Does Routine Labor Generate Routine Earnings?

Abstract

A substantial body of research investigates how skills and attributes of upper management affect firm policies and performance, but the impact of workers outside of upper management has received little attention due to scarcity of data involving lower-level workers. Prior research also suggests that operating uncertainty impedes managers’ ability to understand and predict their own firm’s future earnings performance, leading to accrual estimation errors, and that higher-ability managers are better able to transform economic predictability into smoother accruals and earnings. We predict and find that a firm’s utilization of routine labor (defined as labor at greater risk of future automation) contributes to firms’ and managers’ propensity to report more persistent and predictable accruals and earnings. Results indicate that routine labor generates the most predictable and persistent accruals when managers have higher ability and when firm efficiency is higher, when firms build up inventory and therefore accrue a greater proportion of labor cost, and when the routine labor supply is less impacted by external economic policy (in the form of state minimum wage increases). Taken together, our results suggest the characteristics of lower-level workers interact with those of managers, firms, and the economy to determine the persistence of accruals and earnings.