Arnold Kling  

Economic Turbulence

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Subjective Relative Measuremen... Interrupting the Statist Quo...

From Economic Turbulence, by Clair Brown, John Haltiwanger, and Julia Lane:


The basic message here is that businesses with higher-quality work forces and lower churning are more likely [to] survive...Wal-Mart has succeeded with a low workforce quality and high worker churning strategy while Costco has succeeded with a strategy consistent with these findings...the reason for Wal-Mart's success is that it as at the cutting edge of inventory distribution management using advanced technology...even though its human resource practices would be strong predictors of failure for the average company.

From p. 54. For more on the contrast between Costco and Wal-Mart, see Greg Mankiw's recent post.

Overall, Economic Turbulence is a strong illustration of the seen and the unseen. Job losses are heavily concentrated in large, failing firms. Job gains are diffuse in new and growing firms. Most workers gain over time, but those gains are not as visible as the job losses.

More quotes from the book:


In any given quarter, about one in twenty establishments opens or goes out of business, and one in thirteen jobs begins or ends. (p.10)

Most job loss is highly concentrated: more than two-thirds of all lost jobs occur at businesses that shrunk more than ten percent, and more than one-fifth of workers whose jobs were destroyed worked at businesses that shut down. (p. 14)

In each of the five industries...an establishment at the threshold of the top 15 percent of firms is 140 percent more productive than a firm at the threshold of the bottom 15 percent...poor performers by and large don't survive. (p.43-44)

Only one in three workers in financial services, one in four workers in retail food, and one in six workers in software who started off in the industry in 1992 is till in the same industry more than a decade later...only one in fourteen workers in the software industry were with the same firm in 2003, although the rates are around one in six or seven in the other industries. (p.107)

Over a five-year horizon, in all five industries at least 25 percent of establishments exit and at least 30 percent are recent entrants. (p.121)

The apparently contradictory views, "big rewards exist for jobhopping" and "loyalty pays off," are actually complementary. Some workers...are rewarded for staying with one firm; but in many firms these workers compete to gain access to a long job ladder that offers career development. Workers who do not gain access to these long job ladders, for whatever reason, do better by changing employers. (p. 122)


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COMMENTS (2 to date)
Bruce G Charlton writes:

I am not an economist, but it sounds to me like this is a specific example of different magnitudes of transaction costs (if that is the correct term). Obviously there is a cost from losing workers, advertizing re-hiring etc. But there is also a cost (in the public sector especially, where churning can be glacially slow) from not being able to fire workers and having many restrictions on hiring (eg national salary agreements).

Presumably the overall efficiency benefits to an organization depend on the specific situation, and the way that problems accumulate over time. For example, in public education it can be nearly impossible to 'turn around' a failing organization because to do so requires a change in personnel - especially getting rid of personnel who are actively damaging the organization due to idleness, incompetence or their demoralizing effect on the rest of the workforce.

thinktank writes:

International Institute of Management (IIM) released a new report warning about the U.S. economic risks. The report:
1. Uncovers the forces behind Feb 27th stock market meltdown and the Chinese reaction to the outlook of U.S. Economy.
2. Forecasts the future behavior of U.S. and global markets.

Med Yones, the author of the white paper, warns against costly policy mistakes and provides a detailed analysis of the economic, social and geopolitical risks facing the United States

The complete text of the report is available at:

http://www.iim-edu.org/u.s.economyrisks/

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