Does Routine Labor Generate Routine Earnings?

Abstract

A substantial body of prior research investigates how skills and attributes of upper management affect firm policies and performance, but the impact of workers outside of upper management has received little attention due to scarcity of data involving lower-level workers. We propose that utilization of routine labor represents an important source of variation in firm earnings persistence and predictability. Defining routine labor as occupations at greater risk for future automation, we find that firms hiring more routine labor generate more predictable and persistent earnings. Interestingly, earnings persistence is driven by accruals rather than cash flows, indicating that routine labor may not create smoother underlying economics. Routine labor generates the most predictable and persistent accruals when managers have higher ability and when firm efficiency is higher. Analysis within the manufacturing industry shows that routine labor especially impacts accrual persistence when firms build up inventory and therefore accrue a greater proportion of labor cost. In addition, external economic policy in the form of state minimum wage increases negatively impacts the link between routine labor and accrual persistence, presumably due to a less flexible and more costly labor supply for routine jobs.