Labour Turnover and Labour Productivity in a Retail Organization

We study the impact of labour turnover on labour productivity using a panel dataset of 347 shops belonging to a large UK clothing retailer over 1995-1999. For the within-shop link - holding constant the shop's permanent characteristics - we observe an inverted U-shape effect of labour turnover on productivity. The productivity-maximizing rates of FTE-adjusted quits and hires are each about 20% per year, improving productivity by 2.5% compared to the zero turnover level. We explain the difference between this optimal level of labour turnover and its observed average (quits and hires each around 10%) through the costs of hiring estimated at about £600 per hire. By contrast, between shops, there is a positive link between average rates of turnover and average productivity, suggesting that an unobservable management quality factor generates both high turnover and productivity, which we discuss