The Cross-Section of Labor Leverage and Equity Returns

Andres Donangelo, Francois Gourio, Matthias Kehrig and Miguel Palacios

No WP-2017-22, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Using a standard production model, we demonstrate theoretically that, even if labor is fully flexible, it generates a form of operating leverage if (a) wages are smoother than productivity and (b) the capital-labor elasticity of substitution is strictly less than one. Our model supports using labor share?the ratio of labor expenses to value added?as a proxy for labor leverage. We show evidence for conditions (a) and (b), and we demonstrate the economic significance of labor leverage: High labor-share firms have operating profits that are more sensitive to shocks, and they have higher expected asset returns.

Keywords: Labor leverage; labor mobility; labor supply; wages; productivity (search for similar items in EconPapers)
JEL-codes: J20 J22 J24 J62 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2017-09-04
New Economics Papers: this item is included in nep-hrm
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The cross-section of labor leverage and equity returns (2019)
Working Paper: The Cross-Section of Labor Leverage and Equity Returns* (2017)
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