The Effects of Labor Choice on Investment and Output Dynamics

54 Pages Posted: 23 Jan 2023

See all articles by Haejun Jeon

Haejun Jeon

Tokyo University of Science - School of Management

Xue Cui

Shenzhen University

Chuanqian Zhang

William Paterson University

Date Written: January 19, 2023

Abstract

We incorporate both labor and capital as production inputs and discuss the effects of labor choice on a firm's optimal investment decision and output dynamics based on real options framework. In particular, we introduce different levels of labor flexibility and examine how it affects the firm's investment and employment strategy. We show that upward-only adjustable labor, which can arise from employment protection, discourages investment and makes a negative short-run impact on labor employment but a positive impact in the long-run. We also show that the firm invests earlier and produces more at the investment timing when it is either highly labor-intensive or highly capital-intensive. However, the impact of labor share on output changes over time; it is more pronounced over time when labor is fully flexible or upward-adjustable but less pronounced with downward-adjustable labor. Furthermore, we show that uncertainty can make both positive and negative impacts on investment, but that the latter is more pronounced when the labor share is high.

Keywords: labor share, labor flexibility, investment, capital expansion, real options

JEL Classification: D24, D25, G31

Suggested Citation

Jeon, Haejun and Cui, Xue and Zhang, Chuanqian, The Effects of Labor Choice on Investment and Output Dynamics (January 19, 2023). Available at SSRN: https://ssrn.com/abstract=4331417 or http://dx.doi.org/10.2139/ssrn.4331417

Haejun Jeon

Tokyo University of Science - School of Management ( email )

Tokyo
Japan

Xue Cui (Contact Author)

Shenzhen University ( email )

Chuanqian Zhang

William Paterson University ( email )

300 Pompton Road
Wayne, NJ 07470
United States

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