Churning the workforce is an approach to talent management that relies on use of the outside labor market to meet changing skill needs. Specifically, employers needing new skills, knowledge, and abilities, perhaps most often to meet changing demands from product markets, acquire them by hiring employees from the outside market. The employees they currently have, whose skills are no longer needed, are then laid off.
Churning as a human capital strategy represents a sharp contrast to what had been the dominant model for accommodating change in the workforce: retraining and relocating existing employees to meet the demands for new and different skills and internal development of skills more generally. Lifetime employment models that were popularized in Japan and also operated in the United States were essentially based on this retraining and relocating approach.
Evidence of the prominence of the churning approach comes from several indirect sources: high levels of layoff rates, higher among white-collar and managerial employees than among other occupation groups even when overall economic indicators are strong; growing use of search firms and job boards that facilitate outside hiring; and growing turnover across organizations. There are also some direct sources of information: Only 3 percent of large corporations in the United States reported to the Conference Board in the mid-1990s that they still offered job security to their employees, although they had previously; only 35 percent of U.S. establishments in the 1997 Census National Employer Survey reported that they retrained workers who were at risk of layoff because of obsolete skills.
Several factors appear to have increased the use of the churning strategy: the notion that the pace of change that businesses must accommodate has increased over time and that it is no longer possible to meet those demands by internal restructuring; the labor market infrastructure that makes it possible to hire from the outside (e.g., job boards, search firms) has grown vastly; and at least some employees in large corporations are more resistant to geographic relocations that might allow them to stay in the same corporations, albeit in different positions.
At the extreme, the churning approach raises interesting questions about what constitutes a firm and its competencies. Especially for companies whose competencies seem strongly related to knowledge or human capital, the boundary of a firm and its competencies seems less clear if all the talent is hired from the outside market and is changed on a continual basis. Silicon Valley companies would seem to fit this model, and some say that their true competency is the ability to assemble the right talent in ways that essentially reinvent the firm.
There has been a long academic discussion about the merits of the churning approach, especially the negative consequences for employment security. A number of alternative models have been offered to allow employers to achieve high levels of flexibility in response to changing demands while preserving something like stability in employment relationships.
Perhaps the best known of these alternative arrangements is the core-periphery model, based on the notion that firms have certain core resources and capabilities that are important to protect. In this case, those resources refer to people. The core refers to employees whose skills are crucial to the organization and difficult to replace. Ups and downs in business demand are then accommodated by shifting all the fluctuations in employment to groups other than this core, what one might think of as “peripheral workers,” whose skills are less crucial and easier to replace. A good example is a professional services firm, such as a law firm, in which partners represent the core knowledge and skills of the firm, and the associates, counsel lawyers, or other non-partner lawyers are hired to meet peak demand and then let go if business falls off.
Although the logic of core-periphery models is appealing, there is little evidence that organizations make much use of it. Part of the reason is that the variations in demand to which organizations must respond are changes not simply in the volume of products and services they produce but also in the types of products and services. With the latter, it is more difficult to think of a permanent “core.”
An alternative model, which has been especially prominent in Europe, sees functional flexibility, the ability to reassemble existing competencies in new ways, as a substitute for numerical flexibility, the ability to respond through hiring and layoffs. Exactly what practices and policies constitute functional flexibility may not be completely clear, but teamwork, employee involvement, and other systems of work organization that provide opportunities to respond to change quickly appear to be important components. Here, the evidence is more supportive, especially case studies that show that the capacity for internal adjustments and flexibility may reduce the need for hiring and layoffs. There is also evidence, however, that firms may make use of both functional flexibility and numerical flexibility to accommodate the changes in their markets.
The churning approach to human capital is clearly tied to broader changes in the economy that demand more rapid updating of overall business strategies and underlying competencies. It has both helped drive and responded to related changes in employment relationships, such as declining loyalty between employers and employees and the rise of infrastructure to facilitate outside hiring. Many believe that the consequences for firms have been positive, allowing them to restructure more quickly and in more dramatic ways. The consequences for employees, however, have been mixed. On the upside, workers now benefit from greater opportunities associated with more hiring across companies; on the downside, more face layoffs because of mismatches with changing firm needs.
There have been two policy responses to help employees address the downside of the churning strategies. The first, which is associated with European perspectives, is simply to limit an employer’s ability to lay off workers, especially when the motivations concern demands for new competencies and not poor performance or declining demand. Restricting the ability to lay off, in turn, reduces the ability to hire from the outside. The goal of these restrictions is to force firms to meet their needs for flexibility through internal restructuring. The second response, which is associated with the U.S. system, takes the exact opposite approach in trying to make it easier for employees to move across employers. Here, policy interventions include making pensions and other benefits more portable, so that it is easier to change jobs, and giving workers more information about employment prospects and related skill requirements to help them make better decisions. These two different perspectives are at the core of economic policy differences between the United States and Europe.
- Atkinson, J. 1984. “Manpower Strategies for Flexible Firms.” Personnel Management 16:28-31.
- Cappelli, P. and Neumark, D. 2002. “External Churning and Internal Flexibility: Evidence on the Functional Flexibility and Core-periphery Hypotheses.” Industrial Relations 43:148-182.
- Drago, R. 1996. “Workplace Transformation and the Disposable Workplace: Employee Involvement in Australia. Industrial Relations 35:526-543.
- Price, J. L. 1977. The Study of Turnover. Ames, IA: Iowa State University Press.