How Much Do Job Vacancies Hurt a Company’s Bottom Line?

This may not be surprising, given how many people fell ill or were subject to lockdown restrictions at the time. But hiring difficulties are not unique to the pandemic years. Even prior to Covid, the proportion of businesses grappling with recruitment challenges remained around 30 percent. Despite this prevalence, economists know surprisingly little about how hiring troubles affect business’ bottom lines. That’s because most data about recruiting difficulties come from small-scale surveys, which researchers can’t easily match with information about the financial health of individual firms.

“What happens to profitability? What happens to wages? What happens to hiring standards?” asks Maddalena Ronchi, an assistant professor of finance at Kellogg. “How bad it is when you can’t hire who you’d like to hire—and whether it’s equally bad for all types of firms—is important to know.”

In order to answer these questions, Ronchi and her coauthors Thomas Le Barbanchon and Julien Sauvagnat of Bocconi University developed a way to estimate the impacts of hiring difficulties on individual firms.

Their most sobering result: on average, doubling the time it takes to fill a job vacancy results in a 3 percent drop in profits. And it’s not just already-ailing companies that are vulnerable to these effects. “Even productive, large, growing firms are negatively affected by this type of [hiring] friction,” Ronchi says. “If anything, even more so.”

Keeping score

To understand the role of hiring difficulties in shaping firms’ outcomes, Ronchi and her collaborators needed job-vacancy data that was both broad and deep, covering a wide swath of occupations, locations, and job requirements. They also needed to know whether each position was ultimately filled, and if so, how long the process took. The researchers found just that data in an online platform operated by the French Public Employment Services—“the largest job board for both French firms and the French job seekers,” according to Ronchi.

Ronchi and her coauthors used this dataset to examine job openings from every private firm in France between 2009 and 2017. They measured hiring difficulties by assessing differences in the time it took to fill openings for various occupations within the same local labor market. They also leveraged variation in the “occupational mix” of each firm in their analysis. For example, take two firms operating in the car industry in the Paris region, Renault and Peugeot. Even though these firms operate in the same sector and location, Renault employs a larger share of mechanical engineers than Peugeot. Now suppose it becomes harder to hire mechanical engineers, with the time required to fill job openings in this occupation going up. “Renault, which relies more on mechanical engineers to produce cars, should be more affected than Peugeot,” explains Ronchi. In other words, by exploiting differences in companies’ occupational mix, the researchers could quantify how changes in recruitment time for workers in specific occupations affected individual firms.

Ronchi and her coauthors derived an equation that, when applied to this data, would produce a “score” (between 0 and 1) representing the amount of hiring difficulty faced by each firm, for each year between 2009 and 2017. The researchers then matched each of these scores against their respective firms’ balance sheets for the same time period.

“Once we have a firm-specific measure of hiring difficulties, it’s very simple to relate it to firm performance,” Ronchi says. “And then we can see what the impact is of having a hard time finding the type of workers you need.”

Healthy firms hit hardest

The results weren’t pretty. A company facing the average amount of hiring difficulty in Ronchi’s sample—a score of 0.2 on a scale of 0 to 1—could expect its sales that year to sag by 5 percent and its profitability by 3 percent. Employment and capital investment would also decrease by 8 percent, a correspondence that Ronchi finds interesting, as it indicates that “firms who have a hard time finding workers can’t substitute labor by investing more in machines.”

Of course, not every company faces merely “average” levels of recruiting friction.

“A valuable part of our paper is to show the extent to which the effect of hiring difficulties differs across firms and occupations,” Ronchi adds. Indeed, for companies that the researchers labeled as “labor-intensive”—that is, ones with an above-average ratio of employees to assets—the negative effects of longer recruiting times on profitability and growth were more than doubled. And those same effects almost quadrupled when hiring difficulties affected specialized occupations like nurses, IT engineers, and banking executives.

Ronchi and her collaborators also found that recruiting troubles hit companies in expanding sectors hardest. These firms were likely to see drops in employment four times larger than those in declining sectors—giving the lie to the notion that hiring difficulties mainly drag down companies that were already struggling.

“When hiring frictions increase, you’re going to have firms in growing sectors that could be doing great by expanding more but aren’t able to—while firms that are not looking to hire aren’t affected as much,” Ronchi says. “It’s hurting precisely the companies that policymakers would like to be able to grow: large firms, profitable firms, firms in expanding sectors.”

A new economic indicator?

To Ronchi, these findings prove that hiring difficulties cause more than anecdotal inconvenience to businesses. “They’re a key determinant of growth, and should be taken seriously,” she asserts. “We should think hard about what can relax these difficulties where and when they occur, because it’s an issue that hurts productive, expanding firms.”

Ronchi sees two ways that policymakers could seek to mitigate these difficulties. “One is to increase the local labor supply—for example, by encouraging female employment,” she says. “Another is to set up training programs targeted at these specific professions that cause extra damage to companies when they can’t be filled. Both of these could increase economic growth at the local level.”

The one thing that policymakers shouldn’t do, Ronchi cautions, is ignore the problem. “Hiring difficulties are a prevalent issue both across countries and over time,” she says. “One way or another, these issues are going to affect most firms in the economy.”