Redundancies in an industry in transition: who gets fired and why?

Abstract

Does employee productivity explain why during a period of crisis firms fired relatively more blue-collar than white-collar workers and why, when conditions improved, they began to hire relatively more blue collars? Are redundancies targeted towards the least productive workers? Was firms’ behaviour profit maximising? These questions are investigated in the extreme circumstances of the footwear industry in Russia in the period 1994-2000. Firms in this industry underwent a major upheaval in these years. Part of their response was to downsize the blue-collar workforce more severely than the whitecollars. Was this because (a) white collar employees had higher marginal productivity or (b) because the technical rate of substitution of white collar labour with blue collar labour was greater than the factor price ratio of these two inputs If it turns out that the marginal productivity of white collar employees was the higher, we could conclude that they were embodying more human capital (Becker, 1962); if they were no more productive than blue collars, this could mean that they had been privileged during downsizing for some institutional reasons, e.g. a prior commitment towards higher-ranking staff (Lazear, 1979; Lazear and Rosen, 1981). If it turns out that the technical rate of substitution of white collar labour with blue collar labour was greater than their factor price ratio, this would suggest that the firms’ downsizing policies were consistent with profit-maximising precepts. Russian footwear is a suitable industry for investigation because there are many units, which use a standard technology, and with relatively little political interference. The paper uses Translog and Cobb Douglas production functions with ordinary least squares, two-step least squares and stochastic frontier analysis, both in a panel and in a cross-section setting. Results show that white collar employees were not only more productive than blue collar employees but also the technical rate of substitution of white collar labour with blue collar labour was greater than the factor price ratio of these two inputs. This suggests that even in a turbulent period and with a Soviet heritage, the firms behaved as profit-maximising agents. Institutional factors may also have operated, but they do not need to be invoked in explaining the data.