Competition, Cost Structure, and Labor Leverage: Evidence from the U.S. Airline Industry
48 Pages Posted: 20 Apr 2020 Last revised: 6 Nov 2020
Date Written: November 3, 2020
I study the effect of increasing competition on financial performance through labor leverage. To capture competition, I exploit variation in product market contestability in the U.S. airline industry. First, I find that increasing competitive pressure leads to increasesing labor leverage, proxied by labor share. This explains the decrease in operating profitability through labor rigidities. Second, by exploiting variation in human capital specificity, I show that contestability of product markets induces labor market contestability. Whereas affected firms might experience more stress through higher wages or loss of skilled human capital, more mobile employee groups benefit from competitions through higher labor shares.
Keywords: Competition, labor leverage, labor share, threat of entry
JEL Classification: G39, J31, L93
Suggested Citation: Suggested Citation