The Information Content of Firms’ Cost Behavior Measures: Evidence from Labor Market Flows

Abstract

We examine the information content of aggregate cost structure (ASTR) and compare it to aggregate cost stickiness (ASTK). Using business-level job flows from the Business Employment Dynamics dataset, which has recently been made available by the Bureau of Labor Statistics, we find that, after accounting for GDP growth and other macroeconomic factors, ASTR explains gross job inflows, but only explains gross job outflows in periods of low employee retention. Moreover, ASTK explains gross job outflows, but not gross job inflows, consistent with resource retention decisions affecting job losses more than gains. When we include both ASTR and ASTK in a regression model, both are significant but with opposite signs, and the information content of ASTR is greater. Similar patterns hold in vector autoregression (VAR) models. Finally, we consider the performance of aggregate cost structure estimated from the traditional linear model, which assumes a symmetric relation between change in costs and both increases and decreases in sales (ASTRSYM). We find larger predictive ability and explanatory power of models that include ASTR and ASTK as compared to ASTRSYM.

Keywords: Cost structure, cost stickiness, labor flows

JEL Classification: M41, E24, J60