Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor
Charles A. Dice Center Working Paper No. 2012-25
58 Pages Posted: 2 Oct 2012 Last revised: 17 Dec 2016
Date Written: December 2016
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. We document that the negative firms’ hiring rate-future stock return relation identified in previous studies is significantly steeper in industries that rely relatively more on high skill workers than on low skill workers. A long low hiring rate firms and short high hiring rate firms portfolio earns an average annual stock return of 8.6% in high skill industries, and only 0.9% in low skill industries. Moreover, this pattern is not explained by the standard CAPM. This finding is consistent with a neoclassical model of investment with labor force heterogeneity if it is more costly to replace high skill than low skill workers. This differential cost makes the returns of the firms in the high skill to be more exposed to the aggregate adjustment cost shock. We provide empirical support for this economic mechanism using a model-implied adjustment cost shock proxy.
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
Suggested Citation: Suggested Citation