Carlson School of Management
Twin Cities
The financial economics literature has recently emphasized the health of the financial intermediary sector, focusing mostly on measures of intermediaries' financial leverage and collateral constraints. These researchers identify an alternative channel for financial intermediaries to affect risk and the real sector. They argue that the health of financial intermediaries, as measured by their labor leverage, which proxies for frictions in adjusting labor obligations, is at least as important empirically. Their measure of intermediary labor market risk forecasts the market excess return positively, and debt growth and aggregate investment negatively. In the cross-section, intermediaries with higher labor leverage give out fewer loans; firms connected to such banks invest less. The researchers have built a model in which intermediaries use labor for screening and monitoring, and where wages are sticky, to explain these findings.