Uncertainty of Future Performance: The Impact of Labor Investment and Labor Flexibility

Abstract

Abstract: Theory suggests that human capital investment decreases in response to an increase in the riskiness of the return on the investment which suggests a link between the uncertainty of future performance and investments in labor. While labor investment has been the subject of numerous academic studies, the notion of labor flexibility is a relatively new research issue and is of fundamental interest due to the rise of contingent labor in our competitive global economy. In this study, we investigate the relations between fixed labor investments, labor flexibility and their impact on future earnings uncertainty while controlling for capital and R& D investment. The empirical analysis compares the relative contributions of current investments in labor, labor flexibility, R&D and PP&E to future earnings variability using a sample of roughly 20,000 firm-year observations from 1970-1999. We perform extensive robustness checks and provide strong results consistent with our predictions that fixed labor investments increase the uncertainty of future earnings. In contrast, labor flexibility reduces uncertainty in future benefits. Our results have implications for management's human capital operating decisions and are consistent with the extraordinary growth in contingent employment arrangements in the United States and abroad.

Keywords: Labor investment, labor flexibility, performance, earnings uncertainty

JEL Classification: D24, D82, G30, J41, M40, M46