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Labor Markets and Firm Performance

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Manchester Grand Hyatt, Seaport H
Hosted By: American Finance Association
  • Chair: Margarita Tsoutsoura, Cornell University

Personal Income Taxes and Labor Downskilling: Evidence from Job Postings

Murillo Campello
,
Cornell University and NBER
Janet Gao
,
Indiana University
Qiping Xu
,
University of Notre Dame

Abstract

Using big data on the near-universe of US firms' job postings, we document measurable, negative effects of local personal income taxes on the level of education, experience, and technological skills required by firms when hiring workers (downskilling). Tax-induced downskilling is identified both at the county level and at individual firms' establishments. It is driven by taxes on middle-class earners. Multi-state firms internally reassign their hiring of low- vs. high-quality workers according to local personal income tax changes. This dynamic is more pronounced in industries that rely less on highly skilled labor and on local resources in their production processes, yet mitigated in firms' headquarter states and states that account for a large fraction of sales. Together with downskilling, firms cut IT investment in and eventually exit from localities that increase personal taxes. Our findings point to a "brain-drain" in states with high personal income taxes, showing how taxes bear detrimental effects on the skill composition of local labor markets.

Wage Rigidity and Debt Financing: Evidence from Labor Contract Renewal during the Financial Crisis

Yue Zhang
,
Catholic University of Louvain
Jiaping Qiu
,
McMaster University

Abstract

This paper studies the differential impacts of the 2008 financial crisis on the financing policies and real activities of firms with flexible labor contracts and those with binding labor contracts. We find that flexible-contract firms significantly reduced their labor costs during the crisis, while binding- contract firms lacked such flexibility. Compared to flexible-contract firms, binding-contract firms experienced a larger drop in bond prices and were less likely to issue new bonds. Moreover, binding-contract firms reduced investments, bank borrowing, and equity financing significantly more. Our analysis provides new causal evidence on how labor-market frictions affect firms’ financing in economic downturns.

Local Employment Opportunities and Corporate Retention Policies

Kyeong H. Lee
,
Norwegian School of Economics
Karin Thorburn
,
Norwegian School of Economics
Emma Qianying Xu
,
University of Texas-El Paso

Abstract

We construct a novel measure of employees’ outside opportunities within the local labor market based on detailed occupational data and examine how firms choose policies to retain employees with such opportunities. We find that firms grant more rank and file stock options, provide a more employee-friendly work environment (e.g., employee involvement in major corporate decision making, overall corporate social responsibility program, and inclusion in the 100 best companies to work for in America), and maintain higher levels of financial flexibility (e.g., higher cash balances and lower financial leverage) when employees have more outside options in the local labor market. These relations are stronger among firms relying more on high skill employees and among firms investing more in research and development. Using a quasi-natural experiment involving employee mobility shocks following the adoption of Inevitable Disclosure Doctrine by U.S. state courts, we further attempt to identify the causal effect of employees’ outside opportunities on the firm policies. We find that the recognition of the doctrine attenuates the effects of our measure of employees’ outside opportunities in the local labor market on the firm policies. In addition, our results are stronger for industry clusters and are robust to excluding geographically diversified firms and local areas dominated by few employers.
Discussant(s)
Xavier Giroud
,
Columbia University
Elena Simintzi
,
University of North Carolina-Chapel Hill
Hyunseob Kim
,
Cornell University
JEL Classifications
  • G3 - Corporate Finance and Governance