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Labor cost stickiness and managerial decisions on human capital adjustment

Author

Listed:
  • Dongmin Kong
  • Shasha Liu
  • Rui Shen

Abstract

Purpose - On the basis of labor economics theories, this study examines how adjustment in human capital accounts for labor cost stickiness. Design/methodology/approach - This study makes use of employee education level as a measure of the quality of human capital and relies on data from Chinese public firms to conduct the empirical test. This study focuses on two important components of labor cost changes: one corresponding to the adjustment in the number of employees (capacity adjustment) and another corresponding to the adjustment in the mix of employee education levels (quality adjustment). Findings - This study reveals that labor cost changes driven by the adjustment of employee education level are sticky. This stickiness cannot be explained by the standard adjustment cost theory. This further shows that firms that actively adjust their employee quality during downturns experience improved future performance. The findings are robust to alternative measures and specifications. Originality/value - This study provides new evidence for and insights into the cost behavior literature. Previous studies treat input resources in a homogenous way and focus on the effect of capacity adjustment. This study considers the heterogeneity of resources and examines three dimensions of salary cost adjustment: capacity, structure, and unit cost. In line with the economic theory of sticky costs proposed by Bankeret al.(2013a), the study’s evidence sheds light on the additional underlying economic mechanisms driving cost stickiness behavior. Specifically, managers asymmetrically adjust both employee structure and average salaries, in addition to employee number. This study also adds to the existing knowledge of the consequences of managers' actions regarding cost behavior.

Suggested Citation

  • Dongmin Kong & Shasha Liu & Rui Shen, 2023. "Labor cost stickiness and managerial decisions on human capital adjustment," Journal of Accounting Literature, Emerald Group Publishing Limited, vol. 47(2), pages 325-350, December.
  • Handle: RePEc:eme:jalpps:jal-06-2023-0090
    DOI: 10.1108/JAL-06-2023-0090
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    More about this item

    Keywords

    Sticky cost; Human capital; Labor cost; Employee education level; Firm performance; M40; J30; M51;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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