Leadership

Employee Replacement Costs

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Executive Summary

The authors investigate properties of employee replacement costs, using a panel survey of California businesses in 2003 and 2008. They establish that replacement costs are substantial relative to annual wages and that they are associated negatively with the use of seniority in promotion. They also find some evidence, albeit not under all specifications, that replacement costs are positively associated with establishment size, which is consistent with monopsony. Bivariate scatterplots, pooled regressions and panel-based estimates suggest a positive relationship between replacement costs and the wage. While this result is not robust, it constitutes a puzzle for hiring and separation models, such as Manning (2003).

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