Cash Holdings and Labor Heterogeneity: The Role of Skilled Labor

Abstract

Firms differ in their dependence on skilled labor and face labor adjustment costs that increase with their workers’ skill level. We show that firms with a higher share of skilled workers, and thus less flexibility to adjust their labor demand in response to cash flow shocks, hold more precautionary cash. The effect of labor skills on cash holdings varies with firms’ exogenous exposure to upward and downward labor adjustment costs and their incentives to make those adjustments. It is more pronounced for firms that are constrained, attach a high value to human capital, or operate in competitive markets.

Keywords: Cash Holdings, Skilled Labor, Labor Adjustment Costs, Labor Heterogeneity

JEL Classification: G32, G34, M54