Summary | Worker Turnover at the Firm level

Worker Turnover at the Firm level and crowding out of Lower Educated Workers

The article investigates the perception that employers usually exploit the cyclical downturns to improve their skill level of the workforce. The article uses a unique dataset which has information on jobs, workers, and the characteristics of the firm. It is known that most of the labor markets of Europe have high cyclical unemployment rates more specific for the lower educated workers. It is termed as crowding out. The explanation of the lower education workers’ higher unemployment rate during the cyclical periods can have two explanations; firms invest more for higher educated workers in the job-specific capital. It shows that the highly educated labor would hoard during the cyclical periods while the lower educated are laid off.

The research uses a combined firm-worker dataset for investigating whether the quality of workforce inclines during the cyclical periods of high unemployment at the firm level. The article also investigates whether the difference in the years of schooling for a given job between the inflow and outflow of labor is larger during the recession period. It will help in analyzing if the crowding out is the result of the inflow of comparatively higher educated workers or due to the inflow of comparatively less educated workers.

The data belongs to the AVO dataset of the Ministry of Employment and Social Affairs of Netherlands covering years from 1992-1996. Gross wages, hours worked, education, ages, overtime payments, profit shares, tenure, occupation, contract type, gender, and job complexity are considered from the dataset. Seven levels of education and six levels of job complexity levels are considered.

The article provides a theoretical background for its crowding out investigation showing that Okun in 1981 put forward the model showing that in difficult times, companies increase their hiring standards to adjust costs. It consequently increases the time of finding the right job for the higher educated laborer who accepts a simple job in these difficult times to find a better job afterward. It may lead to crowding out. However, past studies have suggested the opposite as well, showing skilled labor prefers to search for a job than settle for a low skill job.

The testing shows that.

1. In low employment period, the mean education level of the worker inflow had not increased the mean education of the workers however at the time of outflow declined significantly. It shows that upgrading would have taken place at recession times because of the outflow of low education workers.
2. Tests showed that workers with comparatively higher schooling are selected into higher wage firms and that the over schooling does not have a relation with the recession periods; however, it is mainly driven by the selective effects. It shows that for high schooling, labor, their schooling compensates for the lack of other skills.

The conclusion of the study showed that only one of the job complexity levels, the firm upgraded their workers at the time of recession. However, for all the remaining five job complexity levels no significant evidence was found. No evidence was found against the hypothesis that means the education of inflow increases during higher unemployment years, however the rate of leaving firms was higher for lower schooling workers as compared to higher schooling workers.

The main conclusion of the study is that there is very thin evidence for crowding out. Even if it’s considered, it is more outflows driven than inflow driven. If it had been the cause of the high unemployment rates of the lower educated workers, then policymakers needed to create more skilled jobs so that highly educated workers leave these jobs for low educated workers. However, the study shows that it was more because of the lower productivity of the low-level workers that is the cause of the high unemployment rate. Thus, the policymakers should focus on strategizing on the lower segment of the labor market (Gautier, Berg and Ours).

Work Cited

Gautier, Pieter A., et al. “Worker turnover at the firm level and crowding out of lower educated workers.” European Economic Review 46 (2002): 523-538.