According to U.S. labor-market data, many employers report no change in net staffing levels from one calendar quarter to the next. A look at gross staff turnover, however, tells a different story. A key difference between net and gross turnover is that gross turnover accounts for employees who separate from their employers but whose positions are subsequently filled by new hires. Workers who resign, or quit, make up an important share of separations. In fact, data published by the U.S. Bureau of Labor Statistics (BLS) show that the rate of quits is substantial, at approximately 6 percent per quarter.
Of course, it could be that employers reporting no change in staffing levels are not the same employers experiencing quits. However, in “Vacancy Chains,” Michael W.L. Elsby, Ryan Michaels, and David Ratner note that firms that report no change in employment nevertheless experience an average quarterly quit rate of 3.2 percent—lower than the 6 percent average for the broader labor market, but nonetheless substantial. This phenomenon suggests that firms frequently hire to replace precisely those workers that quit.
The authors point out, moreover, that employers repeatedly return to the same staffing levels. More than 40 percent report unchanged levels after one year, and nearly 30 percent report the same levels as much as four years later. These data suggest that employers consistently aim for specific levels of employment, and they maintain them via replacement hiring.
What spurs employers to commit to certain staffing levels? The authors reason that it must be costly to leave positions vacant when workers quit. If positions remain unfilled, the tasks for which they had been responsible would have to be reassigned to other workers. But reassigning tasks is likely to be costly, requiring training and creating disruptions in production. This simple observation turns out to have significant implications for the broader labor market.
The authors’ empirical analysis is based on two BLS datasets: the Quarterly Census of Employment and Wages (QCEW), and the Job Openings and Labor Turnover Survey (JOLTS). The QCEW shows monthly employment levels in all private establishments across 40 states from the early 1990s to 2014. The JOLTS is smaller and begins at the end of 2000, but it includes reports on gross turnover, including quits and layoffs, that are not measured in the QCEW.
These two datasets reveal that replacement hiring plays a prominent role in employment turnover. Gross hiring and quits are significant among establishments reporting no net change in employment. At such establishments, quarterly gross hiring equals 5 percent of the workforce, more than two-thirds of which replaces workers who quit. Replacement hiring is also prominent over longer horizons. At establishments reporting no change in employment across two years, gross hiring is 35 percent of the workforce, and, again, more than two-thirds of this hiring replaces quits. Even when considering all establishments that do any hiring, the authors calculate that replacement hires still account for, on average, 40 to 45 percent of all hires.
Having documented the prevalence of replacement hiring, the authors investigate its implications by designing a model with two features. First, employers can significantly change employment only through costly “restructuring,” defined as changes in organizational and physical capacities required when significantly expanding (or paring back) staffing. The cost of restructuring means that firms are incentivized to maintain the same number of positions. Second, for a given capacity, vacant positions are costly. As a result, firms are incentivized to replace quits, returning employment to its original level (and equal to the number of positions).
The simulations reveal two results. First, when restructuring is costly, the model generates significant replacement hiring. Almost one-quarter of hires are replacement hires. This prediction can account for more than 60 percent of the replacement hires observed in the data.
By contrast, if there is no cost of restructuring, firms simply adjust capacity to equal desired employment levels, avoiding the cost of vacant positions. Accordingly, when employees quit, these firms typically cut capacity down to employment rather than hire up to capacity. As a result, replacement hires make up less than 6 percent of hires when there is no cost of restructuring.
A second important result is that replacement hiring can generate larger swings in aggregate vacancies and unemployment, providing insight into labor-market volatility. The key here is that replacement hiring induces what the authors call a “vacancy chain,” as an initial increase in vacancies at some firms triggers vacancy postings elsewhere. The first firms to fill vacancies do so, in part, by recruiting workers from other employers, creating (momentary) openings at the latter firms. If such openings are costly, though, these firms will fill them. This second round of hiring will, again, lure some workers from other employers, creating still more (temporary) openings and leading to additional hiring. Importantly, the increase in openings in each round also enables the unemployed to find jobs, contributing to a decline in the unemployment rate.
The model exhibits very different dynamics when a strong replacement hiring motive is absent. In most labor-market theories, initial surges in vacancy postings by some firms tend to crowd out hiring at other firms, because recruiting (and hiring) costs increase when there are more firms “chasing” a given number of workers. This negative feedback appears in the authors’ model but is countered by a strong replacement hiring motive. As a result, vacancy postings by some firms now crowd in hiring at other firms, creating a positive feedback loop in which initial hiring begets more hiring, at least for a time. Eventually, ascending recruiting costs bring the process to an end.
By capturing a novel—and positive—feedback channel, “Vacancy Chains” sheds light on the forces at play as firms strive to fill positions created by quits. The authors explain the role of replacement hiring, showing evidence that such hiring has significant effects on labor-market volatility.