How Does Labor Mobility Affect Corporate Leverage and Investment?

72 Pages Posted: 15 Jun 2017 Last revised: 25 Mar 2018

See all articles by Ali Sanati

Ali Sanati

American University, Kogod School of Business

Date Written: March 20, 2018

Abstract

Using a new measure of labor mobility instrumented by state-level shocks, I find that an increase in worker mobility negatively affects firms' average leverage and investment rates, but only in firms that rely on high-skill workers. I develop a dynamic model that provides an economic mechanism to rationalize these findings. In the model, firms make investment and financing decisions, hire labor with different levels of skill and mobility, and set wages through bargaining. Skilled workers with high mobility receive high-value outside job offers more frequently. Firms that rely on this type of labor operate with low leverage in anticipation of the outside offer shocks, in order to retain their workforce against those shocks. The differences in investment are generated both by the capital-labor complementarity and by the differences in financing policies, which affect the cost of capital. I estimate the model to quantify the effect of changes in labor mobility on different aspects of firms' decisions. Counterfactual analyses imply that policies that exogenously change workers' ability to move among firms have a sizable impact on the leverage, investment, hiring, and wages of high-skill firms. My results highlight the importance of considering this channel in evaluating the economic impact of policies that change workers' mobility.

Keywords: Capital Structure, Investment, Labor Skill, Labor Mobility, Inalienable Human Capital, Bargaining

JEL Classification: G32, G33, J24, J62

Suggested Citation

Sanati, Ali, How Does Labor Mobility Affect Corporate Leverage and Investment? (March 20, 2018). Available at SSRN: https://ssrn.com/abstract=2986582 or http://dx.doi.org/10.2139/ssrn.2986582

Ali Sanati (Contact Author)

American University, Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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