The Elephant in the Room: The Impact of Labor Obligations on Credit Markets
Jack Favilukis, Xiaoji Lin, Xiaofei Zhao
American Economic Review · 2020 · Volume 110 · Issue 6
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.
Keywords
Factor Income Distribution, Macroeconomics: Production, Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital, Aggregate Labor Productivity, Aggregate Factor Income Distribution, Financial Markets and the Macroeconomy, Multinational Firms, International Business, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
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