The Cross-Section of Labor Leverage and Equity Returns

60 Pages Posted: 10 Nov 2017

See all articles by Andres Donangelo

Andres Donangelo

University of Texas at Austin - Department of Finance

Francois Gourio

Federal Reserve Bank of Chicago

Matthias Kehrig

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Miguel Palacios

Haskayne School of Business, University of Calgary

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-09-04

Abstract

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.

Keywords: Labor leverage, labor mobility, labor supply, wage, productivity

JEL Classification: J20, J22, J24, J62

Suggested Citation

Donangelo, Andres and Gourio, Francois and Kehrig, Matthias and Palacios, Miguel, The Cross-Section of Labor Leverage and Equity Returns (2017-09-04). FRB of Chicago Working Paper No. WP-2017-22, Available at SSRN: https://ssrn.com/abstract=3068669

Andres Donangelo (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/donangelo/

Francois Gourio

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/fgourio

Matthias Kehrig

Duke University ( email )

237 Social Sciences
Box 90097
Durham, NC 27708-0097
United States

HOME PAGE: http://sites.google.com/site/matthiaskehrig/research

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Miguel Palacios

Haskayne School of Business, University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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