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Labor Heterogeneity and Asset Prices: The Importance of Skilled Labor


Frederico Belo


University of Minnesota; National Bureau of Economic Research (NBER)

Xiaoji Lin


Ohio State University (OSU) - Fisher College of Business

November 26, 2012

Fisher College of Business Working Paper No. 2012-03-025
Charles A. Dice Center Working Paper No. 2012-25

Abstract:     
We show that heterogeneity in the composition of the labor force affects asset prices in financial markets in important ways. Theoretically, we combine a standard model of labor heterogeneity (Acemoglu, 2002) with a standard neoclassical q-theory model with labor adjustment costs. We then show that the negative expected return-hiring rate relation documented in previous studies is steeper in industries with higher labor adjustment costs. Using the overall industry level of labor skill as a proxy for the industry specific size of labor adjustment costs, we provide empirical support for this prediction. The negative expected return-hiring rate relation is twice as large among industries with higher labor skills than in industries with lower labor skills. In addition, we uncover a novel unconditional labor skill return spread. Firms in industries with more skilled labor have on average higher stock returns than firms in industries with low skilled labor, but this difference is only large across small firms. According to this result, firms with higher labor skills labor tend to be more risky because skilled labor is more costly to adjust, which in turn affects the firm's sensitivity to aggregate shocks in the economy.

Number of Pages in PDF File: 39

Keywords: Skill Premium, Labor Hiring, Investment, Stock Return Predictability, Cross-Sectional Asset Pricing, q-theory

JEL Classification: E22, E23, E44, G12

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Date posted: October 2, 2012 ; Last revised: March 1, 2013

Suggested Citation

Belo, Frederico and Lin, Xiaoji, Labor Heterogeneity and Asset Prices: The Importance of Skilled Labor (November 26, 2012). Fisher College of Business Working Paper No. 2012-03-025. Available at SSRN: http://ssrn.com/abstract=2155295 or http://dx.doi.org/10.2139/ssrn.2155295

Contact Information

Frederico Belo (Contact Author)
University of Minnesota ( email )
19th Avenue South
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Xiaoji Lin
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
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