The Elephant in the Room: The Impact of Labor Obligations on Credit Markets

Jack Favilukis, Xiaoji Lin and Xiaofei Zhao

American Economic Review, 2020, vol. 110, issue 6, 1673-1712

Abstract: We show that labor market frictions are first-order for understanding credit markets. Wage growth and labor share forecast aggregate credit spreads and debt growth as well as or better than alternative predictors. They also predict credit risk and debt growth in a cross section of international firms. Finally, high labor share firms choose lower financial leverage. A model with labor market frictions and risky long-term debt can explain these findings, and produce large credit spreads despite realistically low default probabilities. This is because precommitted payments to labor make other committed payments (i.e., interest) riskier.

JEL-codes: D33 E23 E24 E25 E44 F23 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (31)

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Working Paper: The Elephant in the Room: the Impact of Labor Obligations on Credit Markets (2017)
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DOI: 10.1257/aer.20170156

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