DOES IT PAY TO BE FLEXIBLE - EMPIRICAL-EVIDENCE ON THE RELATIONSHIP BETWEEN LABOR DEMAND FLEXIBILITY AND PROFIT MARGINS

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