Competition, Cost Structure, and Labor Leverage: Evidence from the U.S. Airline Industry

Abstract

I study the effect of increasing competition on financial performance through labor leverage. To capture competition, I exploit variation in product market contestability in the U.S. airline industry. First, I find that increasing competitive pressure leads to increasing labor leverage, proxied by labor share. This explains the decrease in operating profitability through labor rigidities. Second, by exploiting variation in human capital specificity, I show that contestability of product markets induces labor market contestability. Whereas affected firms might experience more stress through higher wages or loss of skilled human capital, more mobile employee groups benefit from competitions through higher labor shares.