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LABOR INTENSITY AND OPERATING LEVERAGE IN MANUFACTURING FIRMS

Journal Name:

  • International Review of Economics and Management

Publication Year:

  • 2015
DOI: 
10.18825/irem.81315

Key Words:

Author NameUniversity of Author
Abstract (2. Language): 
I show that industry adjusted labor intensity is positively related to expected returns for firms in the manufacturing industry. Labor is one the most important factor of productions for a firm. When a negative shock hits the economy, revenues fall. However, labor costs do not fall as much as revenues. On average at the firm level, revenues are more procyclical than labor costs and labor costs are less procyclical than capital expenditures. Therefore, firms with relatively high labor intensity are more vulnerable to the business cycle than those with less labor intensity. I also show that firms with higher labor intensity have higher cash flow sensitivity to the aggregate shocks. This result supports the operating leverage mechanism behind the labor intensity and return relationship.
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REFERENCES

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