Hire and fire

Kevin Lewis

July 25, 2019

Mobility Constraint Externalities
Evan Starr, Justin Frake & Rajshree Agarwal
Organization Science, forthcoming

Covenants not to compete are often included in employment agreements between firms and employees, justified by each party’s voluntary “freedom to contract.” However, noncompetes may also generate externalities for all individuals in the market, including those who have not signed such agreements. We theorize that enforceable noncompetes increase frictions in the labor market by increasing uncertainty and recruitment costs and by curtailing entrepreneurship. We find that in state-industry combinations with a higher incidence and enforceability of noncompetes, workers - including those unconstrained by noncompetes - receive relatively fewer job offers, have reduced mobility, and experience lower wages. The results offer policymakers a reason to restrict noncompetes beyond axiomatic appeals to a worker’s “freedom of contract” and highlight labor market frictions that may impact firm-level human capital strategies.

Truck-Driving Jobs: Are They Headed for Rapid Elimination?
Maury Gittleman & Kristen Monaco
ILR Review, forthcoming

The authors analyze the potential effects of automation on the jobs of truck drivers and conclude that media accounts predicting the imminent loss of millions of truck-driving jobs are overstated. Their conclusion is based on three main factors. First, the count of truck drivers is often inflated due to a misunderstanding of the occupational classification system used in federal statistics. Second, truck drivers do more than drive, and these non-driving tasks will continue to be in demand. Third, the requirements of technology, combined with complex regulations over how trucks can operate in the United States, imply that certain segments of trucking will be easier to automate than others. Long-haul trucking (which constitutes a minority of jobs) will be much easier to automate than will short-haul trucking (or the last mile), in which the bulk of employment lies. Although technology will likely transform the status quo in the trucking industry, it does not necessarily imply the wholesale elimination of the demand for truck drivers, as conventional accounts suggest.

Worker Power and Class Polarization in Intra-Year Work Hour Volatility
Joe LaBriola & Daniel Schneider
Social Forces, forthcoming

Precarious work, which has become more prevalent in the United States in recent decades, is disproportionately experienced by workers of lower socio-economic classes, and research suggests that the erosion of worker power has contributed to this class polarization in precarity. One dimension of precarious work of growing interest to scholars and policymakers is instability faced by workers in the amount and regularity of their work hours. However, we know little about the magnitude of month-to-month or week-to-week (intra-year) volatility in hours worked, the extent of class-based polarization in this measure of job quality, and whether worker power moderates this polarization. In this paper, we make novel use of the panel nature of the nationally-representative Current Population Survey (CPS) to estimate intra-year volatility in the actual hours respondents report working in the previous week across four consecutive survey months. Using this new measure, we then show that, net of demographic characteristics and controls for occupation and industry, low-wage workers experience disproportionately greater work hour volatility. Finally, we find evidence that reductions in marketplace bargaining power - as measured by higher state-level unemployment rates - increase wage- and education-based polarization in work hour volatility, while increases in associational power - as measured by union coverage - reduce wage-based polarization in work hour volatility.

Employment Protection, Investment, and Firm Growth
John (Jianqiu) Bai, Douglas Fairhurst & Matthew Serfling
Review of Financial Studies, forthcoming

We exploit the adoption of U.S. state-level labor protection laws to study the effect of employment protection on corporate investment rates and sales growth. We find that, following the adoption of these laws, capital expenditures as a percentage of book assets decrease, resulting in slower sales growth. Our findings are consistent with theories predicting that greater employment protection discourages investment by making projects more irreversible. Supporting this channel, following negative cash flow shocks, firms are less likely to downsize operations in states that have adopted these laws but more likely to downsize in states that have not adopted these laws.

Entrepreneurs’ Legal Status Choices and the C Corporation Survival Penalty
Emily Satterthwaite
Journal of Empirical Legal Studies, forthcoming

Foundational to the American Dream is the ability to easily and rapidly start a new business. Over the past quarter‐century, the limited liability company (LLC) dramatically shifted the choice of legal status calculus for entrepreneurs, and in its wake a consensus against the use of traditional C corporations by closely‐held firms emerged. The C corporation, scholars argued, had fatal drawbacks despite its simplicity: tax disadvantages as well as governance inflexibility. Due to historically limited sources of data, there has been little empirical research on choice of entity generally and none that explores the anti‐C corporation thesis in particular. Have C corporations underperformed as compared to similarly situated businesses with alternative legal statuses? This article exploits a large panel dataset that contains legal status, owner, business, financing, and other firm‐specific information collected from an eight‐year survey of nearly 5,000 enterprises that were formed in 2004. It presents four main results. First, C corporation status is associated with firm failure rates that are 38 percent higher (significant at 0.1 percent) than those of non‐C corporations with similar characteristics. Second, this C corporation survival penalty persists at nearly the same magnitude and significance even after a subset of “anticipated cash‐exit” C corporations with (a) venture capital investors or (b) employee stock option plans are separated out. Third, nonwhite and foreign‐born entrepreneurs have a significantly higher likelihood of choosing C corporation status. Fourth, within the subset of firms that appear eligible to elect out of the default (subchapter C) corporate tax classification and into the tax‐advantaged subchapter S classification, nonwhite and older entrepreneurs are significantly more likely to remain in C corporation status. These findings suggest that increasing legal status complexity is unlikely to be neutral from a distributive perspective, and may be disproportionately burdensome for marginalized entrepreneurs.

Human Capitalists
Andrea Eisfeldt, Antonio Falato & Mindy Xiaolan
University of California Working Paper, May 2019

The widespread and growing practice of equity-based compensation has transformed high-skilled labor from a pure labor input into a class of “human capitalists”. We show that high-skilled labor income in the form of equity claims to firms’ future dividends and capital gains has dramatically increased since the 1980s. Indeed, in recent years, equity-based compensation represents almost 45% of total compensation to high-skilled labor. Ignoring such income results in incorrect measurement of the returns to high-skilled labor, with important implications for macroeconomics. Including equity-based compensation to high-skilled labor cuts the total decline in the labor share since the 1980’s by over 60%, and completely reverses the decline in the high skilled labor share to an increase of almost 1%. Correctly measuring the return to high-skilled labor can thus resolve the puzzling lack of a skill premium in recent data, as well as the corresponding lack of evidence of complementarity between high-skilled labor and new-economy physical capital. Moreover, tackling the capital structure question of who owns firms’ profits is necessary to provide a link between changing factor shares and changing income and wealth shares. We use an estimated model to understand the rise of human capitalists in an economy with declining capital goods prices. Finally, we present corroborating cross section and time series evidence for complementarity between high-skilled labor and physical capital using our corrected measure of the total return to human capitalists.

Declining Worker Turnover: the Role of Short Duration Employment Spells
Michael Pries & Richard Rogerson
NBER Working Paper, June 2019

Using the Quarterly Workforce Indicators, we document that a significant amount of the decline in labor market turnover during the last two decades is accounted for by the decline in employment spells that last less than a quarter. Using a search and matching model that incorporates noisy signals about the quality of a worker-firm match, we show that improved candidate screening by firms can account for the decline in short-lived employment spells. Quantitative exercises show that this explanation can account for the observed changes in various labor market outcomes, whereas alternative potential explanations, such as increased hiring costs, cannot.

Outside Insiders: Understanding the Role of Contracting in the Careers of Managerial Workers
Tracy Anderson & Matthew Bidwell
Organization Science, forthcoming

We explore the role that contracting plays within the careers of managerial workers. Contracting distances workers from organizational coordination and politics, aspects of organizational life that are often central to the managerial role. Nonetheless, managerial workers make up a substantial proportion of the contracting workforce. Qualitative interviews with managerial contractors indicate that the tension between the natures of contracting and managerial work means that managerial contractors carry out substantially more bounded work than regular employees, and that this boundedness can shape the role that contracting plays in their careers. Examining the employment histories of MBA alumni of a U.S. business school, we show that workers with fewer subordinates and greater personal demands are more likely to enter contracting. We also find that contractors report better work-life balance but receive lower pay both while contracting and in subsequent regular employment. Whereas prior research has highlighted the financial benefits and temporal demands of contracting for highly skilled workers, our findings introduce important boundary conditions to our understanding of high-skill contracting: the nature of the occupation is critical.

The Role of Nonemployers in Business Dynamism and Aggregate Productivity
Pedro Bento & Diego Restuccia
NBER Working Paper, June 2019

A well-documented observation of the U.S. economy in the last few decades has been the steady decline in the net entry rate of employer firms, a decline in business dynamism, suggesting a possible connection with the recent slowdown in aggregate productivity growth. We consider the role of nonemployers, businesses without paid employees, in business dynamism and aggregate productivity. Notwithstanding the decline in the growth of employer firms, we show that the total number of firms, which includes nonemployer businesses, has increased in the U.S. economy since the early 1980s. We interpret this trend, along with the evolution of the employment distribution across firms, through the lens of a standard theory of firm dynamics. The model implies that firm dynamics have contributed to an average annual growth rate of aggregate productivity of at least 0.26% since the early 1980s, over one quarter of the productivity growth of 1% in the data. Further, our implied measure of productivity growth moves closely over time with measured productivity growth in the data.


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