Long-term Earnings Research Articles

The Effect of Outsourcing on Remaining Workers, Rent Distribution, and Inequality

Firms can decide whether to produce some goods and services in-house or purchase them from the market. Increasingly, they are purchasing from the market—using subcontractors, temp agencies, and other outsourced labor. Low-wage workers' wages decline when they are outsourced. If firms are rent sharing, remaining workers' earnings might increase if there are more rents or fewer workers to share them with. However, little is known about how outsourcing affects remainers, and the consequent impacts on inequality. I analyze the impact of occupational layoff (OL) outsourcing on remainers and inequality using matched employer-employee data based on German social security records. Outsourcing increases remaining workers' long-run earnings by 6% in a sample of 260 OL outsourcing events. Remainers are also more likely to stay at the outsourcing firm. Higher earnings and lower separations is consistent with remainers receiving additional rents. Earnings gains are larger for workers in the bottom-half of the within-firm wage distribution. When comparing effects by collective bargaining agreements (CBAs), outsourcing increases remainers' long-term earnings by 6% in firms with CBAs, and lowers short-term earnings by 3% in firms without CBAs. These results are consistent with a model of wage setting where firms compensate remainers in the presence of a CBA. When there is no CBA, firms do not compensate remainers, and lower their wages. Analyzing the impact of outsourcing on wage inequality, outsourcing reduces within-firm inequality as the lowest-wage workers leave the firm and low-wage remainers are compensated. 11.7% of workers are part of an outsourcing event. Using Recentered Influence Functions, I show a 1% increase in the share of workers part of an outsourcing event increases earnings at the top of the distribution by approximately 10-15%, and the gini index by 10%. Increased earnings at the top of the wage distribution suggests prior estimates underestimate the impact of outsourcing on wage inequality by not accounting for increased wages among remainers, who are relatively high-wage.

Mothers' Job Search after Childbirth

We explore the impact of successful job search after childbirth on mothers' labor market careers. Using a bounding approach and administrative data, we find strong heterogeneity in the returns to leaving the pre-birth employer. Moving to a new employer after childbirth leads to an increase in re-employment earnings only for mothers at the upper part of the earnings distribution. For these mothers, initial job search also increases long-term earnings. We provide evidence that earnings gains are the result of higher geographical mobility and longer commutes to work. Successful mothers are also more likely to move to faster growing firms and firms offering better opportunities to women. Our results do not suggest that husbands play an important role in supporting successful job search of mothers.

It is about beating the competitors - the usefulness of accounting information in reflecting competitive advantages

This paper examines how a firm's long-term earnings rankings within the industry convey valuable information about its competitive advantages. Earnings rankings are isolated from industry and market-wide factors, therefore, contain firm-specific information that reflects the rareness of the firm's resources and strategies. A higher ranking also indicates more effective value creation and difficulty in imitation, which translates into more sustainable future performance. Since a firm's competitive advantages are defined by rareness, imitability, value, and sustainability, earnings rankings provide a numeric summary of competitive advantages. We decile rank a firm's earnings within the industry and conduct a principal component analysis to measure competitive advantages. The findings confirm a significant positive association between earnings rankings and competitive advantages. In particular, long-term earnings rankings, measured by the 5-year moving averages, should be the most informative. Our results shed light on the usefulness of accounting numbers in implementing strategic management based on competitive advantages.

The Debt-Equity Spread

We propose the debt-equity spread (DES) as a measure of the valuation gap between debt and equity at firm level. DES strongly predicts stock and bond returns in opposite directions. A strategy that takes long positions in firms with low DES, whose stocks are cheap relative to bonds, and short those with high DES generates an average stock return of 6% per annum and bond return of -3.3% per annum. The return predictability is consistently stronger among small, illiquid, and difficult-to-short stocks and bonds. In addition, higher debt-equity spreads are associated with (i) higher probability for negative revision of long-term earnings growth forecasts; (ii) more equity issuance and debt repurchase, resulting in a low leverage ratio; (iii) stronger preferences for stock payments in acquisitions; and (iv) more insider stock selling. Together, these results suggest that the return prediction of DES is likely driven by mispricing rather than risk exposures.

Differential performance impacts of outsider and insider interim CEO successions

ABSTRACT This study finds differential performance impacts of outsider and insider interim CEO successions. Stock markets react incrementally positively to interim CEO successions when the interim CEOs are from outside rather than inside firms. Relative to insider interim CEOs, outsider interim CEOs produce worse earnings performance and greater restructuring charges during their services but lead more frequently to outsider permanent CEO appointments followed by better long-term earnings performance. Our findings suggest that market reactions to interim CEO successions rationally impound the investors’ expectation that outsider relative to insider interim CEO successions will generate greater short-term disruption but pave the way for greater long-term performance improvement.

Sources of Displaced Workers’ Long-Term Earnings Losses

We estimate the magnitudes of reduced earnings, work hours, and wage rates of workers displaced during the Great Recession using linked employer-employee panel data from Washington state. Displaced workers’ earnings losses occurred mainly because hourly wage rates dropped at the time of displacement and recovered sluggishly. Lost employer-specific premiums explain only 17 percent of these losses. Fully 70 percent of displaced workers moved to employers paying the same or higher wage premiums than the displacing employers, but these workers nevertheless suffered substantial wage rate losses. Loss of valuable specific worker-employer matches explains more than one-half of the wage losses. (JEL E32, J22, J31, J63, R23)

Practical Applications of Rebalance Timing Luck:The Difference Between Hired and Fired

<h3>Practical Applications Summary</h3> In <b>Rebalance Timing Luck: <i>The Difference Between Hired and Fired</i></b> from the Summer 2019 issue of <b><i>The Journal of Index Investing</i></b>, authors <b>Corey Hoffstein, Daniel “Justin” Sibears</b>, and <b>Nathan Faber</b> (all of <b>Newfound Research</b> in Boston) warn that index fund managers may be overlooking a significant factor driving their investment performance: the date when they rebalance their portfolios. Rebalancing is essential to sound portfolio management, but most managers give little thought to when to do it. Hoffstein, Sibears, and Faber say that is a mistake. They introduce the concept of rebalance timing luck, showing that portfolios rebalanced in different months perform differently over time. This can mean major long-term earnings shortfalls for managers with bad rebalance timing luck. To solve this problem, the authors suggest dividing index funds into identically managed subportfolios, rebalancing the subportfolios on different dates equally spread out over the year, and then equally redistributing all of the fund’s assets across the subportfolios. They find that fund managers can substantially decrease the effects of rebalance timing luck just by dividing a fund into four subportfolios and rebalancing one per quarter—a simple way to potentially shield themselves and investors from bad rebalance timing luck. <b>TOPICS:</b>Mutual funds/passive investing/indexing, portfolio construction, performance measurement, statistical methods

The Long-Term Distributional and Welfare Effects of Covid-19 School Closures

Using a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.

Characteristics and Implications of Long-Term Earnings Guidance

ABSTRACTWe examine a form of voluntary disclosure that has received limited attention to date, namely, managers' long-term guidance for earnings three to five years in advance. We identify 1,739 long-term earnings forecasts issued by 295 unique firms from 2000 to 2012 and find that relative to firms that issue only short-term earnings guidance, those that also issue long-term guidance are larger, have more certain operating environments, and are followed by analysts who are more likely to issue long-term growth forecasts. Long-term guidance is informative to investors and analysts incorporate the news contained in these forecasts into their own long-term growth forecasts. We also document that the issuance of long-term guidance is associated with more (less) investor focus on long-term (short-term) earnings news. Last, we find mixed evidence on the association between long-term guidance and real earnings management decisions. Our study adds to the literature on managers' voluntary disclosure choices.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: G17; M41.

Do technology spillovers affect the corporate information environment?

Technology spillovers across firms affect corporate innovation, productivity, and value, according to prior research, so information about technology spillovers should matter to investors. We argue that technology spillovers increase the complexity and uncertainty of value relevant information about the firm, which makes information processing more costly, discourages it, and thereby increases information asymmetry between insiders and outsiders. We find that not only does information asymmetry increase, but so does avoidance by sophisticated market participants, uncertainty, and insider trading. We also find that investors do not misestimate short-term earnings, but they underestimate long-term earnings, consistent with the higher future stock returns that we also find.

First-Birth Timing and the Motherhood Wage Gap in 140 Occupations

Is delayed fertility associated with a reduced motherhood wage gap in all occupations? Using multilevel models and data from the 2011–2015 American Community Survey, O*NET, and the Current Population Survey, I examine whether delayed fertility is associated with a reduced motherhood wage gap in 140 occupations. Delayed childbearing is one strategy women use to mitigate the motherhood wage penalty. Findings indicate that mothers in high-earning professional occupations experienced the largest wage penalties with early motherhood but also the largest premiums with delayed childbearing. Although delaying a first birth mitigated the motherhood wage penalty in high-wage occupations requiring extensive career preparation, the majority of women who worked in lower wage occupations with more limited human capital requirements experienced no economic benefit from older motherhood. These results challenge the broader narrative that most women can improve their long-term earnings and partly overcome the structural motherhood wage gap by delaying fertility.

Declining Business Dynamism Among Our Best Opportunities: The Role of the Burden of Knowledge

We document that since 1997, the rate of startup formation has precipitously declined for firms operated by U.S. PhD recipients in science and engineering. These are supposedly the source of some of our best new technological and business opportunities. We link this to an increasing burden of knowledge by documenting a long-term earnings decline by founders, especially less experienced founders, greater work complexity in R&D, and more administrative work. The results suggest that established firms are better positioned to cope with the increasing burden of knowledge, in particular through the design of knowledge hierarchies, explaining why new firm entry has declined for high-tech, high-opportunity startups.

Declining Business Dynamism Among Our Best Opportunities: The Role of the Burden of Knowledge

We document that since 1997, the rate of startup formation has precipitously declined for firms operated by U.S. PhD recipients in science and engineering. These are supposedly the source of some of our best new technological and business opportunities. We link this to an increasing burden of knowledge by documenting a long-term earnings decline by founders, especially less experienced founders, greater work complexity in R&D, and more administrative work. The results suggest that established firms are better positioned to cope with the increasing burden of knowledge, in particular through the design of knowledge hierarchies, explaining why new firm entry has declined for high-tech, high-opportunity startups.

The Long-Term Distributional and Welfare Effects of Covid-19 School Closures

Using a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.

The Long-Term Distributional and Welfare Effects of Covid-19 School Closures

Using a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children’s development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children’s welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.

Analysts’ Cultural Attitudes to Time Orientation

We study how analysts’ cultural attitudes to time orientation affect their production of long-term earnings forecasts, the profitability of their stock recommendations, and managerial myopia for the firms they cover. We find that analysts from a long-term oriented culture produce more long-term earnings forecasts, issue more timely long-term forecasts and more profitable stock recommendations. These results are more pronounced among firms with more long-term investments, for smaller firms, and during periods of higher economic uncertainty. Exploring the quasi-natural experiments of brokerage houses’ mergers and closures, we find a positive and plausibly causal effect of the coverage by long-term oriented analysts on firm innovation. Contrary to extant research finding that analysts’ coverage in general fosters managerial myopia, our paper shows that the coverage of long-term oriented analysts ameliorates managerial myopia.

The effect of citizenship on the long-term earnings of marginalized immigrants: Quasi-experimental evidence from Switzerland.

We provide evidence that citizenship catalyzes the long-term economic integration of immigrants. Despite the relevance of citizenship policy to immigrant integration, we lack a reliable understanding of the economic consequences of acquiring citizenship. To overcome nonrandom selection into naturalization, we exploit the quasi-random assignment of citizenship in Swiss municipalities that held referendums to decide the outcome of individual naturalization applications. Our data combine individual-level referendum results with detailed social security records from the Swiss authorities. This approach allows us to compare the long-term earnings of otherwise similar immigrants who barely won or lost their referendum. We find that winning Swiss citizenship in the referendum increased annual earnings by an average of approximately 5000 U.S. dollars over the subsequent 15 years. This effect is concentrated among more marginalized immigrants.

Long-Term Outcomes for Transition-Age Youth With Mental Health Conditions Who Receive Postsecondary Education Support

This article examines the relationship between receiving support for postsecondary education (college or vocational training) from state vocational rehabilitation (VR) agencies and long-term outcomes for youth with mental health conditions (MHCs). We use longitudinal data to follow three cohorts of youth VR applicants for 9 years after they applied for VR services. The results show a strong relationship between receipt of postsecondary education support and long-term employment, earnings, and federal disability benefit receipt. For some outcomes, such as being employed in the 9 years after VR application, the number of years employed, and benefit receipt in the 9 years after VR application for those who did not receive benefits at the time of application, the association is larger for youth with MHCs than for those with other disabilities. These findings provide valuable descriptive estimates of the benefits of providing postsecondary education support for VR youth with MHCs and how these benefits compare with youth with other types of disabilities.

Intergenerational educational mobility and life course earnings in Israel

This study brings to the fore the importance of absolute intergenerational educational mobility rates and patterns and its consequences for long-term earnings trajectories. Building on the cumulative advantage mechanism, we develop a theoretical formulation for testing the consequences of educational mobility for long-term earnings trajectories. Using data linking the 1983 and 1995 censuses in Israel with annual registered earnings data from 1995 to 2013, we find striking differences in intergenerational educational mobility rates and patterns between Israel's sub-populations. We then show that the intersection of own and parental education (i.e., intergenerational educational mobility) is associated with growing (dis)advantages over the life course. These results are in sharp contrast to a snapshot perspective, where we find that parental education does not bear influence on their offspring's earnings. Finally, we find gender but not ethno-religious differences in the long-term earnings consequences of educational mobility in Israel. The implications of these findings are discussed.

Dow is on its own again

Dow completed its separation from DowDuPont on April 1. DowDuPont shareholders received one share of Dow for every three they own of DowDuPont. The company began trading on the New York Stock Exchange under its old ticker symbol, DOW, and closed at $53.50 per share on April 2. “The new Dow is a more focused and streamlined company with a clear playbook to deliver long-term earnings growth and value creation,” CEO Jim Fitterling says. DowDuPont is scheduled to further split into DuPont and Corteva Agriscience on June 1. The new company is beginning life in turbulent waters. DowDuPont announced that sales for its materials science division, which turned into the new Dow, are expected to decline in the “low-teens” percent in the first quarter versus the year-ago period. Pretax profits will decline more than 20%. Meanwhile, Corteva management also expects to see a sales decline owing to midwestern flooding.