Labor Market Agglomeration and Employee-Retention Policies

Abstract

We construct a measure of a firm’s exposure to labor market agglomeration in the locality—a measure we label LEO—and examine whether such exposure is a key factor in firms’ employee-related policies. We find that when LEO is high, firms grant more broad-based stock options, provide more employee-friendly work environment, and maintain financial flexibility. This relation is present only for high-skilled workers and stronger for firms investing in R&D. Our results show that firms strategically adopt the policies to retain employees who face better local opportunities in a large pooled market for their skills. Two quasi-natural experiments, the staggered adoption of the Inevitable Disclosure Doctrine and Hurricane Katrina, support a causal relation.

Keywords: Labor Force Composition, Labor Market Agglomeration, Stock Options, Corporate Social Responsibility, Working Conditions, Financing

JEL Classification: G32, J21, J33, J62, M14