American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
The Elephant in the Room: The Impact of Labor Obligations on Credit Markets
American Economic Review
vol. 110,
no. 6, June 2020
(pp. 1673–1712)
Abstract
We show that labor market frictions are first-order for understanding credit markets. Wage growth and labor share forecast aggregate credit spreads and debt growth as well as or better than alternative predictors. They also predict credit risk and debt growth in a cross section of international firms. Finally, high labor share firms choose lower financial leverage. A model with labor market frictions and risky long-term debt can explain these findings, and produce large credit spreads despite realistically low default probabilities. This is because precommitted payments to labor make other committed payments (i.e., interest) riskier.Citation
Favilukis, Jack, Xiaoji Lin, and Xiaofei Zhao. 2020. "The Elephant in the Room: The Impact of Labor Obligations on Credit Markets." American Economic Review, 110 (6): 1673–1712. DOI: 10.1257/aer.20170156Additional Materials
JEL Classification
- D33 Factor Income Distribution
- E23 Macroeconomics: Production
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E25 Aggregate Factor Income Distribution
- E44 Financial Markets and the Macroeconomy
- F23 Multinational Firms; International Business
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill