Misperceptions of Career Incentives and Turnover

Policy Context

High turnover rates are common in manufacturing firms in developing countries. In Hawassa Industrial Park in Ethiopia—one of the major government projects of industrialization—foreign firms have provided many formal job opportunities to young female workers since 2016. Even though these jobs offer relatively high amenities, worker benefits, and a good pay scheme, administrative data show that 31% of workers quit within the first month.

Although 78% of the new hires consider promotion likelihood and upper-level salary important aspects of their new jobs, they have substantial misperceptions of the long-run career incentives. In this study, researchers examine the following questions: How does providing information on long-run career incentives update workers’ perceptions of the salary of average workers and their own? To what extent do misperceptions of the long-run career incentives explain the high turnover? Does information help workers make better career decisions and help firms retain better-matched workers?

Study Design

500 workers will receive no information, while 500 workers will receive promotion information. For half of the workers in the information group, researchers will inform them of salary and promotion likelihood to the medium level (team leader or quality controller). For the other half, they will inform workers of salary and promotion likelihood to the high position (supervisor).

A baseline survey will measure (1) misperceptions (salary at each level, promotion likelihood to upper levels, and other non-monetary job aspects), (2) career plans, (3) welfare indicators, and (4) types (including education, experience, general skills, specific garment skills). A follow-up survey will first observe turnover through administrative data, including whether workers exit voluntarily or are fired by firms. The research team will then collect workers’ on-the-job performance and salary payment from each firm. Finally, researchers conduct a follow-up survey to update workers’ misperceptions, over-optimism, career plans, skill development, and welfare.

Results and Policy Lessons

Researchers find that beliefs about career ladder incentives significantly affect turnover rate. A 20% increase in the perceived after-promotion salary reduces the probability of the worker quitting before signing a contract by about 8.36 percentage points, which is about 20% relative to the average rate of early turnover. The effect on turnover is driven primarily by workers with higher educational attainment. They find no evidence of spillovers of the information from treated workers into control workers. Results suggest that firms or the industrial park may provide benchmark information of career ladder incentives to applicants before they start work, which may on one hand help firms retain workers who stay longer, and on the other hand encourage workers who will not stay on the job to search for better opportunities.