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Optimal Employee Turnover Rate: Theory and Evidence

Author

Listed:
  • Mark N. Harris

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Kam-Ki Tang

    (School of Economics, The University of Queensland & Research School of Pacific and Asian Studies, The Australian National University)

  • Yi-Ping Tseng

    () (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

This paper investigates the quantitative effects of employee turnover on firms’ productivity. The Australian Business Longitudinal Survey 1995-98, a unique survey providing firm level data on both production and employee turnover, is used as the data source. Theoretical studies have advocated that firm specific human capital and job matching to be the two major, but competing, mechanisms through which turnover affects productivity. Our results indicate that the effect of job matching dominates when turnover is “low,” while the effect of firm specific human capital dominates when turnover is “high.” We identify that the optimal turnover rate - the rate that maximises productivity, controlling for other factors - is about 0.3, well in excess of the sample mean. The finding suggests that further increasing the flexibility of employment arrangement for small and medium Australian enterprises could yield substantial productivity gains.

Suggested Citation

  • Mark N. Harris & Kam-Ki Tang & Yi-Ping Tseng, 2002. "Optimal Employee Turnover Rate: Theory and Evidence," Melbourne Institute Working Paper Series wp2002n19, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2002n19
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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2002n19.pdf
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    Cited by:

    1. Siebert, W. Stanley & Zubanov, Nick & Chevalier, Arnaud & Viitanen, Tarja, 2006. "Labour Turnover and Labour Productivity in a Retail Organization," IZA Discussion Papers 2322, Institute for the Study of Labor (IZA).

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