Sectoral Labor Reallocation and Return Predictability
61 Pages Posted: 5 May 2015 Last revised: 6 Feb 2018
Date Written: February 2, 2018
Sectoral labor reallocation shocks change the optimal allocation of workers across industries. We find that a proxy for this type of labor market shocks has very strong and robust predictive power for future stock market returns. In predictive regressions, the one-year out-of-sample R2 is as high as 14.88%. We propose a production-based asset pricing model that links the return predictability to time-varying labor adjustment costs. When human capital is tied to the industry, hiring workers from other industries involves more search and training costs. Hence, sectoral reallocation shocks lead to lower returns to hiring and therefore lower future stock returns.
Keywords: Financial Markets and the Macroeconomy, Return Predictability, Sectoral Shifts, Unemployment, Information Diffusion
JEL Classification: G12, G17
Suggested Citation: Suggested Citation