The Cross-Section of Labor Leverage and Equity Returns
Author | : Andres Donangelo |
Publisher | : |
Total Pages | : 60 |
Release | : 2017 |
ISBN-10 | : OCLC:1305024099 |
ISBN-13 | : |
Rating | : 4/5 (99 Downloads) |
Book excerpt: Using a standard production model, we demonstrate theoretically that, even if labor is fully flexible, it generates a form of operating leverage if (a) wages are smoother than productivity and (b) the capital-labor elasticity of substitution is strictly less than one. Our model supports using labor share-the ratio of labor expenses to value added-as a proxy for labor leverage. We show evidence for conditions (a) and (b), and we demonstrate the economic significance of labor leverage: High labor-share firms have operating profits that are more sensitive to shocks, and they have higher expected asset returns.