This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

The Elephant in the Room: The Impact of Labor Obligations on Credit Markets

  • Jack Favilukis
  • Xiaoji Lin
  • Xiaofei Zhao
American Economic Review
vol. 110, no. 6, June 2020
(pp. 1673-1712)
Download Full Text PDF

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.20170156

Additional 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