntary job losses by providing them with benefit payments that partially replace their lost incomes.
  • The level of UI benefit payments made to workers is related to their previous earnings.
  • The replacement rate is defined as the ration of UI benefits to the worker’s previous earnings.
  • UI benefits are financed through payroll taxes levied on employers.
    • These taxes are experience rated and depend on each firm’s layoff history.
    • The experience rating is imperfect so some employers pay only a fraction of their employee’s UI benefits.
    • There is a significant free-rider problem that can lead to an excess number of layoffs.
  • In recent years, a large amount of legislative activity has sought to help those workers displaced as a result of foreign trade.