DO OPERATORS LEVERAGE THEIR LABOR BY HIRING WORKERS? EVIDENCE FROM DAIRY FARMS
When firms expand their business they typically hire more labor and in the process generate increased returns to the business owners. Similar to the concept of financial leverage, we define the degree of labor leverage to be the worker-operator ratio and empirically explore the relationship between the degree of labor leverage and the return to operator’s labor and management using a dataset of closely held family dairy farms in New York State. Total return to operator labor is derived as a common return to generic operator labor and a supplemental return dependent upon managerial quality. The common return is estimated from an average production function with supplemental return estimated from fixed firm effects. Results show that the common return and the supplemental return both increased over the years 2001 through 2016 as these farms expanded, and the ratio of worker to operator increased. Moreover, risk analysis indicates that a higher degree of labor leverage increases the standard deviation of return to operator labor. Therefore, we conclude that operators leveraged their own labor by hiring workers and through that process received a higher but more variable return to their fixed labor quantity.
Applied Economics and Management
M.S., Applied Economics and Management
Master of Science
dissertation or thesis