Does the Rise in Replacement Workers Impact Wages?

Shu Lin Wee, Tepper School Assistant Professor of Economics, speaks about her research on replacement hiring and the productivity wage gap.

Video Transcript

My research basically focuses on macroeconomics and labor markets, so it's at the intersection of the two. And so mostly, I look at unemployment dynamics.

In my paper on replacement hiring, which has the same title, we look at whether the increased share of replacement hires has contributed to the decline in the labor share. You can think of replacement hiring occurring for two reasons. So one reason might be that a firm had a worker and the worker quit. You can also think of replacement hiring occurring when the firm currently has a worker, the worker has not left, but the firm decides to replace his or her current worker with a better worker. The fraction of total hires that are replacement hires has actually been increasing over time. At the same time in the data, we also see that there has been another trend in the U.S. economy, which is that the labor share, which is the total amount of income that goes toward laborers, has actually been declining over time. So we want to see whether these two trends are related.

Then basically, what the firm is trying to do is it basically is trying to increase its market power, right? He basically says to his current worker right now, "Look, you are replaceable." So he's able to then offer workers a lower wage because of that, OK? Now you might also think that another way that replacement hiring, if it is coming through layoffs instead, basically causes wages of the worker to decline. It increases job insecurity for the worker. So at the same time, since the worker basically knows that jobs do not last for a very long time even when he gets employed, he's basically able to say, "Well, for me to look more employable and more attractive to an employer, I'm going to want to ask for lower wages," OK? So this causes wages to again fall.

A rise in replacement hiring through layoffs actually allows the firm to actually have productivity gains, because if he's matching with better workers over time, he's able to produce more. But notice that these firms who are also doing replacement hiring through firing were the ones who are putting downward pressure on the wages. And so what we get now is basically an increase in labor productivity, how much the firm is able to produce with each worker. But a lot of those gains now are not going toward workers themselves. Instead, they're going more toward the firms. The issues within this paper itself should concern policymakers precisely because they do suggest rising inequality.