Competition, Cost Structure, and Labor Leverage: Evidence from the U.S. Airline Industry

48 Pages Posted: 20 Apr 2020 Last revised: 6 Nov 2020

See all articles by Konstantin Wagner

Konstantin Wagner

Halle Institute for Economic Research

Date Written: November 3, 2020

Abstract

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

Wagner, Konstantin, Competition, Cost Structure, and Labor Leverage: Evidence from the U.S. Airline Industry (November 3, 2020). Available at SSRN: https://ssrn.com/abstract=3562128 or http://dx.doi.org/10.2139/ssrn.3562128

Konstantin Wagner (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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