The macroeconomics of firing aversion

by on September 14, 2016 at 12:15 am in Economics, Uncategorized | Permalink

I am indebted to Bryan Caplan for developing and popularizing the idea of “firing aversion.”  The core notion is that employers often do not wish to fire people for one of the same reasons they do not wish to cut nominal wages — it can demoralize their broader workforce.  Furthermore, some bosses simply may feel squeamish about the idea of firing people they know and like.

In the old days, bosses might have enjoyed “busting heads” to keep all the workers in line, but in this softer millennial age, well firing aversion is the order of the day, if only to ease future recruitment and boost intangible capital and institutional continuity.

Now imagine a macroeconomy where firing aversion is present.  At time period zero, a boss hires one hundred workers, who at the time are perceived as being of roughly equal quality and thus are offered the same wage.  After a few years on the job, however, some are “keepers,” while others are being paid more than their marginal products.

Because of firing aversion, they are not fired.  Because of sticky nominal wages, they also do not take a pay cut.  If the economy is imperfectly competitive, and times are good, this nonetheless can be a stable equilibrium.

Now let’s say a negative shock comes along: demand, supply, maybe a bit of both, as is usually the case.  At some margin these workers can no longer be carried and the firing aversion of the boss is overcome and they lose their jobs.  Then, a few points:

1. They’re not getting those jobs back.

2. They’re not worth a comparable wage elsewhere in many cases.

3. Per hour productivity likely will rise, even adjusting for ex ante measures of changes in worker composition.

4. Companies won’t want to pay higher wages to lure these workers out of leisure, rather they are branded as less productive than average and properly so.

5. These workers will have to lower their wage expectations for the next job by an above-average amount.  That is one reason why their reemployment may be slow.  And they won’t re-enter the labor market at anything like their old wages.

6. As the economy returns to full employment, you won’t observe rising wages in the traditional sense because these workers are pulling in relatively low wages.

7. The more that Charles Murray is right in his Coming Apart, the stronger some of these effects will be.   Yet none of it requires a “sudden attack of laziness.”

8. The more the employer can tell apart the quality of different workers, the slower the recovery will be and the less pro-cyclical wages will be.  Arguably we have been seeing this difference at work since the G.H.W. Bush recession.

OK, now maybe you don’t buy firing aversion, fair enough.  Just sub back in the traditional assumption that bosses study and scrutinize worker quality more in tough times, when revenue is tight, and you get essentially to the same place and the same conclusions as listed above.  Firing aversion is simply one way of stylizing a pretty simple incentive effect, namely that the weaker workers have a better chance when cash is flush.

Addendum: How many blog posts have I read asserting “Since wages are not rising, etc., therefore various conclusions including lack of full employment, etc.”?  Hundreds, I believe, mostly from the Keynesian bloggers.  But in the data, real wages were never very cyclical in the first place.  And in theory we should not expect much if any real wage cyclicality either.  Most of all, the more employers can measure worker quality, the less cyclical real wages will be.  And yes I know real wages just rose a lot (see the next blog post to come), if anything that is a sign recovery has been here for some time, not that finally recovery is arriving.

1 Alain September 14, 2016 at 12:21 am

One of the best startups I ever joined had as their sales pitch : “We have no compunctions about firing anyone who doesn’t pull their weight.” It was a tremendously strong pitch. We all followed through on the pitch.

The startup did very well.

2 Alain September 14, 2016 at 12:22 am

Note this was, of course, the sales pitch during recruitment.

Also Tyler’s theory does seem to have a good deal of explanatory power.

3 prior_test2 September 14, 2016 at 2:44 am

Or not, as the German experience with Kurzarbeit, most notably in the recent past during what is called in Germany the Finanzkrise (a word providing a fairly clear eyed view of what actually happened to cause what in America is now referred to as the Great Recession, apparently because the Great Bank Bail-out just doesn’t have the same ring).

Keeping together a manufacturing company’s trained and experienced workforce – basically in toto – during a period of market weakness provides that company with the chance to do well when the market turns back up. But then, if German media reports are to be trusted, that German aversion to firing has led to this socialist hellhole failing to slide down the rankings when it comes to being an exporter, particularly of manufactured goods.

4 tjamesjones September 14, 2016 at 4:36 am

i promise I’ll overcome my firing aversion if you were to work for me

5 ant1900 September 14, 2016 at 12:30 pm

tjamesjones, you owe me a new keyboard

6 jon livesey September 14, 2016 at 1:10 pm

“particularly of manufactured goods.”

Exactly. If you have a well-defined model of churning out mid-tech goods with known designs, most of whose annual changes are refinements on a known model – a little bit better shiny black car – then this makes perfect sense.

If you are inventing new financial models, deep learning software, AI, the Internet, the iPod, iPhone, iPad, new missiles. It is not always so clear.

7 TH September 15, 2016 at 7:16 am

And clearly that’s what most people in the US workforce are engaged in …

8 Daniel Weber September 14, 2016 at 10:33 am

I’ve been at places that were reluctant to fire. It sucked having to pull everyone else’s weight, even the negative producers.

9 MOFO September 14, 2016 at 10:44 am

Yea, bigitme. It becomes a cascade effect. You get tired of pulling all the dead weight, so you stop and eventually become dead weight yourself.

10 Brian Donohue September 14, 2016 at 10:49 am

I’ve worked most of my career at small firms, for precisely this reason. Firing aversion is obviously a thing. I had to fire someone, just once. It was awful. But you can’t hide someone at a small firm- that’s poison.

11 Urso September 14, 2016 at 12:36 pm

My thought would be that small firms would be more subject to firing aversion, because the managers personally know the people they’re firing; it’s not just some guy with a spreadsheet saying, hm we should fire ten percent.

Of course large firms make you run through a series of hoops to fire, which is a separate but related issue – many low level managers would probably rather not bother because it just creates more work for them.

12 Kitty_T September 14, 2016 at 3:49 pm

We’re a small firm with something of a firing aversion, but it’s not entirely irrational. If someone’s a basically decent employee, we’ll try to move them around to avoid their weaknesses rather than retrain someone from scratch. This fails far more than it succeeds (the most common weakness is “inability to interact positively with customers” and we don’t have many positions that don’t require it; the second most common is “I suddenly would like to work only while my kids are in school,” which I’ve basically stopped trying to accommodate), but the brownie points you earn with other employees when you’re seen trying to give someone a second chance is pretty valuable, meaning you get a free pass on morale when you finally fire the ZMP. And occasionally it works.

“Basically decent employee” means, in this context, showing up on time, not drunk, not high, not dressed like a stripper, not stealing, not sexually harassing anyone, and not regaling customers with complaints about your boyfriend’s latest malfeasance. You’d be surprised how hard that is to find, in my industry at least.

(Incidentally, can someone please explain to me the apparent inability of anyone under 30 to cope with customers without constantly demanding that they are shown “respect”? Seriously? A customer is someone who voluntarily parts with their money to pay your wages, that’s all the “respect” you bloody well need. But no, you’d think rude or unpleasant customers are a human rights violation comparable to Jim Crow.)

13 A Definite Beta Guy September 14, 2016 at 11:07 am

I’ll take sub-standard American workers over absolutely abysmal outsourced workers any day of the week. I am quite convinced that some of our outsourced workers are legitimately mentally disabled, and I am talking about their “managers,” not their line workers.

14 Komori September 14, 2016 at 11:52 am

Sounds good to me. Place I currently work definitely has firing aversion, but there are a couple of employees who have done huge amounts of damage to the company. Firing them would raise morale significantly.

15 Dan Lavatan September 14, 2016 at 6:41 pm

Yeah, we need to fire someone for incompetence. My boss doesn’t want to fire her because if we do she might be replaced with nothing. I’m not sure if that would be an improvement or not, but I think we should either do that or replace her with someone competent in the same salary grade. She is also the one person on an H1-B that is stupider than the unemployable Americans who apply to every open position so hiring her was probably illegal, although no competent American would agree to apply for a position with us.

The Kenysians/Democrats seem to want to fix stupid, rather than admit many people should be put on an ice flow prior to increasing global warming.

16 ABV September 14, 2016 at 12:24 am

Anecdotally, I have only worked at places with serious firing aversion. It’s not pleasant, either. I will be changing that soon. If you are a business that doesn’t have firing aversion like Bridgewater, Amazon, Bain Capital then you get derogatory articles written about you. What a world!

17 TMC September 14, 2016 at 9:08 am

I just left that kind of environment. Large Mutual company that had retaining workforce as a company goal. Pretty good deal for those who took advantage of it, but crappy for the rest of us who had to put up with them. We were always in the ‘best places to work’ lists too. Went to a much smaller firm that can’t afford the luxury of keeping perpetual slackers.

18 ChrisA September 14, 2016 at 12:56 am

The explanation I have for firing aversion in normal times vs in recessions is different to ones that Tyler offers. It’s about agency costs again. The top level of managers don’t actually know who are the good performers or who are the bad ones. The ones who know best are the direct line supervisors. A supervisors who has a poor performing employee has two choices – he can either make the case for an additional employee to cover the difference, or he can fire the bad employee and look for a replacement. For the first case, the firm as a whole pays the cost of the additional employee. For the second case the direct line supervisor covers most of the cost, both the emotional pain of the firing plus the time and effort to hire a new employee, plus the risk that actually the employee did provide some benefit. So you will never see direct line supervisors taking to HR the case for laying off an employee voluntarily. When the edict comes down from management though for a certain level of staff reductions, now the direct line supervisor has to act. This is why some firms, like famously GE during Jack Welches time, had a policy to lay off the bottom 10% every year. But whereas that policy is just too blunt for most companies.

19 Doc at the Radar Station September 14, 2016 at 8:29 am

+1

That’s precisely how the last two large corporations I’ve worked for has handled this.

20 mpowell September 14, 2016 at 9:52 am

It makes sense, its just that 10% is too much every year. Try improving your hiring practices. 5%/year should be a good enough filter.

21 Daniel Weber September 14, 2016 at 10:39 am

It has the bad side effect of never wanting to cooperate with smarter coworkers, because you could be in the bottom 5% even if you are great. Microsoft did stack ranking and it was horrible for morale.

22 Peter Centgraf September 14, 2016 at 12:10 pm

This also has the tendency to encourage the politics of bureaucratic infighting, and indirectly, discriminatory firing. People have more aversion to firing people they know well and share similar interests with, so there is an incentive to kiss up and a disincentive to maintain diversity (of race / gender / etc, but also thought, alma mater, class, and other unprotected forms). I was once in the unfortunate position of being the only person who directly benefited from the work of a highly productive woman, and I didn’t have the power to protect her job against those who preferred to keep men they knew personally. There wasn’t any obvious discrimination, but that was the net effect.

23 ChrisA September 14, 2016 at 2:06 pm

I have mixed feelings about the fire 10% or whatever every year policy. I hate it when useless people are allowed to mooch off the work of others. But I also hate that perhaps nice people who don’t do office politics get canned for just that reason. Fortunately I have managed to have a career mostly starting up new companies, and whenever an organisation gets anywhere near mature I go to the next opportunity, so I rarely get to deal with the long termer issue now.

24 byomtov September 15, 2016 at 7:26 pm

It makes no sense. It’s a lazy policy intended to sound hard-nosed, rather than make smart decisions.

25 John Hawkins September 14, 2016 at 2:03 am

It is also amazing to me to see how often the “lump of labor” fallacy is committed by Keynesian bloggers. Labor is literally at the center of their models, is it too much to ask for them to disaggregate it and understand it a little better? Austrians do this with capital (Hayekian triangles), Monetarists do this with money (M0,M1,M2,M3, Divisia Aggregates, “Everything reminds Milton of Money, Everything reminds me of sex but I try to keep it out of my papers”, etc…), could the Keynesians do us a service and PLEASE do this with labor?

26 Peter Centgraf September 14, 2016 at 12:13 pm

I think this is an unfair criticism. There are some well known Keynesians involved in developing labor market search models, and heterogeneity of labor is key to the whole matching process implied.

27 mulp September 14, 2016 at 9:31 pm

What is at the core of your model?

The unemployed on welfare and workers getting wage supplements?

Or phantom consumers with phantom income coming out of the mists of the cornfield of supply side dreams to by what is produced?

The people who are not spending more money buying more gdp to make it bigger are the bottom half of the labor force you think are over paid and need to have their incomes cut to hold down or cut gdp.

I’m a real student of Keynes and I see lump of labor == lump of gdp. Capital needs to get almost zero of gdp.

Why reward rent seekers who do not work but just take from workers?

28 Ricardo September 14, 2016 at 2:26 am

“…but in this softer millennial age, well firing aversion is the order of the day…”

I don’t think you need the supposed “softness” of “millenials” to explain firing aversion. American employers devote considerable resources into trying to convince their employees that they are part of a team and a corporate corporate culture where, if they play by the rules and contribute to the company, they can expect career growth there. Presumably, this is done in hopes that job satisfaction and security can substitute for higher wages. To arbitrarily fire employees or lay them off in a downturn is a tacit admission of dishonesty on the part of senior management and destroys any good will that may have previously been built up.

29 tjamesjones September 14, 2016 at 4:39 am

the counter argument says that actually the remaining staff like it when they see underperformers sacked. that’s probably more what I’ve seen throughout my career. generally staff anxiety only comes when there are layoffs driven by company wide struggles (due to market changes, recession, etc).

30 A Definite Beta Guy September 14, 2016 at 7:33 am

This is only the case in GROSS incompetence. All those mass layoffs you here about are targeted at various under-performing workers, and they are horrendous for employee morale. Especially if coupled with outsourcing.

31 prognostication September 14, 2016 at 9:50 am

At my former job people didn’t even want to see grossly incompetent people fired necessarily, they just wanted to see grossly incompetent people who were also personally unlikable fired.

32 Millian September 14, 2016 at 3:20 am

The GMU crowd’s “ideas” are like looking at a world before econometrics, right?

33 Abhilash September 14, 2016 at 3:58 am

That was an really great news and i am feeling glad to hear this.

34 Ted Craig September 14, 2016 at 6:56 am

Another reason for firing aversion: the more people you oversee, the more important you are. If you are in charge of 100 people and you fire 50, you are half the man you used to be.

35 Norman Pfyster September 14, 2016 at 12:45 pm

According to Stone Temple Pilots, being half the man you used to be makes you a creep.

36 Econchic September 14, 2016 at 7:04 am

I think the picture is even more complicated with some dynamism. At the same time the slacker is not being fired, it’s not hard to imagine a high performing worker is going through market mismatch and instead of being in a positing closer to their mp they are way lower, and thus getting a lower wage. Firing aversion not only does a disservice to the slacker, since it sends the signal he is worth more that he is, but also to the higher performer in a badly ran company who is at a wage mismatched to their skill and effort, and can not access the job currently occupied by the slacker. When the economy slowed down the slacker ends up with a higher wage expectation than he should, and the high mp employee ends up with a lower wage expectation that he should. ?

37 A Definite Beta Guy September 14, 2016 at 7:37 am

Companies underpay current workers relative to market conditions. I am not sure if this is controversial or not in the economics world, but it certainly isn’t controversial in the corporate world. The macroeconomic implications are the same as any simple supply-and-demand graph: if business is booming and you to need hire workers, you will need to up your wage bill to poach quality talent.

38 Zach September 15, 2016 at 2:47 pm

There’s an interesting countercyclical argument there: trying to tailor employment perfectly to current needs means you’re always buying on the spot market and taking what you can get. Firing aversion might be the flip side of hiring opportunistically.

39 Corey September 14, 2016 at 7:37 am

Seems to me you can get the same net long-run effect just by having companies with no performance culture die during recessions. My company doesn’t have an arbitrary percentage like GE but us managers spend a lot of time and effort identifying poor (also excellent) performers and taking action. Our competitors go out of business during recessions.

40 The Other Jim September 14, 2016 at 8:26 am

>the weaker workers have a better chance when cash is flush.

These last 11 words were all you needed.

If you felt compelled to add anything, it’s that firing aversion has been greatly compounded by modern litigation hazards (unless you talking about a white male under 50.) Also hiring aversion has been greatly compounded by the ever-increasing burden of State-mandated benefits that must be given to every worker, no matter how weak they are.

Yay, State!

41 Alain September 14, 2016 at 11:12 am

Correct. Firing is exceptionally costly due to the litigation hazards. I would hope that if we had a full understanding of the costs of these ‘protections’ that they never would have been enacted.

42 JWatts September 14, 2016 at 2:38 pm

“Correct. Firing is exceptionally costly due to the litigation hazards. I would hope that if we had a full understanding of the costs of these ‘protections’ that they never would have been enacted.”

Add to that the aversion of modern HR departments for specifying why an employee was fired. It’s general policy to provide as little information as possible about former employees do to potential litigation. So, future companies that hire have a harder time selecting good candidates. Leading to a negative feedback loop.

43 Kitty_T September 14, 2016 at 4:26 pm

That’s not such a big problem as you’d think. Every competent person with HR duties knows how to say, and how to hear, the words “I’m sorry but our policy is not to discuss the circumstances of prior employee’s separation” in a way that communicates at least a thumbs up or down – and sometimes a lot more than that.

Far from the most efficient way to do it, of course.

44 Peter Centgraf September 14, 2016 at 12:19 pm

There is an irony that conservatives would generally prefer that benefits be linked to work, rather than made available without a work test, but that this also increases the friction involved in hiring and firing that allows for economic dynamism. There is some evidence that the dynamism of social democratic Nordic states is higher for exactly this reason.

45 Dan Lavatan September 14, 2016 at 6:44 pm

Yeah, and RIFing helps since they can say they aren’t discriminating, look at the fact we fired 500 other people at the same time and out balance sheet sucks. Our org is actually good at force reductions, but the other aspect is the manager wont get the headcount back for 10 years and managers self worth is measured in headcount.

46 rayward September 14, 2016 at 8:37 am

Alternative narrative: In good times the better workers are rewarded for their work or they move on to another employer who will reward them for their work, leaving behind less able but lower paid workers. In bad times, to save costs, higher paid but better workers are let go along with some lower paid but less able workers, leaving behind less able but lower paid workers. In both cases, productivity suffers at the former employers since less able workers predominate. Productivity at employers with the better and higher paid workers is improved with profits enhanced as long as the added productivity exceeds the added cost. When good times return, the better workers who were let go are rehired but at the wage paid the less able workers, while the less able workers who were let go remain unemployed or leave the labor force. The cycle repeats, with stagnant wages and stagnant productivity. Cowen’s narrative is more appealing since it assumes that employers retain the best workers and let go the less able workers during bad times and that the workers who are aren’t rehired when good times return are the less able workers. The alternative narrative is less appealing since it assumes that employers let go some of the better workers during bad times and that the workers who are rehired when good times return including the better workers are paid a lower wage when they return.

47 collin September 14, 2016 at 9:03 am

Of course, company’s have a lot of good reason for ‘firing aversion’

1) For most positions, companies have to find a new employee which is risking the market unknown, and 2016 that might mean paying more and getting less. And it will cause disruptions in servicing.
2) Job security is benefit and workers might be less inclined to leave job for slightly higher wages. (Probably explains the 1950s economy a lot in which the post Great Recession seems to following in a lot ways.)
3) In a very productive economy, many position have very defined skill set and hard to replace. In our office, there were many times when senior leadership underestimated a job type, fired employees and hurt the whole business. Look at the banks and titling issues in ~2009 – 2010 in which the banks did not do housing titles completely right and slowed the repossession process. (In reality the banks dodged a bullet on that one.)

Given that Uber is now losing $1.2B in 2016 partially because they have pay a lot more to induce the right drivers. Uber offers nothing more than wages to drivers so they are more dependent on raising wages. That shows there are benefits to long employee relationships.

48 collin September 14, 2016 at 9:04 am

Funny this post is written on the same day as you were lamenting on stagnant wages in the US.

49 Corey September 14, 2016 at 10:36 am

I disagree with all your points. I don’t know which companies you’ve worked for, but this doesn’t match my experience over the past 25 years in tech in any way.

1) For most positions, companies cannot hire enough qualified employees. They are doing as much as they can with the good hires they can get. Eliminating a poor performer doesn’t have nearly the impact that a mediocre culture would have. We hire constantly and eliminating a dud just adds one more position to the list of thousands we’re trying to fill.
2) No skilled worker nor their employer has believed in “job security” in 20+ years. There are other frictions to leaving for higher wages, but job security is something quaint our parents believed in. If people are engaged and excited by their work, that counts for more than almost anything else. Duds eliminate that excitement.
3) In our modern economy, winning companies hire for soft skills that will apply no matter what tech skill the employee will need to perform. If they are conscientious, trustworthy, imaginative, competitive, and willing to learn any new skill to win, they get hired. My company has a defined policy in hiring tech workers that states clearly they do not have to have related work experience with the software tools we use. Having related skills is a plus, but not strictly required. If someone has the soft skills and will fit our culture, we will use them.

Uber is losing money to build their business. They won’t be offering any drivers any wages before long, but they’ll still be the name-brand in the business model that destroyed the Taxi industry. Long after every vehicle is autonomous you’ll still take an Uber.

50 Millian September 14, 2016 at 11:38 am

Not every industry can be like tech. Tech is a growth industry self-selecting for White and Asian men whose social skill sets allow them to endure less-than-humane workplace behaviour.

51 Corey September 14, 2016 at 1:00 pm

I’m in tech personally and in the tech part of my company but everything I’ve stated applies to the non-tech part of the company, which is predominantly female and much more diverse.

There are companies growing in every part of the economy. They’re growing because of how well they’re managed. Tech may have invented some of the strategies but everyone is doing it now… or at least the winners are. EG: When my wife and I are chatting about work over dinner and I talk about “stories” in the current “sprint” (Agile / Scrum terms) she recognizes them and understands them because her department (HR/Insurance) is adopting these strategies to be more nimble. If you’d told me even 5 years ago that an HR group at an Insurance company would have daily Scrum stand-ups I would’ve thought you were insane. But it’s happening…

52 collin September 14, 2016 at 12:41 pm

I don’t work in tech so experiences may differ as I remember our office had less fire adversion in the rowdy 1990s with higher growth than I do today. It may be our office completely depleted its talent ‘bench’ in the 2009/2010 downturn and can’t afford to pay top notch wages today.

53 MOFO September 14, 2016 at 10:54 am

Working with competent people and not block-heads is a benefit too.

54 Scott Sumner September 14, 2016 at 9:23 am

You ended the post conceding that real wages just rose a lot. But the 5.2% figure in your next post refers to household income, not wages. Those are radically different concepts. Nominal hourly wages are growing at 2.5%, and real wages are growing by even less.

I think that might actually strengthen your argument.

55 rayward September 14, 2016 at 10:47 am

Household income is up in part because the number of persons in the household has gone up (as more young adults live with parents, siblings live together, and unrelated persons live together). I still believe Cowen’s narrative is influenced by ideological preferences – his. See my comment above.

56 Floccina September 14, 2016 at 9:34 am

That is why Open-book management might work great. https://en.wikipedia.org/wiki/Open-book_management

57 Floccina September 14, 2016 at 10:02 am

BTW this goes with my general impression that secrecy is great overrated. Hear that Hillary Clinton?

58 B.B. September 14, 2016 at 10:08 am

Let me note that with firing aversion, when a threshold is crossed, the best strategy is to fire as many as needed all at once. Get the misery out the door. The employer only has to fire once. And employees don’t become demoralized by the uncertainty from a drip-drip-drip sequence of firing. One and done. Also, stigma is decreased with massive firings, compared to just firing one person at a time.

If many firms do the same thing, we can see massive economy-wide layoffs, that is, a recession. Employment seems to drop faster and sharper in a recession than conventional theory suggests. That was very true in the six months after Lehman: US businesses got scared and cut every marginal worker. Productivity surged. The marginal workers did not get recalled; they had to look for new jobs at new firms at lower wages.

There is a bit of an Arnold Kling story here.

59 Brian Donohue September 14, 2016 at 10:56 am

Good comment. The past seven years have been a painful, wrenching process for tens of millions of people. But it appears we are coming out the other side, all while keeping a tight lid on government employment. Little by little.

For some Austrians, though, the purifying is never enough.

60 Student September 14, 2016 at 10:22 am

Interesting argument. The only problem I have is that there is no real world t = 0. As a result, I wonder how you can posit that bosses cant perceive the quality of the workers at t=0 but they can under point 4? If there was a true t=0, fine. But there isnt.

61 derek September 14, 2016 at 10:37 am

The US economy is starting to look more and more like the Canadian economy, and European. High youth unemployment, high base unemployment, low growth. So what happens to these people who can’t get hired or get jobs that pay substantially less? There are always those situations and people, but what if it becomes 1/3 or 2/5 of the workforce, or even greater than half?

10% globally productive, 25% working for government where nothing matters, then the rest in low paying service industries. I think we will find out whether you can run a country like that.

There is no productivity growth. So the 10% aren’t even earning their wages.

62 SPENCER September 14, 2016 at 10:39 am

But in the modern economy — and especially in finance — cut back in a firms employment more and more takes the form of eliminating some type of activity or line of business and all the people who work in that division or line of business. So individual performance comes to matter less and less. For example, a firm will decide to quit trading certain types of bonds and fire all the traders who trade in that specific type of bond.

63 Allie September 14, 2016 at 11:36 am

The theory makes a lot of sense, regardless of the potential softness of millennials. There are plenty of reasons for firing aversion among any demographic, as enumerated in the comments above (power tripping, need to foster team environment, convenience etc.). I think the concept, though, speaks to the larger issue of the less than stellar education system in this country and general skills mismatch.
Having an epidemic of workers who ” are being paid more than their marginal products,” as Tyler calls them, is indicative of a few things:
1. A person’s skills are poorly matched to the job he/she is in
2. A person is lazy/not interested
#2 we can’t do much about, but #1 means that the person either hasn’t been prepared by their training/education OR their training/education is outdated and no longer applicable. I think there’s a problem among workers in the U.S. of having a sense of being “done” with education at age 18, or 22, or 25 or whatever it be depending on how many degrees you get, and then you’re just ready to go off into the world. In reality, the world is changing and thus skills and training need to be updated. Additionally, when it comes to higher education, I think it often does little to prepare people with actual skills required on the job.
All this to say, maybe wages have been stagnant because workers are struggling to add value in the way its needed for most industries in the U.S.

64 lemmy caution September 15, 2016 at 2:16 pm

The US has a higher education system that is the envy of the world. If you are going to say our system is bad, maybe point out a better system?

65 bryce September 14, 2016 at 12:04 pm

Isn’t there a competing, sectoral explanation? Maybe both of these things play a role? In the sectoral explanation, the hot economy over-allocates labor resources to a particular sector. Maybe it was construction, real estate brokering, mortgage origination, etc in the period leading up to 2007/2008. Many of those jobs have not come back. Many of the workers are likely to face a skills mismatch when looking for alternative sources of income, irrespective of their marginal products with the previous line of work.

66 Shane M September 14, 2016 at 12:13 pm

re: firing aversion. I see other reasons for this effect:

– In my experience, it can take a long time to get a new employee up to speed, and even then they might not work out. The existing employee might not be great, but they are a bird in the hand. (Humans are risk averse).
– The hiring and training of a new employee can be burdensome on existing employees – often considerably. Existing employees often put a lot of time and effort into training the new people. (Often early on you can tell when somebody isn’t going to work out, but the show must go on.)
– Getting rid of an employee often means their accountabilities are added to existing employees – they’re the only ones that can do them because the new person you bring in won’t be able to hit the ground running, and even for the existing employees adapting to processes and workflow the old employee had can be difficult to adapt to. (Often particularly difficult because the old employee had scattershot and inefficient workflow and process).

Now, certainly there are some employees who could go without anybody much caring because they literally add little value, but most employees are somewhere on the spectrum where they’re not very good, but they’re better than a new hire would be for the first 6-12 months.

67 JonFraz September 14, 2016 at 2:26 pm

A couple of obvseravtions:

Hiring an we person is always ab it of a gamble. All you really know about them is their experience and their salary history (these are things can be verified). You won;t know any of the specifics as to why they are no longer at their old job. For that reason I’m not so sure that employers are that averse to paying the new hire something like his old salary, assuming of course that is within the bounds of the going market rate for the job.
Also the fact that someone had problems at one job does not mean they will at another. There are many things that contribute to success or failure in a job– not just the abilities and behavior of the employee himself. Problematic coworkers or bad management are major determinants as well.

68 mulp September 14, 2016 at 9:36 pm

“Now imagine a macroeconomy where firing aversion is present. ”

I imagine the 50s, 60s, and 70s when the middle class was built and gdp grew faster than since firing became considered a virtue.

If we refrained it as “Now imagine a macroeconomy when cutting consumer spending aversion is present. “…

69 Janus Daniels September 14, 2016 at 9:54 pm

“amazing the contortions people will go through to avoid saying that we need more demand”
https://twitter.com/ObsoleteDogma/status/776021066854633472

70 Db September 15, 2016 at 12:05 am

I’d also propose (9) after negative shock driven layoffs, labor supply would be diluted with lower quality talent finally let go after accumulating in the “good times”. As recovery begins and firms seek to rehire, not only would strong talent remain scarce, but assuming interviews are not perfect audits of applicant quality, firms may be more reluctant to hire due to the risk of bringing on a zero/negative MP worker. I’d be curious as to how much this effect slows unemployment recovery versus skill mismatch due to reallocation to new sectors during recovery.

It’s unclear to me whether the assumptions would be met, but an interesting point to discuss is whether some sort of labor market for lemons effect would compound this slowed rehiring effect. Relying on the same observation / assumption that interview are frankly terrible at filtering good workers, would previous labor market non-participants who dropped out due to relative underperformance at their level of human capital (a common narrative of where “hidden unemployment” has gone) adversely select back in, competing with workers who, given recessionary unemployment, have somewhat comparable employment gaps? Perhaps this could in part explain the lay off “curse” of those who claim to send out hundreds of job applications and get no responses during the recent slow recovery…

71 byomtov September 16, 2016 at 12:49 am

I am indebted to Bryan Caplan for developing and popularizing the idea of “firing aversion.”

Coming soon from GMU: The amazing discovery that people like money.

Everybody already knows that, of course, but they are going to come up with a nice academic name for it.

72 Wes Winham September 22, 2016 at 10:56 am

I belive firing aversion is one of the important components in raising between-firm inequality, too: http://niskanencenter.org/blog/why-in-wage-segregation/

I would love to see a study measuring the rate of performance-related involuntary separation between firms and how that correlates with high versus low-wage firms. My guess is that low-wage firms are much more subject to firing aversion and they tend to wait to use layoffs to clean house periodically. High-wage firms (like Netflix) use metaphors like “a high-performance sports team” instead of metaphors like “family”.

Part of the equation is that some firms are better at screening for talent, but that can’t be the whole story. Firms that are worse at screening could just fire underperformers more, but you don’t see that.

In a dynamic market, even if you’re very good at screening for the positions you have available today, those positions and needs rapidly change. Especially at smaller firms, that means that the person who was great for a role 3 years ago can be a poor fit for the requirements of a role today. Throw firing aversion into the mix, and that firm won’t be equipped for their new challenges until they have an excuse to perform a layoff.

Firing sucks. Nobody except sociopaths likes it. It takes strong separation between human, tribal instincts and rational decision making. It also takes very strong leadership to do it well, and to provide the right balance of privacy and transparency so to not negatively impact the rest of the team. Throw in the fact that many companies judge managers on retention (without providing a carve-out for mismatched role versus skill/will alignment) and it’s not at all surprising that firing aversion has a large impact.

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