Laborism, Investment Efficiency in Labor, and Operating Performance Around the World

Abstract

We examine how labor-friendly institutional features, i.e., laborism, relate to corporate investment efficiency in labor in a sample that represents 33 countries during 1996 to 2012. We consider various dimensions of laborism such as the presence of left-leaning government, rigidity of employee protection laws, and collectivist culture. We hypothesize that due to higher labor adjustment costs associated with laborism, firms operating in stronger laborism countries make more inefficient labor investment decisions. Supporting this hypothesis, we document that laborism is negatively related to labor investment efficiency – firms deviate more from the optimal level of labor investment in the presence of stronger laborism. We further find that laborism reduces labor productivity as well as future operating performance, aggravating future GDP per capita in the economy.