How Does Employment Change with Changes in Sales Activity?

This paper examines how employee numbers change with changes in sales activity. The arguments that, when sales decline, managers retain employees with higher levels of human capital or who have closer relations with managers are important to the literature on cost stickiness. However, there is no direct empirical evidence supporting these arguments. Using Chinese listed companies’ data, we document that labor is sticky - managers increase labor quantity to a larger extent when sales activity increases than they decrease labor quantity when sales activity decreases. Our empirical evidence also demonstrates that, when firms experience sales declines, managers retain more salespeople, technicians, accountants, and administrators, who possess higher levels of human capital or are closer to managers, than production personnel who are paid less. We also investigate whether labor stickiness varies with different ultimate ownership. Labor stickiness in state-owned enterprises (SOEs) is higher than that in non-SOEs, consistent with greater empire building incentives in SOEs and lower earnings management incentives relative to non-SOEs.