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The Cross-Section of Labor Leverage and Equity Returns*

January 2017

Working Paper Number:

CES-17-70

Abstract

We study labor-induced operating leverage. Theoretically, we show that if labor markets are frictionless, two sufficient conditions for the existence of labor leverage are (a) relatively smooth wages and (b) a capital-labor elasticity of substitution strictly less than one. Our model provides theoretical support for the use of labor share'the ratio of labor expenses to value added'as a measure of labor leverage. We provide 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 economic shocks and have higher expected returns.

Document Tags and Keywords

Keywords Keywords are automatically generated using KeyBERT, a powerful and innovative keyword extraction tool that utilizes BERT embeddings to ensure high-quality and contextually relevant keywords.

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:
demand, macroeconomic, earnings, corporate, employed, finance, labor, leverage, shareholder, economically, profit, stock, contract, equity, expense, earn, share

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:
Bureau of Labor Statistics, Total Factor Productivity, Cobb-Douglas, Bureau of Economic Analysis, National Income and Product Accounts, Federal Reserve System, Federal Reserve Bank of Chicago

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