A running theme during the last year has been the surge of workers leaving their jobs – and, subsequently, the number of open positions that employers are trying to fill. “Quiet quitting,” the “great resignation,” “resenteeism” and “boomerang employees” have all entered the lexicon as part of a larger discourse around worker attrition and dissatisfaction.
To be sure, some firms – especially those in tech – have been hit by the recent economic downturn and are laying off their employees as a result. Many other employers, however, are searching for ways to retain their employees in a historically tight labor market. New research from UNC Kenan-Flagler Business School Professor Eva Labro and Jim Omartian, assistant professor of accounting at the University of Michigan Ross School of Business and an MBA and Ph.D. graduate of UNC Kenan-Flagler, shines a light on how firms operate when faced with retention concerns. Using unemployment rates as a proxy for retention difficulties, Labro and Omartian examine manufacturing plants to understand how these employers strive to maintain their workforce.
The authors are interested in two primary research questions. First, what methods do firms use to retain workers in a tight labor market? Second, how do multiplant firms – or firms with more than one location – balance potential inequities across their plants when faced with retention concerns? In response to the first question, the authors find that employers use a variety of pay and nonpay mechanisms; firms do increase monetary compensation, but also alter practices around bonus provision, data collection and employee agency.
On the second point, the authors find that compensation increases are less feasible for multiplant firms because of spillovers and concerns around cross-plant inequity. Multiplant firms also may find nonpay levers to be more cost-effective since the spillovers for these mechanisms are far less intense and frequent.
A significant body of research demonstrates that retaining and stabilizing a workforce is essential for product reliability.1 Losing an employee means that a firm must either restructure its internal operations or else find a new hire to complete the work performed by the departing employee. Higher turnover also hurts company culture and morale.2 Moreover, the cost of voluntary turnover is sizable to both the firm in question and the broader economy; the loss of a worker can cost a firm as much as twice that worker’s annual salary.3
The loss of a worker can cost a firm as much as twice that worker’s annual salary.
Additionally, workforce instability causes losses that can be far more difficult to measure. When a worker leaves – especially one who has been employed in an essential role or for a sizable amount of time – the firm also loses the institutional knowledge possessed by that worker. That knowledge can take multiple forms; one such example could be plant workers’ knowledge of best practices for their specific roles in the manufacturing process. Alternatively, a plant manager’s understanding of that plant’s supply chain network, as well as the manager’s business relationships with representatives across that supply chain, could constitute essential knowledge that the firm unknowingly relies upon.
It follows, then, that obstacles to retention can severely hamper a firm’s productivity and ability to operate. The two research questions analyzed by the paper offer a deeper understanding of how firms respond to such retention concerns.
On face value, the solution might seem quite simple for employers who want to keep their workers: just increase pay past market level, and workers will want to stay. However, increasing pay can be far less feasible than it might seem. Transaction and adjustment costs may limit the frequency with which firms can renegotiate wages. Moreover, wages tend to be relatively downwardly rigid. Once a firm raises wages for its employees, it is relatively harder to reduce those wages, meaning that the employer may be stuck paying wages at a certain fixed level.
To answer this question, the authors focus on the manufacturing industry, in which plants are surveyed by the U.S. Census Bureau every five years. They used data encompassing 28,000 plants collected in 2010 and 2015, allowing them to use the decreases in local unemployment rates as a proxy for increased retention concerns.
As mentioned above, the authors find that firms use both pay and nonpay levers as strategies to retain their workers. Total compensation increases, to be sure; a 10% reduction in the unemployment rate is associated with a pay increase of between 1.1% and 1.5%. However, pay increases are far from the only mechanism firms use to keep their staff. The authors also find that plants change their incentive structure and offer greater agency.
In terms of incentive structure, firms respond to retention concerns by making it far more likely that bonuses will be paid out. In particular, firms make it less likely that bonuses will be set based on individual performance – which grants the employer more leeway to pay bonuses. When it comes to agency, firms tend to provide a number of responses that make their employees feel more essential and included in decision-making practices. Employees review key performance indicators more frequently and are made more aware of performance targets; they also are given more opportunities to provide feedback to their employer. Thus, firms in an environment that threatens their ability to retain workers look to boost morale by making workers feel more included – and increasing the likelihood of reward through bonuses.
While wages are an important – and often the primary – benefit that workers receive from their employer, a firm has various strategies at its disposal when trying to retain its workforce. The authors demonstrate some of these strategies in this paper by documenting the ways in which firms respond to concerns of worker attrition.
The question of multiplant firms adds a further set of complications. If a firm has a plant in one location that increases compensation, benefits or some other provision for its workers, possible inequities arise within the firm, wherein workers at that plant receive higher pay than their coworkers at other locations. Multiplant firms thus face a unique challenge in this regard; they must maintain some degree of uniformity so as not to cause cleavages within their ranks. The authors document within-firm wage spillovers to support this point; changes in the unemployment rate at one plant’s location disproportionately affect wages at the firm’s other plants.
The paper thus offers an important takeaway for multiplant firms: Nonwage mechanisms are far cheaper to implement as a means of retaining workers, precisely because they don’t demonstrate spillover in the same way wage increases do. This finding holds particular significance given the state of current labor markets. Employers face significant concerns with keeping workers, as well as the potential of a recession in the not-too-distant future (as we’ve projected). Understandably, employers may be hesitant to raise wages if they know that any economic downturn will soon require greater financial austerity.
Earlier, we discussed how a departing worker might also deprive a plant of a robust body of institutional knowledge that the employee in question has collected over the years. Labro and Omartian also provide evidence that firms should increase their collection and use of data as a means to combat the knowledge losses that might be incurred from employee attrition.
The authors use several variables to measure data utilization, including the number of KPIs a plant uses, the availability of data for decision making and the extent to which data affects design and forecasting at a plant. Across all measures, the authors find that as retention concerns increase, so too do all of these measures – indicating that employers rely on data to codify institutional operations and reduce reliance on their employees’ tacit knowledge. This can be another takeaway for employers and managers seeking to limit the damage caused by attrition; even if workers are departing, data can serve as a bulwark that preserves knowledge essential to a firm’s production.
As employers struggle to maintain their workforce in economically uncertain times, they may have difficulty assessing the menu of strategies available to them. As Labro and Omartian demonstrate, firms can adjust in ways beyond merely increasing pay to foster a better working environment – and attempt to retain their employees. Moreover, for multiplant firms, these nonpay levers may even be preferable to prevent concerns around equity. Even if attrition remains a problem, firms can also fall back on greater use of data to mitigate the negative effects caused by the departure of workers.
Kenan Institute Technical Business Writer Thomas Nath authored this insight.
1 Moon, K., Loyalka, P., Bergemann, P., & Cohen, J. (2022) The Hidden Cost of Worker Turnover: Attributing Product Reliability to the Turnover of Factory Workers. Management Science 68(5):3755-3767. https://doi.org/10.1287/mnsc.2022.4311
2 Hall, J. (2019, May 9). The Cost Of Turnover Can Kill Your Business And Make Things Less Fun. Forbes. https://www.forbes.com/sites/johnhall/2019/05/09/the-cost-of-turnover-can-kill-your-business-and-make-things-less-fun/?sh=46e806f07943
3 Heinz, K. (2022, Jan. 11). The True Costs of Employee Turnover. BuiltIn. https://builtin.com/recruiting/cost-of-turnover