TY - JOUR
T1 - The elephant in the room
T2 - The impact of labor obligations on credit markets†
AU - Favilukis, Jack
AU - Lin, Xiaoji
AU - Zhao, Xiaofei
N1 - Publisher Copyright:
© 2020 American Economic Association. All rights reserved.
PY - 2020/6
Y1 - 2020/6
N2 - 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. (JEL D33, E23, E24, E25, E44, F23, G32)
AB - 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. (JEL D33, E23, E24, E25, E44, F23, G32)
UR - http://www.scopus.com/inward/record.url?scp=85085577017&partnerID=8YFLogxK
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U2 - 10.1257/aer.20170156
DO - 10.1257/aer.20170156
M3 - Article
AN - SCOPUS:85085577017
SN - 0002-8282
VL - 110
SP - 1673
EP - 1712
JO - American Economic Review
JF - American Economic Review
IS - 6
ER -
