Labor Adjustment Costs and Asymmetric Cost Behavior: An Extension

39 Pages Posted: 4 Sep 2019

See all articles by Joanna Golden

Joanna Golden

University of Memphis - School of Accountancy

Raj Mashruwala

University of Calgary - Haskayne School of Business

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Date Written: August 27, 2019

Abstract

The issue of asymmetric cost behavior has attracted significant interest in the managerial accounting literature. The literature has hypothesized that adjustment costs, particularly labor adjustment costs, play a significant and central role in driving empirically observed cost behavior patterns. Recent studies attempt to empirically test this hypothesis, albeit with distinct limitations. Using a new proxy for labor adjustment costs in a different population of firms, our study takes a fresh look at this hypothesis. We test the robustness of results documented in prior studies to help substantiate the credibility, reliability, and stability of prior findings.

Our proxy for labor adjustment costs captures the reliance on skilled labor across industries in a population of US public firms. Prior studies argue that skilled labor is associated with higher adjustment costs than unskilled labor due to greater hiring and firing costs associated with skilled labor. Based on the theoretical underpinnings of asymmetric cost behavior, we expect that a higher reliance on skilled labor will be associated with greater cost asymmetry. Our empirical results support this proposition. In additional subsample tests, we also find that the effect of labor adjustment costs on cost asymmetry is more pronounced when unemployment rates are low, for firms located in high Wrongful Discharge Laws (WDL) states, and for firms situated in low-hiring credit states. Together, these results provide compelling evidence that validates the consequential role of labor adjustment costs in determining asymmetric cost behavior.

Keywords: reliance on skilled labor, labor adjustment costs, asymmetric cost behavior, cost stickiness

JEL Classification: M41, M54, J24

Suggested Citation

Golden, Joanna and Mashruwala, Raj and Pevzner, Mikhail, Labor Adjustment Costs and Asymmetric Cost Behavior: An Extension (August 27, 2019). Management Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3443815

Joanna Golden

University of Memphis - School of Accountancy ( email )

223 Fogelman College Admin. Bldg.
Memphis, TN 38152
United States

Raj Mashruwala (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403-220-4332 (Phone)

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
72
Abstract Views
600
rank
388,469
PlumX Metrics