Tuesday, May 1, 2012

The cost of hiring in Germany

How much does it cost to hire someone? This question is surprisingly difficult to answer. It is not sufficient to keep a log of all the recruitment expenses, the time spent and the training costs. Indeed, there are a lot of implicit costs that may, or may not, appear in the future. Indeed, when you commit to employ someone, you also commit to insuring this person in many ways. In the US, health care insurance is a factor. In many jurisdictions, rules regarding firing may also entail substantial costs, for example if they force you to retain an underperforming employee. And you often also commit to provide some insurance against productivity changes by paying a relatively stable wage. Summing up, figuring out the cost of a hire is damn hard.

Samuel Muehlemann and Harald Pfeifer try to figure out some of these costs for skilled workers in Germany. They find a cost worth on average eight weeks of pay, and that is only taking into account time and expenses during the recruitment process as well as the monetary and time costs of training. Strangely, there are no economies of scale, as the elasticity with respect to the number of hires is 1.3. Even worse, the cost doubles from small to large firms. Labor market institutions do not seem to be blamed for this convexity. I am not sure how to rationalize all this. Large firms can hire several workers simultaneously, and this must save some costs. Same for training programs.

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