Replacement Hiring

The share of replacement hires has risen over time from 33% in the early 1990s to about 41% in 2015 without a corresponding rise in the share of quits and vacancy posting. We build a model that reconciles these facts and use it to uncover the factors behind the rise in replacement hiring. In our model, matched firms can continually meet new applicants and replace existing workers without having to post a new vacancy or experience a quit. Replacement hires, by allowing firms to replace less productive workers, generate private productivity gains but socially inefficient outcomes as firms fail to internalize the lost value when current workers are released into unemployment. Overall, our calibrated model suggests that an increase in the ratio of old to new vacancies and an increase in firms' outside options are key factors that promoted the increase in the share of replacement hires. Furthermore, we find that welfare in our calibrated economy is 2% lower in terms of output and unemployment is 50% higher relative to the efficient benchmark.