Organized Labor Effects on SG&A Cost Behavior

Abstract

This study examines how organized labor affects selling, general, and administrative (SG&A) cost behavior. We find that labor cost stickiness is higher for firms facing stronger unions, but the stickiness of SG&A costs is lower. This is consistent with an argument that managers’ discretionary decisions to retain SG&A resources are negatively affected by high labor adjustment costs that increase retention of slack labor resources during periods of decreased demand. We conduct an event analysis of labor union elections and find that SG&A cost stickiness decreases after firms experience new union certification. Cross-sectional tests show that the effect of labor union strength on SG&A cost stickiness is more pronounced for firms that are in better financial condition, have higher analyst coverage, and have higher net operating assets. We find a similar effect of union strength on discretionary spending when examining research and development costs.

Keywords: Organized Labor; Labor Unions; SG&A Cost Behavior; Sticky Costs

JEL Classification: J50, D22, M41