Quit Turnover and the Business Cycle: A Survey

Workers might change jobs for many reasons. They might fall out with the boss and so decide to change employer, or learn that the job is not really for them, or they might accept a poorly paid job as being preferable to being unemployed - say gathering work experience improves one's CV - and continue search for something better while employed. A slightly different reason is that some firms may hit a sticky patch and, fearing the risk of layoff, employees quit to more permanent employment elsewhere. A competitive labor market ensures such quit turnover is efficient: it reallocates workers from less to more productive matches. In non-competitive labor markets, however, firms always have the incentive to increase profit by paying a wage below marginal product while, in the absence of slavery contracts, employees always retain the option of quitting to better paid employment. The interaction between these two forces need not generate efficient outcomes. The focus of this chapter is to consider new develpments in the search and matching literature where wages, quit turnover and unemployment are endogenously determined in economies with aggregate shocks. The aim of the discussion is not only to highlight possible market failures but also to explain how on-the-job search and employee turnover fundamentally affect our understanding of fluctuations in aggregate employment.