Does it Pay to be Flexible?: Empirical Evidence on the Relationship between Labour Demand Flexibility and Profit Margins

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This paper addresses the determinants of price-cost margins in U.S. 4-digit industries. Margins are larger in capital intensive and concentrated industries with high growth rates and R&D and advertising to sales ratios. They also fluctuate significantly over the business cycle. We go beyond the existing literature by considering an issue which is a dominant topic in the business literature, the flexibility of firms to adjust to exogenous shocks. In particular, we find a significant positive relationship between the flexibility of labour demand and price cost margins suggesting that it pays to be flexible.

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