Should They Stay or Should They Go? Sorting versus Human Capital Loss in Employee Turnover

Abstract

According to conventional wisdom, the costs of employee turnover are substantial and something that firms should avoid. Yet the causes and consequences of employee turnover are complicated. There may be both positive effects from sorting among employees and negative effects from loss of valuable human capital. Maybe poor performance is cause for turnover rather than its consequence. This study attempts to disentangle sorting effects from the effects of human capital loss while controlling for reverse causality in a panel study of 3,033 Danish small and medium-sized firms 1995-2007. I compare fixed effect and GMM estimators and the results I report suggests substantial simultaneity bias (reverse causality) which invalidates fixed effect estimates. The substantive results suggest that sorting benefits and human capital loss are mechanisms that operate simultaneously.

Keywords: Employee turnover, strategic human capital, sorting, financial performance, panel data, GMM estimation

JEL Classification: M10, M12, M51, J6, D24