“What could possibly be more important than who gets hired, developed, promoted, or moved out the door?”
- Jack Welch (1935 - 2020), former chairman and CEO of General Electric (GE)

Labour turnover refers to the amount of people who leave an organization, expressed as a percentage of the workforce, per time period (usually one year). Calculating and monitoring the labour turnover rate is important for an organization’s workforce planning. According to Leigh Branham (2000), in his book "Keeping the People Who Keep You in Business", the cost of losing an employee varies from 25 percent to 200 percent of the employee’s salary.

Labour turnover in any organization is predictable and unavoidable because employees will leave for their own personal and/or professional reasons. People may leave an organizations for several reasons, including:

• External promotion* opportunities in other organizations.

• Higher pay / better remuneration in other organizations.

• Dissatisfaction in the workplace, such as poor working relationships or not feeling valued.

• Resignations due to personal reasons (such as family commitments).

• Career break, perhaps to pursue higher and further education or to start a family.

• Retirement (when people reach the statutory age to leave the workforce).

• Redundancy (employees being let go as their job roles no longer exist).

• Dismissal (being "fired" for misconduct or under-performance at work).

* In the context of human resources, promotion refers to the career advancement of an employee in terms of their hierarchical ranking and professional responsibilities.

According to Sir Richard Branson (founder of the Virgin Group), “The reason why people leave companies is not generally due to lack of pay; it’s due to not being proud of the company they’re working for and not being listened to.”

The labour turnover rate per time period is calculated by using the formula:

For example, if a school employs 90 teachers during the academic year, but 10 of them leave during the year (for whatever reason), the school has a turnover rate of:

(10 / 90) × 100 = 11.1%

In some industries where labour turnover is more commonplace, such as fast-food and supermarkets, it can be more useful to calculate the monthly labour turnover rate. In such cases, the following formula is used:

For example, if a franchised fast-food restaurant business has 45 employees at the start of this month and 55 workers at the end of this month, with 10 employees who left during the month, its monthly turnover rate would be calculated as:

• Employees who have left = 10

• Average size of workforce = (45 + 55) / 2 = 50

• Labour turnover rate = 10 / 50 = 20%

As the business has a labour turnover rate of 20%, this means that for every 50 employees hired at the restaurant, an average of 10 people leave each month.

In general, organizations prefer to have a lower labour turnover rate, due to the opportunity cost, such as the higher costs associated with replacing and recruiting new staff. A low labour turnover rate will reduce the costs and time needed for induction training, improves the personalisation of customer service, as well as increase labour productivity, all of which provide benefits to the firm.The opposite of labour turnover is employee retention. This measures the ability of an organization to keep its employees at the firm, rather than leave.

Retaining employees is important, as they may have established essential skills, expertise and institutional knowledge. In addition, there are significant costs of high labour turnover. These include the costs related to:

• Recruiting new (replacement) workers.

• Inducting and training new staff.

• Management time during the recruitment process.

• Lost productivity during the time between the loss of employees and hiring replacement workers.

• Getting workers familiarised with the operations and corporate culture of the organization, such as adjustment to the new working environment, and company policies, procedures and processes.

• Negative impact on remaining workforce, e.g. overburdening existing staff, poor morale, and lower productivity.

• Negative publicity if the organization struggles to retain its workers.

Motivation theories can be used to show how employers retain their staff. Ultimately, labour turnover can be expensive for an organization. Retaining employees is important for an organization to be financially healthy in the long term.

However, a zero rate of labour turnover is not necessarily desirable either. This is because there can be benefits of some people leaving the organization (or new staff joining the firm). In particular, with new employees there are potential benefits of:

• New ideas (often referred to as ‘new blood’) from those joining from outside of the organization

• Skills and experiences from the new recruits, which may not currently exist (or would be too expensive and time consuming to upskill internal recruits).

A firm can manage a very low labour turnover rate by implementing more opportunities for external training.

 Exam Practice Question

LovenSkate hired 108 workers at the start of 2022 and 102 workers at the end of the year, with ten employees having left the company permanently and two who took maternity leave during the year.

(a)	Define the term labour turnover.	[2 marks]
(b)	Calculate the labour turnover rate for LovenSkate. Show your answer to 2 d.p.	[2 marks]

 Teacher only box

Answers

(a)  Define the term labour turnover.  [2 marks]

Labour turnover refers to the number of people leaving an organization expressed as a percentage of the total workforce, per time period (usually a year).

Award [1 mark] for a definition that shows some understanding of labour turnover.

Award [2 mark] for an accurate definition that shows good understanding, similar to the example above.

---

(b)  Calculate the labour turnover rate for LovenSkate. Show your answer to 2 d.p.  [2 marks]

• Average number of employees for the year = (108 + 102 ) / 2 = 105

• Annual labour turnover rate = (10 / 105) × 100 = 9.52%

• Note that the two people who took maternity did not leave the company permanently, so are not part of the calculation (the value of the numerator) for the firm's turnover rate.

Award [1 mark] for the correct answer and [1 mark] for showing appropriate working out.

 ATL Activity 1 - Why Quit?

"The only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle.”
- Steve Jobs (1955 - 2011), Co-founder of Apple

Read this excellent LinkedIn article about bad management mistakes that make good people quit their jobs. What are the main reasons given?

Read the full article here.

 Teacher only box

The 9 reasons given in the article are:

1. They overwork people

2. They don’t recognize contributions and reward good work

3. They fail to develop people’s skills

4. They don’t care about their employees

5. They don’t honour their commitments

6. They hire and promote the wrong people

7. They don't let people pursue their passions

8. They fail to engage creativity

9. They don't challenge people intellectually

 ATL Activity 2 (Thinking skills) - The costs of high labour turnover

Read this interesting article from the Huffington Post about the true costs of high labour turnover.

What are the main reasons suggested in the article?

To add context, after students have read the article, ask students to discuss the costs of high labour turnover at their school, should a significant number of IB Diploma teachers choose to leave.

 Teacher only box

The main costs of high labour turnover highlighted in the article are:

1. The cost of training (induction and upskilling of new staff).

2. Interview costs (including the immense amounts of time needed to plan and conduct these interviews).

3. Advertising costs.

4. Lowered engagement from existing workforce - it is demoralizing to see so many colleagues leave.

5. Lower productivity of new hires - it can take up to 2 years for new workers to fill the productivity gap.

6. 'The gossip machine' - existing workers wonder why staff are leaving, perhaps for better paid jobs, so may start demanding higher salaries.

7. Less effective service (due to a combination of the above factors).

---

To add context for students, ask them to consider the costs of high staff turnover if all of their IB Diploma Programme subject teachers, EE supervisor, CAS advisor, and TOK teachers left! Answers might include:

• No taught classes (at least temporarily)

• Added pressure on students - self taught classes?

• Higher costs for the school, struggling to recruit so many teachers in a short time frame

• Lower productivity / lower efficiency

• Concerned parents

• Bad publicity for the school

• Impact on exam results

• Morale - Why me? Did they all leave because of me?

 Watch this detailed video to review your understanding of labour turnover: