Turnover in the Labor Force
Total Page:16
File Type:pdf, Size:1020Kb
ROBERT E. HALL* MassachusettsInstitute of Technology Turnover in the Labor Force EVERY MONTH, AN IMPORTANT FRACTION of the populationmoves from one economicactivity to another:Some are laid off and mustseek work, or they quit to take newjobs; young people leave school and look for work; workersleave the labor force becauseof disabilityor duties at home. The continualprocess of turnoverseems to be the characteristicof the modern Americaneconomy that distinguishesit from those of other developed countries,where the experienceof individualworkers appears to be much more stableover time. Is high turnoverinevitable in a postindustrialecon- omy?How do the variousdemographic groups in the laborforce differ with respectto turnover?What is the relationbetween turnover and unemploy- ment?What are the social benefitsand costs of turnoverand unemploy- ment?These are some of the criticalquestions that I addressin this paper. Any moderntreatment of turnoverand unemploymentmust distinguish betweenthe role of eventsoutside the controlof the individualand the role of his responseto his economicenvironment. Fluctuations in the demand for labor are the most importantexternal source of disturbancesin an in- dividual'scareer, so it is conventionalto distinguishbetween the demand side of the problemand the supplyside. Turnover among jobs wasthe tradi- tional explanationof the frictionalunemployment that exists to some ex- tent in everyeconomy, but until recently,it receivedlittle discussion.Even ten yearsago, economistsconsidered unemployment a simpleshortage of * I am gratefulto Zvi Body, RichardKasten, Meir Kohn, and Steven Shavellfor able assistance.This researchwas supportedby the National Science Foundation. 709 710 Brookings Papers on Economic Activity, 3:1972 jobs, withoutasking how the distributionof the laborforce among the jobs changesfrom month to month. The federalgovernment's accidental experimentation with a high-pres- sure economy startingin 1965 broughtabout two importantshifts in the thinkingof economistsabout unemployment. First, it forceda muchcloser considerationof the role of turnoverin the processthat generatesunem- ployment.Economists can no longer speak of the employedand the un- employedas if they were distinctgroups over time, althoughthis mistake still appearsin popular accounts of unemployment.Second, tight labor marketsprompted an examinationof the role of supply-of the voluntary activitiesof workers-in creatingturnover and its consequentunemploy- ment.Workers can decideto quit, and do so in largernumbers when labor marketsare tight. Further,once looking for work, whetherbecause they chose to or were laid off, workersmake consciousdecisions about what kindsof job to accept.The notion that some componentof unemployment is voluntary,in the sensethat throughdifferent choices workers could lower the unemploymentrate, has been advancedoccasionally. Obviously, there is heavy political content in the debate about the voluntarycharacter of unemployment.Liberals fighting for low unemploymentat the cost of high inflationare reluctantto acceptthe suggestionthat part of the unemploy- ment they hope to reduceresults from the choice of the unemployed. The distinctionbetween the two recent developmentsin the theory of turnoverand unemploymentis critical.A studentof turnoverneed not take a positionon the importanceof voluntaryactivity in bringingit about, and measurementsof turnoverdo not themselvesshed muchlight on the ques- tion of the voluntarycharacter of unemployment.The findingthat blacks, women,or teenagersbecome unemployed more frequently than adultwhite malestells nothingabout the responsibilityof unemployedworkers in these groupsfor theirown plights.The firstpart of this paperis devotedto more refinedmeasurement of turnoverusing data that do not permitseparation of the influencesof externalevents (mainly layoffs) from those of the con- scious decisionsof individuals. I shall say somethingabout the relativeimportance of conditionson the supplyside and the demandside, however.Most of my evidenceis indirect, but it leavesthe impressionthat fluctuationsin the demandfor labor are a criticalaspect of the processof turnover. The focus of the paperis almostexclusively on turnoveramong members of the labor force, that is, on the processby which workersleave or lose Robert E. Hall 711 jobs and find newjobs. Inadequatedata make it difficultto deal with the equallyimportant problem of movementsin and out of the labor force. The Theoryof Turnover A generaltheory of turnoverunderlies the whole paper.On the demand side I considerthe economyas composedof a largenumber of employers, most of whom accountfor only a tiny part of the whole.' Employerssell relativelyspecialized products and so face randomfluctuations in demand. Most of the fluctuationsare unrelatedto changesin the overallrate of eco- nomic activityand thus tend to canceleach other statisticallywhen aggre- gate outputor employmentis calculated.Employers meet theirfluctuating needsfor laborthrough a personnelpolicy that balancesthe costs of hiring and firingagainst the costs of holding excess workersduring a period of slack or of paying overtimeand using temporarysources of labor during periodsof peak demand.An importantquestion is how muchtraining and knowledgewill be lost if a workerleaves one firmand takes a job with an- other.2Workers with a good deal of suchtraining-for example,those with positionsin a bureaucracywho communicatewith many other workers- will be held as overheadlabor duringa slumpwhen those whose skillscan be replacedwith little cost will be laid off. Further,the layoff policy of a firm dependson conditionsin the labor marketin which it hires.The ap- parentsensitivity of this dependenceis one of the surprisingfindings of this paper.In slackmarkets, firms have a good chanceof recallingworkers who are laid off, and, in any case, find it easy to recruitqualified replacements.3 Thus, everythingelse held constant,firms should lay off workersmore fre- quentlyin slack markets. Workersalso face eventsthat are random,at least fromthe point of view of the observer.They may learnabout better jobs or decideto changetheir 1. By "employer"I mean the productiveunit, not necessarilythe firm. Large firms producinga variety of productsin a numberof plants should be consideredas a group of separateunits for the purposesof the theory. 2. This is what Gary Becker calls "firm-specific"human capital. See his Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education (Columbia University Press for the National Bureau of Economic Research, 1964), pp. 18-29. 3. This seems to hold even apart from the fact that slack marketsmay have unem- ployed workersavailable at wages below the marketwage. 712 Brookings Papers on Economic Activity, 3:1972 types of work.Again, theirdecisions to quit will dependon the amountof the loss involvedand the cost of findingnew work. Everythingelse held constant,slack marketsshould discouragequits. Unemploymentis one of the key variablesin a theory of turnoverbe- cause it servesas the main indicatorof distressin labor markets.Basic to understandingthe relationbetween turnover and unemploymentis the fact that only a fractionof those looking for work ever become unemployed. To be recordedas unemployed,a personmust be out of work and looking for work.A workerwho quitshis presentjob to take a new one neverenters unemployment.The samerate of turnoveramong jobs, as measuredby the sum of quits and layoffs,will correspondto a higherunemployment rate if there is a higherproportion of layoffs.As George Perryhas pointed out, the probabilitythat an individuallooking for work will become unem- ployed is a more sensitiveindicator of conditionsin the labormarket than is the probabilitythat a person,once unemployed,will findwork in a given time period.4 Preview This paperdiscusses the resultsof two empiricalstudies of turnover.The firstcovers the entirepopulation of workingage and uses data on the num- ber of spells and the numberof weeks of unemploymentreported by in- dividualsto estimatethe probabilitythat an individualwith particular characteristicswill becomeunemployed in a given weekif not unemployed, or that he will leave unemploymentif alreadyunemployed. From these probabilitiesit is possibleto derivethe fractionof the year that each in- dividualshould expect to be unemployed.The resultsof this studycan be used to break down unemploymentrates of demographicand economic groupsinto componentsof frequency,measured directly as the probability of becomingunemployed, and duration,measured as the inverse of the probabilityof leavingunemployment. The secondstudy covers only men aged 45 and above and is concerned withjob changes.It distinguishesvoluntary changes, generally quits, from involuntarychanges, mainly layoffs. The data are drawnfrom employment histories,so it is possibleto examinethe importantrelation between length of tenureand the probabilityof leavingthe job. 4. "UnemploymentFlows in the U.S. Labor Market," BrookingsPapers on Eco- nomicActivity (2:1972), pp. 245-78. Robert E. Hall 713 The thirdpart of the paperbrings the resultsof the firststudy to bearon the issue of the geographicaldistribution of turnover.Data on turnover fromthe officialdata for manufacturingindustries are also discussed. Four mainthemes appear in the discussionof these studies.First, layoffs are a majorsource of turnover,especially of job changesthat requirea spell of unemployment.Further, layoffs are extremelysensitive to conditionsin the labormarket. This