The Effect of Labor Cost Behavior on Labor Investment Efficiency

Abstract

Labor investment is one of the firms important decisions that has significant influence over firm value (Lee and Yu 2017). However, how labor cost behavior of firms affect labor investment efficiency has rarely been examined. According to Oi (1962), costs regarding labor employment doesnt only include wage payment but also includes costs regarding hiring and training activities, which enhances potential labor productivity. This study investigates the association between cost behavior of these labor costs and the labor investment efficiency. Following model of Oi (1962) augmented with Greenward and Stiglitz (1988), this paper test the hypotheses that optimal level of labor cost is associated with efficiency of labor investment. Empirical results support the hypotheses: the level of hiring cost, training cost, and wage is positively associated with labor investment efficiency only they successfully contribute to labor productivity and firm value.