Firm Survival and Employee Turnover

I’ve received a lot of questions as of late regarding current economic conditions and employee risk.  Both business leaders and employees are struggling with the realities of a down market crashing against a personal need for sustainability and financial security.  Employees are inclined to hide, stay out of sight, not rock the boat and somehow survive.  Employers are peppered with quick hit strategies, the need to act swiftly, massively shifting priorities and the temptation to cut, cut, cut.  

In April of 2005, a very unlikely source authored an interesting publication addressing some of these issues.  It was entitled, “Growing Old Together: Firm Survival and Employee Turnover“.  And the authors?  Two researchers from the Federal Reserve Board‘s Divisions of Research & Statistics and Monetary Affairs. This is a very scientific paper, but the abstract does a good job summarizing their thesis:

“Labor market outcomes such as turnover and earnings are correlated with employer characteristics, even after controlling for observable differences in worker characteristics.  We argue that this systematic relationship constitutes strong evidence in favor of models where workers choose how much to invest in future productivity. Because employer characteristics are correlated with firm survival, returns to these investments vary across firm types.  We describe a dynamic general equilibrium model where workers employed in firms more likely to survive choose to devote more time to productivity-enhancing activities, and therefore have a steeper earnings-tenure profile.  Our model also predicts that quit rates should be lower in firms more likely to survive, and should tend to fall during slow times, while job destruction rates should rise.  These predictions, we argue, are borne out by the existing empirical evidence.”  

Ok, so some of this seems pretty obvious.  If your organization is going to make it, you’re going to work a bit harder to ensure that this is, in fact, the outcome.  Is that correct?

“Quite intuitively, workers employed in firms highly likely to survive choose to invest more in future productivity than their counterparts in low survival firms. These investment patterns have several implications for the features of turnover and earnings across firm types in steady state and the evolution of turnover rates following business cycle shocks that are consistent with the relevant empirical evidence.”

And what about quit rates and job destruction?

“We qualitatively evaluate the dynamic properties of our model by computing the transition path between steady states following shocks to total factor productivity (TFP) and gross firm failure rates. Two outcomes of these experiments are particularly notable. First, as in the data, we find that quit rates are procyclical, because workers use slow times to retool (see DeJong and Ingram, 2001). Second, we find that job destruction rates are countercyclical provided gross failure rates for firms rise during recessions, even if the increase is very small as suggested by the existing evidence on corporate failure rates.”

It’s an interesting study.  In effect, they offer evidence that allows you to logically (and dispassionately) understand cyclicality in employment.  To simplify one of their flows, they spoke to the fact that training usually precedes an expectation for higher wages.  During times of training, our productivity would obviously slow, and history has shown that training increases during recessions (DeJong and Ingram, 2001).  If you’re training more, producing less and quitting less often, this can lead to layoffs, something too many Americans are painfully familiar with.

So what should you do?  For employees, the obvious answer may be to do everything in your power to help ensure the survival of your organization.  This is often easier said than done and should not involve stepping over the bodies of your coworkers and peers.  The market will eventually recover and those flaming bridges will come back to haunt you.  Instead, raise your hand and encourage those around you to do the same.  A trench mentality may do nothing more than lead to the fate that you fear the most.  So stay aware of what’s happening around you and let’s keep the conversation going.