Labor Market Friction and Labor Cost Stickiness: Evidence from the High-speed Railway in China

Abstract

Integrating research on labor market friction and the theory of sticky costs, we argue that reduced labor market friction will increase a firm's stickiness in labor costs. This tendency is weakened by push factors increasing the potential pool of prospective employees in the labor market while it is strengthened by pull factors illustrating a firm's dependence on human capital. Leveraging the unique context of high-speed railway connection in China that decreases labor market frictions as an exogenous shock as well as the exceptional disclosure of cash compensation for employees, we find that firms tend to be stickier in labor cost when there is an introduction of high-speed railway to the firm's headquartered city. Our study contributes to strategic human capital research by relying on cost stickiness theory to capture firm labor cost investment in a novel way and by providing evidence that the bargaining power of employees shapes firms' heterogenous responses to labor market mobility.

Keywords: cost stickiness theory, employee mobility, human capital investment, quasiexperiment