We examine whether aggregate cost stickiness predicts future macro-level unemployment rate. We incorporate aggregate cost stickiness into three different classes of forecasting models studied in prior literature, and demonstrate an improvement in forecasting performance for all three models. For example, when adding cost stickiness to an OLS regression that includes a battery of macroeconomic indicators and control variables, we find that a one-standard-deviation-higher cost stickiness in recent quarters is followed by a 0.23 to 0.26 percentage point lower unemployment rate in the current and following quarter. In out-of-sample tests, we find significant reductions in the root mean squared errors upon incorporation of cost stickiness for all three models. Additional tests suggest that professional macro forecasters, particularly those employed in nonfinancial industries, do not fully incorporate the information contained in cost stickiness. Finally, we find a stronger predictive power of cost stickiness toward the end of recessionary periods; we also assess cross-sectional variation of this predictive ability.

We examine how firms’ contractual relationships with their employees affect the design of their debt contracts, and the use of financial covenants in particular. Viewing the firm as the nexus of both explicit and implicit contractual relationships, we argue that managers cater to their employees’ preferences when negotiating contractual terms with creditors. We argue that an increase in unemployment-insurance benefits reduces employees’ cost of job loss, which, in turn, allows managers to take more risk. First, we show that more generous benefits are associated with a higher operating leverage, operating cash flow volatility, and product-development frequency. We then find that loans initiated following an increase in unemployment-insurance benefits include a higher proportion of performance, rather than capital covenants. Overall, our study demonstrates how the design of debt contracts changes in response to arguably exogenous changes in employees’ collective tolerance—and, in turn, managers’ preferences—for risk.

We provide evidence that credit investors do not fully impound the implications of firms' cost structure (or operating leverage) when pricing credit default swaps. Information about firms' cost structure is not disclosed and needs to be estimated. Furthermore, the performance implications of firms' cost structure depend on the expected macroeconomic conditions. We focus on the debt market because of the strong emphasis of this market on downside risk. To measure expected aggregate macroeconomic conditions, we employ the change in the anxious index (AI), which is the probability of a decline in real GDP provided by the SPF—the survey of professional forecasters. We find that the interaction between the firm's cost structure and change in AI predicts one-quarter-ahead CDS spreads. Portfolio-level analysis confirms this result.