Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/200560 
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 2017-22
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
Using a standard production model, we demonstrate theoretically that, even if labor is fully flexible, it generates a form of operating leverage if (a) wages are smoother than productivity and (b) the capital-labor elasticity of substitution is strictly less than one. Our model supports using labor share - the ratio of labor expenses to value added - as a proxy for labor leverage. We show evidence for conditions (a) and (b), and we demonstrate the economic significance of labor leverage: High labor-share firms have operating profits that are more sensitive to shocks, and they have higher expected asset returns.
Document Type: 
Working Paper

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