Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor

Fisher College of Business Working Paper No. 2012-03-025

Charles A. Dice Center Working Paper No. 2012-25

58 Pages Posted: 2 Oct 2012 Last revised: 17 Dec 2016

Frederico Belo

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

Xiaoji Lin

Ohio State University (OSU) - Fisher College of Business

Jun Li

University of Texas at Dallas

Xiaofei Zhao

University of Texas at Dallas - Naveen Jindal School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 2016

Abstract

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

Belo, Frederico and Lin, Xiaoji and Li, Jun and Zhao, Xiaofei, Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor (December 2016). Fisher College of Business Working Paper No. 2012-03-025; Charles A. Dice Center Working Paper No. 2012-25. Available at SSRN: https://ssrn.com/abstract=2155295 or http://dx.doi.org/10.2139/ssrn.2155295

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

Jun Li

University of Texas at Dallas ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)

Xiaofei Zhao

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States

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