This study examines the effect of shortages in labor supply on asymmetric cost behavior. Building on the labor demand literature, it is argued that labor supply shortages increase adjustment costs for hiring new employees. Consistent with this explanation, results provide evidence that companies facing restrictions in labor supply increase costs (and resources) less than companies operating with sufficient access to additional personnel. This leads to a more symmetrical cost behavior for increasing activity compared to decreasing activity. Additional analyses show that shortages in labor supply induce firms to increase selling prices but also to temporarily expect more effort from their current employees. The effect decreases with the length of the labor supply shock and is more pronounced for companies located in less populated regions. Results are robust to alternative explanations, such as prior period slack creation or pessimistic managerial expectations with respect to future demand.
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Manufacturing Accounting Research Conference, 2016