Abstract
Using U.S. state-level labor protection law as an exogenous shock, we find that the adoption of the law alleviates the wages pressure on highly leveraged firms, primarily due to employees’ improved job security offered by the law. Particularly, our finding is more pronounced for financially constrained/distressed firms, and for firms whose employees have strong bargaining power or face high unemployment risk. Overall, our work offers a new perspective towards understanding the relation between leverage and wages, showing a positive side of the labor protection law in lowering labor costs for highly leveraged firms.
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