Labor Adjustment Research Articles

CEO Locality and Employment Stickiness

AbstractWe explore whether CEOs’ hometown identity involves labour adjustment decisions. We document that local CEOs, with their hometown ties, reduce employment to a lesser degree following sales downturns than nonlocal CEOs. This finding suggests that local CEOs’ strong local attachments motivate them to prioritise employee interests and build good reputations, which create private benefits or reserve future career paths in their hometowns. Our findings are more pronounced in areas where local connections are highly valued, thus supporting our argument. We further find that the retention efforts of local CEOs are related to low future performance. We extend the cost stickiness literature by documenting that CEOs’ place attachment influences resource adjustment decisions, particularly regarding labour, which eventually influences subsequent performance.

Allocating labor across small firms: Experimental evidence on information constraints

We document interest in labor reallocation among small firm owners in Ghana; 60% and 41%, respectively, self-report willingness to hire or work for the average local firm owner. Firm owners also exhibit high willingness-to-pay for information on a random subset of hiring firms and jobseeking firm owners during a Becker–Degroot–Marschak exercise. Conditionally random variation in access to this information generates immediate labor adjustments within and between firms, though rarely of firm owners themselves, and impacts firm closure 5-months post-intervention. Our findings suggest that labor market information of this kind is both valuable and actionable in our context.

Worker reallocation, firm innovation, and Chinese import competition

While recent work has documented a nexus between international trade and firm innovation, the underlying mechanisms explaining firms’ innovation in response to import competition are, thus far, poorly understood. To identify the mechanism of labor adjustments and its economic relevance, we use longitudinal linked employer–employee data from Denmark (1995–2012). We first show that import competition triggers a significant increase in the share of R&D workers at the firm level. The majority of the increase in the share of R&D workers is explained by between-firm, not within-firm, worker reallocation. The significance of this reallocation becomes evident when we show that innovation improvements are observed only among firms that experience a large increase in the share of R&D workers, especially if this increase is achieved through between-firm worker reallocation. We then extend our analysis to Portugal where the labor market is more rigid and find contrasting yet consistent results: labor reallocation occurs only within firms and it does not result in increased innovation.

The Impact of Corporate Social Responsibility on Labor Investment Efficiency: Evidence from China

This study examines the impact of corporate social responsibility (CSR) on labor investment efficiency utilizing a sample of China’s listed companies. The empirical results demonstrate that CSR improves labor investment efficiency, and the effect is significant in terms of both overinvestment and underinvestment. Findings from cross-sectional tests indicate that CSR has a more significant effect on labor investment efficiency in non-state-owned firms and firms with more financing constraints or higher labor adjustment costs. The conclusion is robust after utilizing a 2SLS regression, replacing indicators for labor investment efficiency and accounting for the impact of non-labor investment. In general, the results support stakeholder theory and confirm that CSR can enhance external monitoring and improve firms’ investment behavior.

Does exporting to China spur firm innovation activities in developing countries?

Trading with developed countries has been shown to promote technological progress. However, it remains unclear whether trade between developing countries promotes or hinders technological progress. To address this gap, the present study utilizes micro data from the 2006–2021 World Bank Enterprise Surveys for 139 developing countries to assess the link between exports to China and innovation activities. We analyze the relationship between exports to China and various proxies for firm-level innovation activities in other developing countries. Our findings suggest that exports to China significantly enhance innovation in other developing countries, regardless of the innovation measures used. The heterogeneous analysis shows that the effects are more pronounced for mature firms and exporters, while young firms and non-exporters are more likely to introduce process innovation directly, rather than spending more on R&D. This effect becomes more pronounced after the implementation of China's Belt and Road Initiative in 2013. The underlying mechanism is that exporting to China (only for capital-intensive goods) could increase the demand for skilled labor, thereby contributing to higher innovation activities among firms in developing countries, as evidenced by firms hiring a greater proportion of skilled labor. These labor adjustments could contribute to the increase in the likelihood of firms introducing process innovation and spending on R&D by 38% and 47%, respectively.

Labor market adjustment to extreme heat shocks: Evidence from Brazil

Despite ample evidence on the labor productivity impact of heat shocks, little is known about how heat shocks affect labor adjustment over time. This paper uses administrative employer–employee linked data from Brazil to examine margins of labor market adjustment to extreme heat. Tracking workers over time and across job spells, I find that quarterly heat shocks increase the probability of formal manufacturing layoffs. In the medium run, there is limited intersectoral and interregional reallocation, as well as a significant failure rate to reallocate back to formal sectors, indicating job transitional costs. Finally, the employment impact of heat shocks is larger for workers in more routine manual task intensive, less abstract occupations.

A Theory of the Term Structure of Interest Rates under Limited Household Risk Sharing

Abstract We present a theory in which the interaction between limited sharing of idiosyncratic labor income risk and labor adjustment costs (that endogenously arise through search frictions) determines interest rate dynamics. In the general equilibrium, the interaction of these two ingredients relates bond risk premiums, cross-sectional skewness of income growth, and labor market tightness. Our model rationalizes an upward-sloping average yield curve and predicts a negative relation between labor market tightness and bond risk premiums. We provide evidence for our theory’s mechanism and predictions.

Job polarization and non-standard work: Evidence from France

Using annual and quarterly data from the French LFS, we investigate the interplay between the extensive and intensive margins of labor adjustment, job polarization, and non-standard work (NS) along the business cycle. We find that the declines in aggregate work hours during economic downturns can primarily be attributed to the reduction in routine standard employment (R,S) during past recessions in France. We then study the dynamics of routine standard employment, highlighting several key findings: (i) The primary drivers of R,S employment are inflows from routine non-standard work (R,NS) and unemployment. (ii) Individuals who lose R,S jobs are more likely to transition to R,NS positions following a brief period of unemployment. (iii) A majority of transitions within this employment category occur within the same employer, resulting in asymmetric adjustments in individual working hours. This often involves a notable increase in hours following either a contractual upgrade or a change in employer. Finally, we draw a comparative analysis between these findings and the United States, where the dynamics of routine employment appear distinct, despite a similar trend in job polarization.

Does Trade Secrets Protection Affect Human Capital Investment? Evidence From the Inevitable Disclosure Doctrine

This study investigates the impact of trade secrets protection on corporate employment decisions. By exploiting the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by the U.S. state courts as an exogenous shock that significantly reduces employee mobility, we employ a difference-in-differences (DiD) approach and find that the adoption of the IDD, on average, leads to higher deviation from the optimal employment level explained by the underlying economics (i.e., lower labor investment efficiency) for firms headquartered in that state, whilst the rejection of the previously adopted IDD results in lower deviation from the optimal employment level (i.e., higher labor investment efficiency). Further analyses show that the impact of the IDD adoption on corporate employment decisions is primarily driven by firms’ overinvestment in labor, suggesting that firms strategically engage in precautionary human capital hoarding in response to the reduced talent supply in the labor market and consequently higher labor adjustment costs. Our cross-sectional analyses show that the impact of the IDD adoptions on corporate employment decisions is more pronounced for (1) firms in high-skill industries and (2) firms facing high levels of product market competition. Overall, our findings indicate that the trade secrets protection environment can be an influential determinant for labor investment practices and have implications for both policymakers and industry practitioners.

An Empirical Analysis of Gender Differences in Asymmetric Labor Adjustment: Evidence from Korea

An Empirical Analysis of Gender Differences in Asymmetric Labor Adjustment: Evidence from Korea

Labor skill and accounting conservatism

We examine the role of labor market frictions in shaping firms’ accounting policies. We find that firms’ reliance on high-skill labor is negatively related to accounting conservatism, presumably because higher labor adjustment costs make conservative accounting policies more costly. Cross-sectional tests further support the notion that labor adjustment costs are the main driver for the negative relation between labor skill and accounting conservatism. Specifically, the negative relation is more pronounced when a firm i) operates in more competitive industries, ii) has a higher voluntary employee turnover rate, and iii) is more financially constrained. Finally, we show that the positive implication of accounting conservatism for future operating performance and cost of debt is weaker for firms requiring high labor skill, providing plausible explanations for a negative relation between labor skill and accounting conservatism. Collectively, we provide novel evidence on the relation between labor force heterogeneity and accounting conservatism.

Returning from overseas: STEMs migration and corporate digitalization

This paper investigates the spillover effect of cross-border migration of STEMs from the U.S. on corporate digitalization. Using a sample of Chinese high-tech enterprises (HTEs), we find that the cross-border migration of STEMs promotes the HTEs' digitalization. The talent attraction effect from the labor market and the market competition effect from the product market are proven to be two crucial channels. Further tests show that the spillover effect is more pronounced in samples with lower labor adjustment cost, higher employee care, and better employment environment. Finally, the above effect contributes to the high-quality development of HTEs. This paper verifies the impact of cross-border migration of human capital on corporate digitalization from the perspective of labor incentives, we provide policy insights for policymaker to seize the opportunity to bring in overseas STEMs.

Labor market institutions and technology-induced labor adjustment along the extensive and intensive margins

What is the composition of total hours response to a technology shock in countries with different labor market institutions in terms of extensive and intensive margin movements? To answer this question, I identify technology shocks using structural vector autoregressions (SVARs) and decompose the responses of hours into adjustments along the extensive and intensive margins. I compare the adjustments along the two margins between groups of countries with strict and flexible labor market institutions. I find that both margins play a large role in accommodating technology shocks, with adjustments along the intensive margin being more important. Furthermore, countries with flexible labor market institutions display a larger drop in employment, whereas the results for the intensive margin are mixed. Finally, the cross-country differences in fluctuations along the two margins can be linked to the strictness of institutions that target quantity and price adjustments in the labor market.

Does executives’ overseas experience improve firms’ labor investment efficiency?

Based on upper echelons theory and using a sample of private Chinese A-share listed firms from 2008 to 2020, this paper studies the impact of executives’ overseas experience on firms’ labor investment efficiency. The results show that executives with overseas experience significantly enhance firms’ labor investment efficiency. After distinguishing between different types of overseas experience, the results show that executives with only study experience or with both study and work experience abroad have a significant positive effect on firms’ labor investment efficiency, while executives with only overseas work experience have no significant effect. A cross-sectional analysis based on labor adjustment costs shows that the positive impact of executives’ overseas experience is more pronounced in labor-intensive firms, firms with a greater proportion of R&D investment and firms with a higher percentage of highly educated employees. The mechanism tests show that executives with overseas experience can optimize labor investment efficiency by lowering agency costs, attracting analyst attention and alleviating financing constraints under conditions of underemployment. This study enriches the literature on the characteristics of executive teams and the efficiency of labor investment, providing reference and inspiration for firms to attract more high-quality returnees and optimize their labor resource allocation.

Identifying Resilient and Non-Resilient Labour Conditions in Europe Using Qualitative Comparative Analysis

Abstract Based on the concept of labour market resilience, this paper is aimed to determine the combination of initial conditions behind resilient and non-resilient labour markets after the financial crisis in 2008 in Europe. We start from the assumption that some initial conditions in 2007 are crucial to achieve a specific labour result when a shock appears. In this sense, the effect of temporary employment in cyclical sectors, labour market flexibility, the level of education among the workforce, and the expenditure on Labour Market Policies (LMP) have been tested using crisp-set Qualitative Comparative Analysis (csQCA) in 25 European countries. Whilst our results do not explain labour market resilience in its entirety, we have found a model explaining 85% of the non-resilient cases. These findings suggest that the different levels of initial conditions may have prompted dissimilar labour adjustments with varying success rates in dealing with the job losses.

Deleveraging for talents: Human capital reliance and corporate leverage

AbstractUsing data from Chinese listed firms, we develop a measure of a firm's reliance on human capital that is based on its demand for highly educated employees. We find that a high reliance on human capital is linked to low corporate leverage, and this effect is more pronounced among firms at a high risk of human capital mobility and those facing high skilled‐labour adjustment costs. Our results indicate that firms strategically manage their capital structure to maintain financial flexibility, enabling them to effectively respond to the labour‐related costs associated with human capital losses and costly labour adjustments.

Marginal Intra-Industry Trade and Labor Adjustment Cost in EU

Intra- Industry Trade is a crucial issue from the point of view of increased importance in international trade and its' labor adjustment cost influence in the literature. This research analyzes the relationship between MIIT and labor adjustment cost by comparing the different measures of marginal intra-industry trade. We compare the A, MD1, and MD2 indexes, which are different measures of MIIT. 127 manufacturing subsectors are used in 15 European Union countries in the period between 1990- 2017. The result of dynamic panel data of system GMM shows that the MD2 measurement method explains the low adjustment cost better than MD1. It significantly correlates with a few of the variables concerning trade. MD1j has a strong relationship with sectoral employment, consumption, productivity, and openness in the manufacturing industry in the European Union. Three measures of MIIT present a negative link between MIIT and adjustment cost, which is suitable with the literature.

Labour marketisation level and corporate labour investment efficiency: Evidence from China

AbstractThis study investigates the effect of labour marketisation level on corporate labour investment efficiency. Using a sample of Chinese listed firms, we provide evidence that higher labour marketisation level is associated with higher corporate labour investment efficiency. Firms with higher labour marketisation level reduce over‐investment and under‐investment in labour. In the cross‐sectional tests, we discover that this effect is more prominent for private enterprises and firms with stronger product market competition, more financing constraints, and higher labour adjustment costs. We eliminate the impact of other non‐labour investments and ensure that our results are not driven by these investments.

Uncertainty shocks and employment fluctuations in Germany: the role of establishment size

Abstract Uncertainty shocks are found to affect labour market outcomes adversely. Most studies interrelate non-convex labour adjustment costs with the propagation of macroeconomic uncertainty to the labour market. I show that non-convex labour adjustment costs differ by establishment size in Germany. Hence, uncertainty shocks should affect large and small establishments differently. Therefore, this article studies the effects of uncertainty shocks on employment adjustments in large and small establishments employing four structural vector auto-regressive models for Germany from 1992 to 2014. These four models estimate the effects of uncertainty shocks on employment, worker flows, job flows, as well as worker churn in establishments with fewer than 100 and with at least 100 employees. The results suggest that uncertainty shocks trigger considerable employment fluctuations in large establishments while they barely affect small establishments. Furthermore, large establishments adjust their labour input by delaying the replacement of workers.

Unions and Automation Risk: Who Bears the Cost of Automation?

Abstract Automation creates winners and losers. By examining establishment-level panel data, we explore how labour unions affect labor adjustment associated with automation. Although automation can increase new hires of junior and unskilled production workers, the presence of labour unions neutralizes these effects. The results suggest that labour unions have incentives to protect incumbent workers negatively affected by automation.