Business blog

Q&A - Why might high labour turnover be bad news for a business and what can it do about it?

There are many reasons why a high labour turnover figure (poor employee retention) may cause problems for a firm…

High labour turnover:

• Increases recruitment costs (e.g. advertising for replacement staff; employing temporary staff whilst the job vacancies are filled)
• Can reflect poor morale in workforce and so low productivity levels
• Increases training costs of new workers
• Can result in lower productivity while new/replacement workers settle in

There is no set level or percentage of labour turnover that determines when it begins to have a negative impact on business performance. Everything depends on the type of labour markets in which the business competes. Where it is relatively easy to find and train new employees quickly and at relatively little cost (that is where the labour market is loose), it is possible to sustain high quality and customer service despite having a high labour turnover rate.

By contrast, where skills are relatively scarce, where recruitment is costly or where it takes several weeks to fill a vacancy, labour turnover usually causes problems for a business. This is especially true of situations in which the business are losing staff to direct competitors or where customers have developed relationships with individual employees (e.g. key sales people).

A business can improve its employee retention by offering:

- Financial incentives (e.g. bonus, salary rise)
- Non-financial incentives (e.g. promotion, more decision making power, better communication and consultation)
- Improving the effectiveness of its recruitment and selection processes so that fewer unsuitable employees are recruited in the first place
- Conducting research to understand why employees are leaving (through exit interviews or surveys)

A business may also have to adopt more flexible working practices in order to retain staff and fit in with the changing trend in UK employment and working patterns.  For instance, there is a greater emphasis currently being placed on “flexible hours contracts” and part-time working.  This is mainly to allow for the growing number of women joining the workforce who have to juggle childcare and their working lives.

However, it is important to recognise that there are some advantages of a firm experiencing labour turnover:

- It gives the chance for new people to be brought into the business who may have fresh ideas and up to date market knowledge. 
- Workers with specialist knowledge or expertise can be employed rather than having to train up existing lower skilled employees.

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