Does Political Risk Influence Wage Theft?

We study the effect of firm-level political risk on wage theft. On one hand firms exposed to political risk might engage in wage theft to lower their expenses and to improve their financial flexibility. On the other hand, political risk increases firm transparency and scrutiny, hence reducing management incentives to undertake wage theft. Using a firm-level measure of political risk and wage theft data from the WHISARD database of the US Department of Labour, we show that firm political risk increases wage theft. Using the redrawing of US congressional districts, as a plausible exogenous shock, we show that this relation is likely causal. This effect is short-term and is attenuated in the presence of monitoring by major customers and government contractors, employee power, and internal corporate governance monitoring. Further, we provide evidence that firms undertaking wage theft in response to political risk increase their cash holdings. Finally, in line with the investment under uncertainty theory, we show that wage theft is a substitute rather than a complement to a reduction in investment when uncertainty increases.