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

56 Pages Posted: 25 Aug 2015 Last revised: 23 May 2021

See all articles by Frederico Belo

Frederico Belo

INSEAD; Centre for Economic Policy Research (CEPR)

Xiaoji Lin

University of Minnesota

Jun Li

University of Texas at Dallas

Zhao xiaofei

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 2015

Abstract

We introduce labor-force heterogeneity in a neoclassical investment model. In the baseline model, we highlight the fact that labor adjustment costs are higher for high skilled workers than for low skilled workers. The model predicts that the negative hiring-expected return relation should be steeper in industries that rely more on high skilled workers because firm's hiring responds less elastically to changes in the discount rate when labor adjustment costs are higher. In an extended version of the model we show that the previous prediction also holds in the presence of additional sources of labor-force heterogeneity such as higher wage rigidity of high skilled workers. Empirically, we document that the negative hiring-expected return relation is between 1.7 and 3.2 times larger in industries that rely more on high skilled workers, than in industries that rely more on low skilled workers. This result is robust: it holds in U.S data, in international data, across sub-samples, and in both firm-level and portfolio-level analyses. Taken together, our results show that labor-force heterogeneity affects asset prices in financial markets.

Suggested Citation

Belo, Frederico and Lin, Xiaoji and Li, Jun and xiaofei, Zhao, Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor (August 2015). NBER Working Paper No. w21487, Available at SSRN: https://ssrn.com/abstract=2649780

Frederico Belo (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Xiaoji Lin

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
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)

Zhao Xiaofei

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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