Labor Rigidity and the Dynamics of the Value Premium
57 Pages Posted: 27 May 2015 Last revised: 29 Nov 2017
Date Written: January 15, 2015
This paper documents that (i) the labor-share is a strong predictor of both the value and duration premia, (ii) these premia are highly correlated, and (iii) the labor-share does not forecast the component of the value premium orthogonal to the duration premium. A simple equilibrium model with labor rigidity and heterogeneity in cash-flow durations rationalizes these facts. The economic channel is a term-structure effect: labor rigidity boosts short-run dividend risk because wages are more responsive to permanent than transitory shocks. This leads to downward-sloping equity risk and to a cross-sectional duration premium. In turn, value firms earn a compensation over growth firms which is predicted by labor-share variation.
Keywords: value premium, labor rigidity, term-structure, predictability, duration
JEL Classification: D51, E21, G12
Suggested Citation: Suggested Citation