Local labor match and corporate investments: Evidence from new flight routes

Abstract

We exploit new flight connections from small cities to international airports as a quasi‐natural experiment to study the effects of local labor match on corporate investments. Using a cosine similarity of occupational makeups, we find that corporate investment rates are higher for firms with human capital profiles that are more similar to those of the local labor. The effects are more pronounced among financially constrained firms and less evident among firms with higher unionization membership and coverage. Firms with better local labor match are also more likely to downsize their employments when experiencing negative cash flow shocks. Collectively, our findings suggest that local labor match spurs corporate investments by lowering labor costs and increasing ex‐ante investment incentives.