The Information Content of Cost Behavior Components: Evidence from Labor Market Flows

Abstract

We examine the information content of cost behavior components in firms’ asymmetric cost function, namely, aggregate-level elasticities of costs with respect to sales increases vs. decreases. We show that the persistence of the elasticity of costs is higher for sales increases than for sales decreases. Using business-level job flows from the Business Employment Dynamics (BED) dataset, which has recently been made available by the BLS, we find that, after accounting for GDP growth and other macroeconomic indicators, the aggregate elasticity of costs with respect to sales increases explains gross job inflows, but not gross job outflows. On the other hand, the aggregate elasticity of costs with respect to sales decreases explains gross job outflows, but not gross job inflows. When we include both elasticities in the regression, both are significant but with opposite signs. We obtain similar results in vector autoregression (VAR) models. Additional tests indicate that: (a) the effect of aggregate elasticity of costs with respect to sales decreases is more pronounced in periods with high uncertainty; and (b) asymmetric cost models explain more of the variation in job outflows than models that assume symmetric cost responses.