We provide new estimates of the wage costs of firms' debt using an empirical approach that exploits within-firm geographical variation in workers' expected unemployment costs due to variation in local labor market in a large sample of public firms. We find that, following an increase in firm leverage, workers with higher unemployment costs experience higher wage growth relative to workers at the same firm with lower unemployment costs. Overall, our estimates suggest wage costs are an important component in the overall cost of debt, but are not as large as implied by estimates based on ex post employee wage losses due to bankruptcy; we estimate that a 10 percentage point increase in firm leverage increases wage compensation for the median worker by 1.9% and total firm wage costs by 17 basis points of firm value.
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Pay, Employment, and Dynamics of Young Firms
July 2019
Working Paper Number:
CES-19-23
Why do young firms pay less? Using confidential microdata from the US Census Bureau, we find lower earnings among workers at young firms. However, we argue that such measurement is likely subject to worker and firm selection. Exploiting the two-sided panel nature of the data to control for relevant dimensions of worker and firm heterogeneity, we uncover a positive and significant young-firm pay premium. Furthermore, we show that worker selection at firm birth is related to future firm dynamics, including survival and growth. We tie our empirical findings to a simple model of pay, employment, and dynamics of young firms.
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FALLING HOUSE PRICES AND LABOR MOBILITY: EVIDENCE FROM MATCHED EMPLOYER-EMPLOYEE DATA
August 2013
Working Paper Number:
CES-13-43
This study uses worker-level employment data from the U.S. Census Bureau to test whether falling home prices affect a worker's propensity to take a job in a different metropolitan area from where he is currently located. Using a sample of workers from the American Community Survey, I employ a within-MSA-time estimation that compares homeowners to renters in their propensities to relocate for jobs according to data from the Longitudinal Employer Household Dynamics database. This strategy allows me to disentangle the influence of house prices from that of other time-varying, location-specific shocks. Estimates show that homeowners who have experienced declines in the nominal value of their home are approximately 20% less likely to take a new job in a location outside of the metropolitan area that they currently live and work in, relative to an equivalent renter. This evidence is consistent with the hypothesis that housing lock-in has contributed to the decreased labor mobility of homeowners during the recent housing bust.
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Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms
February 2020
Working Paper Number:
CES-20-06
This paper examines how employee earnings at small firms respond to a cash flow shock in the form of a government R&D grant. We use ranking data on applicant firms, which we link to IRS W2 earnings and other U.S. Census Bureau datasets. In a regression discontinuity design, we find that the grant increases average earnings with a rent-sharing elasticity of 0.07 (0.21) at the employee (firm) level. The beneficiaries are incumbent employees who were present at the firm before the award. Among incumbent employees, the effect increases with worker tenure. The grant also leads to higher employment and revenue, but productivity growth cannot fully explain the immediate effect on earnings. Instead, the data and a grantee survey are consistent with a backloaded wage contract channel, in which employees of financially constrained firms initially accept relatively low wages and are paid more when cash is available.
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Import Competition and Firms' Internal Networks
September 2021
Working Paper Number:
CES-21-28
Using administrative data on U.S. multisector firms, we document a cross-sectoral propagation of the import competition from China ('China shock') through firms' internal networks: Employment of an establishment in a given industry is negatively affected by China shock that hits establishments in other industries within the same firm. This indirect propagation channel impacts both manufacturing and non-manufacturing establishments, and it operates primarily through the establishment exit. We explore a range of explanations for our findings, highlighting the role of within-firm trade across sectors, scope of production, and establishment size. At the sectoral aggregate level, China shock that propagates through firms' internal networks has a sizable impact on industry-level employment dynamics.
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The Cross-Section of Labor Leverage and Equity Returns*
January 2017
Working Paper Number:
CES-17-70
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.
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HUMAN CAPITAL LOSS IN CORPORATE BANKRUPTCY
July 2013
Working Paper Number:
CES-13-37
This paper quantifies the 'human costs of bankruptcy' by estimating employee wage losses induced by the bankruptcy filing of employers using employee-employer matched data from the U.S. Census Bureau's LEHD program. We find that employee wages begin to deteriorate one year prior to bankruptcy. One year after bankruptcy, the magnitude of the decline in annual wages is 30% of pre-bankruptcy wages. The decrease in wages persists (at least) for five years post-bankruptcy. The present value of wage losses summed up to five years after bankruptcy amounts to 29-49% of the average pre-bankruptcy market value of firm. Furthermore, we find that the ex-ante wage premium to compensate for the ex-post wage loss due to bankruptcy can be of similar magnitude with that of the tax benefits of debt.
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Collateral Values and Corporate Employment
September 2015
Working Paper Number:
CES-15-30R
We examine the impact of real estate collateral values on corporate employment. Our empirical strategy exploits regional variation in local real estate price growth, firm-level data on real estate holdings, as well as establishment-level data on employment and the location of firms' operations from the U.S. Census Bureau. Over the period from 1993 until 2006, we show that a typical U.S. publicly-traded firm increases employment expenditures by $0.10 per $1 increase in collateral. We show this additional hiring is funded through debt issues and the effects are stronger for firms likely to be financially constrained. These firms increase employment at establishments outside of their core industry focus and away from the location of real estate holdings, leading to regional spillover effects. We document how shocks to collateral values influence labor allocation within firms and how these effects show up in the aggregate.
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Earnings Growth, Job Flows and Churn
April 2020
Working Paper Number:
CES-20-15
How much do workers making job-to-job transitions benefit from moving away from a shrinking and towards a growing firm? We show that earnings growth in the transition increases with net employment growth at the destination firm and, to a lesser extent, decreases if the origin firm is shrinking. So, we sum the effect of leaving a shrinking and entering a growing firm and remove the excess turnover-related hires because gross hiring has a much smaller association with earnings growth than net employment growth. We find that job-to-job transitions with the cross-firm job flow have 23% more earnings growth than average.
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The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter?
October 2005
Working Paper Number:
CES-05-29
We examine the effect of financial dependence on the acquisition and investment of single segment and conglomerate firms for different long-run changes in industry conditions. Conglomerates and single-segment firms differ in the investments they make. The main differences are in the investment in acquisitions rather than in the level of capital expenditure. Financial dependence, a deficit in a segment's internal financing, decreases the likelihood of acquisitions and opening new plants, especially for single-segment firms. These effects are mitigated for conglomerates in growth industries and also for firms that are publicly traded. In declining industries, plants of segments that are financially dependent are less likely to be closed by conglomerate firms. These findings persist after controlling for firm size and segment productivity. We also find that plants acquired by conglomerate firms in growth industries increase in productivity post-acquisition. The results are consistent with the comparative advantages of different firm organizations differing across long-run industry conditions.
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ENFORCING COVENANTS NOT TO COMPETE: THE LIFE-CYCLE IMPACT ON NEW FIRMS
June 2014
Working Paper Number:
CES-14-27
We examine the impact of enforcing non-compete covenants (CNC) on the formation and performance of new firms using matched employer-employee data on 30 US states. To identify the impact of CNC, we exploit the inter-state variation in CNC enforcement along with the fact that courts do not enforce such covenants between law firms and departing lawyers in any state. Using a difference-in-difference-in-difference specification with law firms and firms that are not withinindustry spinouts as the baseline, we find states with stricter CNC enforcement have fewer, but larger within-industry spinouts that are more likely to survive their nascent years, and conditional on survival, grow faster during those years. These results are consistent with CNC enforcement having a selection effect on within-industry spinouts. Particularly, with stricter enforcement, only founders with higher-quality ideas and resources choose to overcome CNC-related barriers, which reduces entry rate but increases observed short-term performance of these spinouts.
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