Labor Cost Stickiness and Managerial Decisions on Human Capital Adjustment

51 Pages Posted: 18 Feb 2021

See all articles by Dongmin Kong

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology

Shasha Liu

School of Management, Jinan University

Rui Shen

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics; Shenzhen Finance Institute

Date Written: January 29, 2021

Abstract

On the basis of labor economics theories, we posit that adjustment in human capital accounts for a significant part of cost stickiness. Using the education level of employees as a measure of the quality of human capital, we find that labor cost changes driven by the adjustment of employee education level are sticky. This stickiness cannot be explained by the standard adjustment cost theory and is more salient during industry expansion. We further show that firms that actively adjust their employee quality during downturns experience improved future performance. Our findings are robust to alternative measures and specifications. Overall, this study extends the economic theory of sticky costs by showing that human capital adjustment drives cost stickiness. Moreover, such adjustments have long-term implications on the firm’s performance.

Keywords: Sticky cost, Human capital, Labor cost, Employee education level, Firm performance

JEL Classification: M40, J30, M51

Suggested Citation

Kong, Dongmin and Liu, Shasha and Shen, Rui, Labor Cost Stickiness and Managerial Decisions on Human Capital Adjustment (January 29, 2021). Available at SSRN: https://ssrn.com/abstract=3775380 or http://dx.doi.org/10.2139/ssrn.3775380

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

Shasha Liu

School of Management, Jinan University ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

Rui Shen

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172
China

Shenzhen Finance Institute ( email )

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