Firm performance and labour turnover: Evidence from the 2004 workplace employee relations survey

We explore the impact of labour turnover on firm performance by analysing the predictions of an extension of the efficiency wage model of [Salop, S., (1979) 'A Model of the Natural Rate of Unemployment'. American Economic Review, 69, 117-125.] developed by [Garino, G. and Martin, C., (2008) 'The Impact of Labour Turnover: Theory and Evidence from UK Micro Data'. Quantitative and Qualitative Analysis in the Social Sciences, 1(3), 81-104.], which separates incumbent and newly hired workers in the production function. Within this theoretical framework, an exogenous increase in the turnover rate can increase profits if firms do not choose wages unilaterally. We test the theoretical predictions of the model using UK cross-section establishment-level data, the 2004 Workplace and Employee Relations Survey. In accordance with our theoretical priors, the empirical results support the standard inverse relationship between the quit rate and firm performance where firms unilaterally choose the wage and generally support a positive relationship between firm performance and the quit rate where trade unions influence wage setting.