The effects on performance of voluntary and involuntary labour turnover in an evolutionary signalling model

Empirical research on the consequences for firms' performance of labour turnover rates often has problems measuring labour turnover in a way that allows for strict investigation of common hypotheses in the literature. In this paper, a model developed for studying firms' acting under asymmetric information is adapted to shed light on the relationship between turnover and performance, and to contribute to the understanding of the causal relationships between labour turnover and performance. It is show that voluntary turnover has the expected negative effect on performance while the relationship between involuntary turnover and performance is complicated. This complication stems from labour turnover and firms' performance both being consequences of strategies for solving labour market information asymmetries rather than turnover affecting performance directly. The labour market is modelled with heavy inspiration from Michael Spence's classic labour market of asymmetric information. There are two types of workers and these may choose to take education or not in order to signal their type. The signalling behaviour of workers depends on the benefits to signalling, i.e. on the wage premium that they can expect to receive if they choose to take education. Firms aim at producing a given amount of homogeneous output and labour is the only input to this. Firms must hire workers based only on the observation of the signal. In order to maximise performance, which in the model means minimising unit labour costs, firms need to identify the able type of workers from the less able. Firms' strategies differ according to their organisational inertia and slack. Inertia means stability and thus more efficient routines but it also means that bad matches of occupation and ability persist. Slack means deliberately hiring more workers than is expected to be needed. This comes at a costs but it also acts as an insurance of available labour, should the firm have overestimated the abilities of its workforce. The performance of firms' strategies depends on environmental factors; some of them endogenous via the labour market and others exogenous. In this paper focus is on varying exogenous factors that have a direct impact on labour turnover: the rate of voluntary turnover and the speed at which routines improve when firms' organisation is stable. Varying the latter is sufficient for radically changing the evolution of the labour market; for example developments where education is a credible signal of ability, developments where the unable attempt to bluff and earn the wage premium to education, and developments where the premium to education is so low that education cannot function as a signal. Often, the model switches back and forth between these three extreme cases. The specific characteristics of the asymmetry in the labour market do not have a large effect on the performance of firms' strategies. Strategies that are effective at minimising labour costs in the long run tend to be superior in coping with any labour market. However, focus here is on the relationship between labour turnover and performance; not in identifying superior strategies.