Oil Price uncertainty and labor investment efficiency

Abstract

This study examines whether oil price uncertainty affects the efficiency of firm-level labor investments. Using a sample of 5183 US firms from 1991 to 2019, we find an inverted U-shaped relationship between oil price uncertainty and labor investment inefficiency. More specifically, firms overinvest in their human capital during the volatility of negative oil price changes. Labor overinvestment (staff overhiring) is highest at an oil price uncertainty of about 38% and decreases after that point. Our findings remain robust to several alternative specifications and are restricted to the subsamples of firms that are more likely to overinvest ex-ante, have high labor intensity, and have overinvestment in non-labor investment expenditures. These findings are relevant to managers, shareholders, and policymakers in devising strategies that demonstrate the response of corporate labor investments to oil price uncertainty.