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 - Naveen Jindal School of Management
Fisher College of Business Working Paper No. 2012-03-025
Charles A. Dice Center Working Paper No. 2012-25
We investigate the impact of labor-force heterogeneity on asset prices in a neoclassical model with labor and capital adjustment costs, and with aggregate productivity and adjustment cost shocks. The negative firms’ hiring rate-expected stock return relation identified in previous studies should be steeper in industries that rely relatively more on high skill workers because it is more costly to replace a high skill than a low skill worker. Empirically, a hiring spread portfolio that goes long low hiring rate firms and short high hiring rate firms earns an average annual stock return of 8.6% in high skill industries, and only 0.9% in low skill industries. This pattern in returns is not explained by the CAPM. According to the model, the CAPM fails because the high returns of the hiring spread portfolio in the high skill industry are driven by firms’ exposure to the aggregate adjustment cost shock. We provide empirical support for this economic mechanism using a model-implied adjustment cost shock proxy.
Number of Pages in PDF File: 60
Keywords: Labor Heterogeneity, Labor Skill, Labor Hiring, Investment, Stock Return Predictability, Cross-Sectional Asset Pricing, q-theory, Adjustment cost shocks
JEL Classification: E22, E23, E44, G12
Date posted: October 2, 2012 ; Last revised: July 29, 2016
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