Firms' responses to changes in frictions in related human capital factor markets

Abstract

AbstractResearch SummaryStrategic human capital scholars suggest that firms' human capital rents are greater when labor market frictions are more prevalent. Taking this argument further, we suggest that when frictions for one type of human capital decrease, firms are motivated to place greater emphasis on human capital that is interdependent in production where frictions are unchanged. Empirically, we exploit an exogenous institutional change in the National Football League to demonstrate that coaching (managerial) dismissal and replacement is more likely to occur (and is influenced by a wider variety of information) after frictions for player (production worker) human capital decrease. Our findings suggest adding a new dimension—tradeoffs between related labor market segments—to the scholarly conversation about how firms manage their human capital (and other resources) strategically.Managerial SummaryWe often point to the existence of labor market frictions for different types of human capital as reasons why firms would emphasize one type of human capital over another. But changes in frictions in markets for related human capital, the present focus, can influence this decision as well. In particular, our study demonstrates that when the NFL implemented free agency and a salary cap in the market for player talent in 1993, limiting the ability of teams to stockpile talented players, NFL teams responded by increasing their emphasis on coaching talent in the production of wins. This increased emphasis manifested in more frequent coaching dismissals and a greater influence of different types of information on the desirability of replacing a team's head coach after 1993.