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Employee Replacement Costs

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  • Dube, Arindrajit
  • Freeman, Eric
  • Reich, Michael

Abstract

We investigate properties of employee replacement costs, using a panel survey of California businesses in 2003 and 2008. We establish that replacement costs are substantial relative to annual wages and that they are associated negatively with the use of seniority in promotion. We also find some evidence, albeit not under all specifications, that replacement costs are positively associated with establishment size, which is consistent with monopsony. Bivariate scatterplots, pooled regressions and panel-based estimates suggest a positive relationship between replacement costs and the wage. While this result is not robust, it constitutes a puzzle for hiring and separation models, such as Manning (2003). In these models, the negative wage elasticity of replacement costs is a key assumption. These results thus call for further research on employment costs models.

Suggested Citation

  • Dube, Arindrajit & Freeman, Eric & Reich, Michael, 2010. "Employee Replacement Costs," Institute for Research on Labor and Employment, Working Paper Series qt7kc29981, Institute of Industrial Relations, UC Berkeley.
    • Handle: RePEc:cdl:indrel:qt7kc29981
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    References listed on IDEAS

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    Cited by:

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    3. Samuel Muehlemann & Harald Pfeifer, 2016. "The Structure of Hiring Costs in Germany: Evidence from Firm-Level Data," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 55(2), pages 193-218, April.
    4. Manning, Alan, 2011. "Imperfect Competition in the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 11, pages 973-1041, Elsevier.
    5. Marc Blatter & Samuel Muehlemann & Samuel Schenker & Stefan C. Wolter, 2016. "Hiring costs for skilled workers and the supply of firm-provided training," Oxford Economic Papers, Oxford University Press, vol. 68(1), pages 238-257.
    6. Samuel Muehlemann & Mirjam Strupler Leiser, 2015. "Ten Facts You Need To Know About Hiring," Economics of Education Working Paper Series 0111, University of Zurich, Department of Business Administration (IBW), revised Sep 2015.
    7. Nguyen, Justin Hung, 2022. "How do labor adjustment costs affect corporate tax planning? Evidence from labor skills," International Review of Financial Analysis, Elsevier, vol. 83(C).
    8. Frederico Belo & Jun Li & Xiaoji Lin & Xiaofei Zhao, 2017. "Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3669-3709.
    9. Hackbarth, Dirk & Gu, Lifeng & Johnson, Timothy, 2017. "Inflexibility and Stock Returns," CEPR Discussion Papers 12441, C.E.P.R. Discussion Papers.
    10. Jan Eeckhout & Ilse Lindenlaub, 2019. "Unemployment Cycles," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 175-234, October.
    11. Samuel Muehlemann & Harald Pfeifer & Felix Wenzelmann, 2013. "The Costs of Recruiting Apprentices: Evidence from German Firm-Level Data," Economics of Education Working Paper Series 0095, University of Zurich, Department of Business Administration (IBW), revised Nov 2015.
    12. Marlon R. Tracey & Solomon W. Polachek, 2020. "Heterogeneous Layoff Effects of the US Short‐Time Compensation Program," LABOUR, CEIS, vol. 34(4), pages 399-426, December.
    13. David A. Matsa, 2018. "Capital Structure and a Firm’s Workforce," NBER Working Papers 25125, National Bureau of Economic Research, Inc.
    14. Ronald Leung & Marco Stampini & Desire Vencatachellum, 2014. "Does Human Capital Protect Workers against Exogenous Shocks? Evidence from Panel Data on South Africa during the 2008-2009 Crisis," South African Journal of Economics, Economic Society of South Africa, vol. 82(1), pages 99-116, March.
    15. Ghaly, Mohamed & Dang, Viet Anh & Stathopoulos, Konstantinos, 2020. "Institutional investors' horizons and corporate employment decisions," Journal of Corporate Finance, Elsevier, vol. 64(C).
    16. Tasawar Nawaz, 2019. "Exploring the Nexus Between Human Capital, Corporate Governance and Performance: Evidence from Islamic Banks," Journal of Business Ethics, Springer, vol. 157(2), pages 567-587, June.
    17. Cao, Zhangfan & Rees, William, 2020. "Do employee-friendly firms invest more efficiently? Evidence from labor investment efficiency," Journal of Corporate Finance, Elsevier, vol. 65(C).
    18. Reich, Michael, 2012. "Unemployment after the Great Recession: Why so High? What Can We Do?/El desempleo después de la Gran Recesión: ¿Por qué tan alto? ¿Qué podemos hacer?," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 30, pages 11-28, Abril.
    19. Rong, Yuen & Tian, Cunzhi & Li, Lifang & Zheng, Xinwei, 2020. "Labor hiring and stock return: A model and new evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    20. Ilse Lindenlaub, 2015. "Unemployment Cycles," 2015 Meeting Papers 1368, Society for Economic Dynamics.
    21. Kathleen Manipis & Stephen Goodall & Paul Hanly & Rosalie Viney & Alison Pearce, 2021. "Employer survey to estimate the productivity friction period," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 22(2), pages 255-266, March.
    22. Reich, MIchael & Jacobs, Ken & Bernhardt, Annette, 2014. "Local Minimum Wage Laws: Impacts on Workers, Families and Businesses," Institute for Research on Labor and Employment, Working Paper Series qt9pf1225f, Institute of Industrial Relations, UC Berkeley.

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