How Does Labor Mobility Affect Corporate Leverage and Investment?

Abstract

Using state-level shocks to workers’ mobility across firms, I show that an increase in labor mobility is related to a decrease in firms use of debt and investment rates. The effects are concentrated 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, to increase financial flexibility that helps them 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 effects of changes in workers’ mobility, for example, because of new government policies or the rise of remote work. Counterfactual analyses show that such changes in workers’ mobility have a sizable impact on financing, investment, hiring, and wages in high-skill firms, but little effect on low-skill firms.

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

JEL Classification: G32, G33, J24, J62