The Effect of Labor Turnover on Firm Performance among Japanese Firms

Author Name YAMAMOTO Isamu (Faculty Fellow, RIETI) / KURODA Sachiko (Waseda University)
Creation Date/NO. December 2016 16-J-062
Research Project Labor Market Analysis Using Matched Employer-Employee Panel Data
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The Japanese labor market has exhibited less mobility compared with that of other countries. However, it is recently said that labor mobility should be enhanced to achieve more efficient labor allocation among firms or sectors. Previous studies, however, do not provide enough insights as to whether or not the higher labor turnover at firm level contributes to better firm performance. Therefore, this paper investigates this effect using panel data of Japanese firms. We find an inverse-U shaped relationship between the labor turnover rates and firms' profit rates, indicating the higher labor turnover rates improve firms' profit rates, but that much higher turnover rates beyond the optimal would damage the profit. This finding is consistent with the optimal turnover model by Abelson and Baysinger [1984]. We also find that the effect of higher labor turnover rates depends on the type of firm characteristics. Specifically, firms with conventional Japanese employment practice can earn profits by raising labor turnover, whereas those with higher separation rates and workers with poor mental health would suffer losses by further raising labor turnover.