Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor
University of Minnesota; National Bureau of Economic Research (NBER)
Ohio State University (OSU) - Fisher College of Business
University of Texas at Dallas
University of Texas at Dallas - Jindal School of Management
August 13, 2015
Charles A. Dice Center Working Paper No. 2012-25
Fisher College of Business Working Paper No. 2012-03-025
We introduce labor-force heterogeneity in a neoclassical investment model. In the baseline model, we highlight the fact that labor adjustment costs are higher for high skilled workers than for low skilled workers. The model predicts that the negative hiring-expected return relation should be steeper in industries that rely more on high skilled workers because firm's hiring responds less elastically to changes in the discount rate when labor adjustment costs are higher. In an extended version of the model we show that the previous prediction also holds in the presence of additional sources of labor-force heterogeneity such as higher wage rigidity of high skilled workers. Empirically, we document that the negative hiring-expected return relation is between 1.7 and 3.2 times larger in industries that rely more on high skilled workers, than in industries that rely more on low skilled workers. This result is robust: it holds in U.S data, in international data, across sub-samples, and in both firm-level and portfolio-level analyses. Taken together, our results show that labor-force heterogeneity affects asset prices in financial markets.
Number of Pages in PDF File: 55
Keywords: Labor Skill, Labor Hiring, Investment, Stock Return Predictability, Cross-Sectional Asset Pricing, q-theory
JEL Classification: E22, E23, E44, G12
Date posted: October 2, 2012 ; Last revised: August 21, 2015
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