Labor-Technology Substitution: Implications for Asset Pricing
60 Pages Posted: 24 Nov 2015 Last revised: 21 Feb 2019
Date Written: February 18, 2019
This paper studies the asset pricing implications of a firm's opportunities to replace routine-task labor with automation. I develop a model in which firms optimally undertake this replacement when their productivity is low. Hence, firms with routine-task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment-level occupational data, I construct a measure of firms' share of routine-task labor. Compared to their industry peers, firms with a higher share of routine-task labor (i) invest more in machines and reduce disproportionately more routine-task labor during economic downturns, and (ii) have lower expected stock returns.
Keywords: Routine-Biased Technological Change, Routine-Task Labor, Stock Returns
JEL Classification: E22, E23, G12, J24
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