Do Time-Varying Risk Premiums Explain Labor Market Performance?

Abstract

Within the standard search and matching model, time-to-build implies that high aggregate risk premiums should forecast low employment growth in the short run but high employment growth in the long run. If there is also time-to-plan, high risk premiums should also forecast low net hiring rates in the short run but high net hiring rates in the long run. Our evidence indicates two-quarter time-to-build in the aggregate payrolls data, no time-to-plan in the aggregate hiring data, but two-quarter time-to-plan in the job creation data for manufacturing firms. High payroll growth and high net job creation rate in manufacturing also forecast low stock market excess returns at business cycle frequencies.

Keywords: Time-varying risk premiums, payroll growth, hiring rate, search and matching, time-to-build, time-to-plan

JEL Classification: G31, G12, J23