Staff Turnover Damages Productivity of Young Companies

While studies have shown that a moderate level of staff turnover can benefit established companies by contributing to an increase in productivity, this is not the case for more recently established firms. When employees at these younger firms are replaced, this has negative effects on the firms' productivity. This negative effect is particularly marked if the company founders have no experience of managing staff, and also becomes more pronounced the more recently the company was founded. In terms of the damage done to the productivity of these young firms by staff turnover, it does not make any difference whether the replaced employees left the company of their own accord or whether they were let go by the firm. These are the findings of a recent study carried out by the Centre for European Economic Research (ZEW) in Mannheim.

This current analysis is based on an interpretation of data collected by the KfW/ZEW Start-up Panel on 15,300 young German companies founded between 2005 and 2012. According to the findings of the study, a one per cent increase in the staff turnover rate leads to a 0.074 per cent decrease in a firm's corporate value added. In other words, if an average recently founded company replaces one out of three employees, this will lead to a loss of 22,000 euros in value added in the same year the employee is replaced. Further analyses suggest that young firms are unable to recoup this loss in productivity even over the course of the next two years, by which time the new employee should have settled in at the company.

The negative effect on productivity is particularly pronounced in recently established firms if the founders have no previous experience of managing personnel. The negative impact is around twice as high when compared to companies whose founders already had management experience. In the survey on which this ZEW study is based, 72 per cent of company founders in total said that they had previous management experience, either from founding another company or from being employed as a manager within another firm. However, a learning effect is not measurable for all the company founders with previous experience, with founders whose previous attempts at setting up a company failed, for instance, struggling with staff turnover just as much as those with absolutely no experience.

High costs as a result of staff turnover

Furthermore, the ZEW study also found that, as companies grow older, the loss in productivity resulting from staff turnover becomes smaller. Firms that are less than 2.4 years old in particular see their productivity decrease considerably when employees are replaced. But while there are some indications that staff turnover at firms older than 2.4 years is less damaging, it still does not have a positive effect on productivity.

"The negative effect of staff turnover can be explained by the weak position of younger companies in the labour market, which makes it difficult for them to attract well-qualified employees. Another explanation is the lack of management experience among many company founders, who as a result find it hard to make sure they are matching themselves as employers to the right kind of employee," says Martin Murmann, a researcher in the ZEW Research Department "Economics of Innovation and Industrial Dynamics" and author of the study. "This means that younger firms, unlike their more established counterparts, run a higher risk of unexpectedly having to replace employees. On top of that, they also have comparatively higher costs as a result of staff turnover because departing employees in younger firms generally have a great amount of tacit knowledge."

For further information please contact:

Martin Murmann, Phone: +49(0)621 1235-282, E-mail: murmann@zew.de