R E S E A R C H N O T E S

WILLIAM N. COOKE”

Turnover and Earnings: Some Empirical Evidence

JOB SEARCH THEORISTS generally maintain that voluntary turnover is the result of rational choice on the part of workers who assume that, given good rates of return, investment in job information will have a positive impact on their future earnings.’ According to these theorists, search-unemployment (S-U) is a period of a full-time investment in job information, during which job seekers weigh the costs (primarily foregone earnings) against the benefits of further search. Several existing “optimal search policy” models appear to confirm the hypothesis that voluntary S-U results in increased earnings? However, data also provide some support for the argument that seeking employment while unemployed actually weakens one’s bargaining position? The present study tests the hypotheses that voluntary turnover leads to improved earnings, but involuntary turnover leads to reduced earnings.“ While not a direct test of job search theories, the findings do provide some interesting implications about search theory and turnover in general.

The sample population, a small cross-section of a large group of defense industry workers who were laid off in 1963-1964, is an unusual one, and not without certain difficulties. Nevertheless, some conclusions can be made from an empirical analysis of these workers’ turnover experience. In the following discussion, the effects of turnover on wages are evaluated twice, First, a worker’s earnings just prior to the first layoff experience are compared with the pay level of his next job immediately following the layoff. Then, the effect of the worker’s most recent turnover on his present earnings is measured. In this latter case, those who do not change jobs are also included in an attempt to compare the outcomes associated with changing employers with those of not changing employers. The results of the analyses are

*Assistant Professor of Labor and Industrial Relations, College of Business Administration, University of Maine at Orono.

‘See, for example, Gary Becker and Barry Chiswick, “The Economics of Education,” American Eco- nomic Review, LVI (May, 1966), 358369.

S e e J. J. McCaIl, “Economics of Information and Job Search,” Quarterly Journal of Economics, LXXXIV (February, 1970), 113-120, and John Barron, “Search in the Labor Market and Duration of Unemployment: Some Empirical Evidence,” American Economic Review, LXV (December, 1975),

3J. Peter Mattila, “Job Quitting and Frictional Unemployment,” American Economic Review, LXIV

OThe author wishes to thank the following people for helpful comments on an earlier draft-_of this

934-942.

(March, 1974), 235-239.

paper: Hugh Folk, Frederick Gautschi, and Girish Punj.

INDUSTRIAL RELATIONS, Vol. 18, No. 2 (Spring 1979). 1979 by the Regents of the University of California. 0019/86~6/79/OSZS/220/$1 .OO

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ResearchNote / 221

surprising. Both involuntary and voluntary turnover without S-U are associated most frequently with equivalent or improved earnings immediately upon changing employers but reduced earnings in the present. The only hypothesis supported in both tests is that involuntary turnover with S-U leads to reduced earnings.

Sample The sample consists of a cross-section (n = 1,670) drawn from a pool

of roughly 19,000 employees laid off during 1963-1964 from three defense firms: the Boeing Company of Seattle, the former Republic Aviation Corporation of Long Island, and the Martin Company of Denver? In 1976, under the auspices of the Social Security Administration, questionnaires designed to elicit information about the subsequent employment, re-employment, and pension forfeiture experiences of these one-time government contract workers were mailed to a select 8,000 workers; 1,670 persons responded. Unfortunately, no follow-up survey was allowed. Employment profiles cover the period 1963-1964 to 1976.

The sample is biased in a number of ways. First, the respondents do not repre- sent a random sample of laid-off contract workers, nor necessarily workers in general (even though we might expect the long-run adjustment period of 12 to 13 years to vitiate the impact of a previous mass layoff experience). Another bias is the skewed age distribution of the sample. No respondent is under 30 years old, nor left the labor force before 1976. Thirdly, the recording of nonemployment periods was ignored if such periods were less than two weeks duration. Consequent- ly, the incidence of S-U may be too small, biasing the regression coefficients of search-unemployment upward. Given these shortcomings, inferences from the empirical analysis are expressed with caution.

Empirical Analysis We hypothesize that voluntary turnover leads to higher earnings as

a result of rational investment decisions. Involuntary turnover, on the other hand, is presumed to lead to earnings losses because (a) the decision to change jobs is not that of the employee, (b) some discharges act as negative signals to prospective employers, and (c) permanent layoffs are a function of unfavorable market condi- tions, which limit re-employment opportunities.

Separate tests were conducted to measure the effects of turnover on wages received in jobs taken immediately after layoff (“immediate changes”) and the effects of previous turnover on earnings in jobs held in 1976 (“present earnings”).

5The employment experiences of 11,000 of the total workers laid off from these three firms were investigated in three separate studies undertaken by L. Fishman, et al., during 1964-1965. Fishman used Social Security numbers to identify the respondents. In 1976, as part of a study of pension forfeiture among government contract workers conducted by the Department of Labor, the Social Security Admin- istration agreed to match the Social Security numbers of the Fishman sample with persons recently employed and mail questionnaires to their employers. Approximately 10,000 Social Security numbers were matched, and 8,000 surveys were delivered. For data on the 1964-1965 investigations, see L. Fishman, e t al., Reemployment Experiences of Defense Workers: A Statistical Analysis of the Boeing, Martin, and Republic Layoffs (Washington, D.C.: ACDA, 1968). The Department of Labor survey was carried out by Hugh Folk and the author while both were on the staff at the Center for Advanced Com- putation, University of Illinois. See Mobility and Pension Rights of Federal Contract Workers, Report of the Secretary of Labor to Congress, December 1977 (Washington, D.C.: 1977).

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Quit

Immediate changes. To test whether or not the experience of turnover is asso- ciated more frequently with increases, maintenance, or decreases in average earnings, observations of earnings before and after turnover are compared. Dif- ference of proportions tests are made to test statistical significance. Table 1 shows the direction of immediate changes in monthly earnings rates associated with the workers’ most recent change of employers! As hypothesized, most of those who quit without S-U had increased earnings (57 per cent); only 39 per cent who voluntarily searched for alternative employment while unemployed increased their earnings. Thus, the hypothesis that voluntary S-U leads to higher earnings is not supported. For those laid off, a majority (52.5 per cent) of those avoiding S-U maintained or increased earnings. Consequently, the hypothesis that layoffs lead to reduced earnings is not supported. Finally, as expected, a majority of those laid off and experiencing S-U had reduced earnings (57 per cent).

Layoff

Increased 56.6% 38.6%

Decreased 29.0% 50.6% Na 54 1 83

No change 14.4% 10.8%

Wage level No S-U S-U 1 NOS-U S-U

39.2% 33.8% 13.3% 9.0% 47.5% 57.2% 181 145

Previous turnover and present earnings. Examining the association of previous turnover experiences and present earnings allows for a longer-run test of the hypotheses. Here we seek the independent effect of turnover upon earnings and include in the analysis those who do not change jobs? To estimate this association, ordinary least squares (OLS) regression analysis is employed. The equation is semi-logarithmic, with the dependent variable being the natural log of 1976 month- ly earnings. The independent variables are listed in Table 2. Education, age: occupation, and previous area of residence are treated as control variables. For brevity, we avoid developing the hypotheses of these variables in our model specifi-

sThe earnings changes reported in Table 1 are significantly different from random proportions. Assuming a random distribution would yield equal proportions of increases and decreases in earnings, the standardized normal distribution was used to test the difference between the reported distribution and the assumed distribution. By equally dividing the No Change proportion between Increased and Decreased (in each category), the revised proportions are found to be significantly different from the expected proportions at the .02 level for each category of voluntary and involuntary turnover. Thus we feel confident that the reported proportions are not random.

’A problem of simultaniety possibly exists, since it is also possible that turnover is a function of earn- ings.

8The use of age over years of experience improves the coefficients of determination, and the F-ratio of the equation. Years of experience was taken directly from a question asking the number of “years of year-round work experience.” It is not clear why the age term is a better explanatory variable, but such a question is not the inquiry of this paper.

Research Note / 223

TABLE 2

OLS REGRESSION RESULTS DEPENDENT VARIABLE = NATURAL LOG OF 1976 MONTHLY EARNINGS

Variablea Coefficient t-value

Education Some college or trade school .0783 2.319 Bachelor degree .1987 4.880 Graduate work .2280 5.328 Ph.D. .5161 4.239

In years .0393 3.372 In years squared - .0005 3.917

Female -.2870 5.373

Seattle (Boeing) -.0370 1.257 Denver (Martin) -.0187 0.672

Managers, administrators .3764 11.193 Scientists, engineers .3856 6.340 Technicians .2346 9.253

Clerical, sales ,0518 1.214

Age

Sex

Previous residence

Occupation

Craft and kindred, forepersons .1516 4.456

Quit -.0306 1.100 Turnover

Quit with S-U -.1646 2.427 Laid off -.0796 2.688 Laid off with S-U -.2092 6.026

[those with high school education or less, males, operatives and laborers, Long Island workers (Republic), and those who do not change jobs]

Constant 6.1511

Degrees of freedom = 1087 R2 = .333 SEE = .355

a Other than age, all variables are entered as dummies-true = 1, false = 0. Except for previous area of residence and turnover, all variables are 1976 observations.

cation. The turnover variables are proxies for the hypotheses developed above and are observations of the individual’s most recent experience in changing employers? A period of search-unemployment was recorded only if the respondent indicated that he or she was unemployed and actively sought work between employers.

Results Table 2 indicates the results of applying the model to the data set.

Only area of residence, the clerical, sales occupational category, and the quit category failed to be significantly different from zero at the .01 level. The coeffi- cients of the other control variables proved to be consistent with conventional

the average, job changes occurred 4.75 years prior to 1976 (with a standard deviation of 3 years). Approximately 22 per cent of the respondents experienced more than one job change over the given period. Entering the number of job changes as an independent variable resulted in an insignificant coefficient. Similarly, entering the number of job changes as dummy variables (e.g., one, two, three, or more) resulted in insignificant coefficients.

224 / WILLIAM N. COOKE

expectations. First, the higher the level of education the higher are the monthly earnings. Also, both categories of age show a flattening-out relationship with earn- ings. When the partial derivative of the age terms is set at zero, it becomes apparent that increases in earnings begin to diminish after 39 years of age. Moreover, the data in Table 2 confirm the expected effects of sex on earnings. Women make roughly 30 per cent lower earnings than men with the same educational level, of the same age, from the same original area, of similar occupations, and with similar mobility experiences. The area of residence dummies are negative and insignificant. Although it is not known in what labor markets the respondents are now employed, one must guess that a large proportion of workers has remained in each original labor market area.

Finally, as expected, those in what are considered the more highly skilled occu- pations receive higher monthly earnings. Only the earnings of clerical and sales persons are not significantly greater than the earnings of operatives and laborers.

The regression coefficients of the turnover variables support only the hypotheses about involuntary turnover. Interestingly, those who voluntarily left their previous employer earn about 3 per cent less than those who do not change jobs. However, the t-ratio is not significantly different from zero at the .05 level. The regression coefficient for those who quit with S-U is -.165 and highly significant.

In support of the hypotheses about forced turnover, for those who were laid off (or quit due to a notice of impending layoff), monthly earnings are approximately 8 per cent lower than for those remaining with a given employer the full 12-13 year period. Furthermore, those laid-off workers who incurred a period of S-U report earnings 21 per cent below those who did not change jobs. Finally, it is interesting to note that earnings are actually lower for those quitting with S-U than for those laid off without S-U.

To summarize, except in the case of laid-off workers with S-U, the hypotheses are not supported by the evidence presented. The first hypothesis that voluntary changes lead to increased earnings is supported by the immediate change in earn- ings observations but not by the OLS estimation. Voluntary S-U is associated with lower earnings immediately upon changing employers and in the present. This also contradicts our expectations. Lastly, the hypothesis that forced turnover leads to reduced earnings is not supported in the before/after observations but is supported by the OLS estimates.

Discussion

Are these findings the curious artifact of a unique clustering of respondents? The survey instrument was designed to seek information about pension forfeiture and was prefaced with a note about Congressional concern. Those experiencing pension forfeitures due to layoff would be inclined to respond more often. This response bias, however, does not have a clear bearing upon present earnings nor voluntary job changes. Although we need to remain suspicious of findings based upon relatively low response rates, no salient factor(s) a priori renders the results incredible. Obviously, replication of these results constitutes

Research Note 1 225

the most convincing evidence. Such evidence on two other samples is reported elsewhere .lo

Since the majority of job changers (whether voluntary or involuntary) avoiding S-U maintained or improved their earnings immediately upon re-employment, it is surprising to find the negative regression coefficients associated with previous turnover. This comparison of turnover-earnings relationships illustrates a possible misspecification of the model: that some important variable(s) associated with turnover is overlooked.1I The following discussion considers two explanations of the findings.

First, according to Becker’s firm-specific training hypothesis, persons experi- encing permanent turnover (whether voluntary or involuntary) have little firm- specific training.12 Since firm-specific skills are useful only to the given employer, specifically trained workers have less incentive to leave. Employers share the investment in specific-training and consequently have less incentive to permanently lay off such workers. If it could be shown that specifically trained workers on the average make higher earnings than workers with general training or no training, ceteris paribus, job changers with general or no training could be expected to maintain or increase earnings upon changing employers. Yet they also would demon- strate lower present earnings,13

Secondly, job changers may simply be less productive workers than those persons who do not change jobs (although education, age, and occupation are identical). This condition would permit job changers to maintain or increase earnings, yet show lower present earnings. It still might be asked why less productive workers would be more likely to change employers voluntarily as well as involuntarily. One might argue that those who seek alternative employment are more likely dissatis- fied with the employer’s perception of their productive value and hope to find another employer with a different perception. Other employers, though, similarly perceive the job seeker’s productive capacity (this assumes any increases in earnings are minimal), Likewise, employers select the less productive for layoffs (assuming the internal structure so allows), As Welch argues, for “workers who are either laid off or fired, there is a clear signal to potential future employers that as seen by past employers (relative to conditions those employers faced when separations occurred) the workers in question were receiving wages in excess of productivity. As such it seems reasonable to consider the possibility of impaired future offers.. . . ” I 4

In this light, laid-off job seekers will find it more difficult to maintain or increase earnings. Unfortunately, the data at hand lack the richness required for making a judgment about productivity.

LoWilliam Cooke, “Turnover and Earnings: The Scientist and Engineer Case,” forthcoming. “The results reported in Table 1 do not control for other variables such as education, age, sex, occu-

pation, etc. As a result, the direction of wage changes may be attributable to variables other than the reason or circumstance of changing employers. With these other variables controlled for in the regression analysis, the comparison between tests may be inappropriate.

W a r y S. Becker, Human Capital (New York: Columbia University Press, 1964). ‘3Unfortunately, direct measurement of specific training effects has thus far proven unsuccessful. For

14Finis Welch, “What Have We Learned from Empirical Studies of Unemployment Insurance?”, a fuller elaboration of the theoretical argument, however, see Cooke, op. cit.

Industrial and Labor Relations Reoiew, XXX (July, 1977), 452.

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The exploratory nature of the present analysis precludes any firm conclusions. However, the data do suggest that periods of search-unemployment are best avoided by both voluntary and involuntary job changers. It is suggested, therefore, that either the experience of S-U is not a useful proxy for investments in job information, job seekers have failed to make rational optimal investment decisions, or job search theorists have misspecified the basic model. In any case, further research into the turnover-earnings relationship is clearly warranted. In particular, the effects of specific training need to be considered and better measures of productivity de- veloped.