Labor Flow Shocks Matter for Asset Pricing

Abstract

Using a novel dataset based on individual resumes of public firm employees, we propose a monthly index of labor flows, and decompose it into an expected level and an unexpected shock components. We find that the shocks strongly predict short-term market excess returns, while the levels do not. The substantial return predictability remains out-of-sample, and delivers sizable economic value in asset allocation. Our findings cannot be explained by existing labor-related predictors and common economic variables. In exploiting the underlying economic mechanism, we show that concerns about economic conditions are more likely to influence return predictability.

Keywords: Labor flow, Labor friction, Hiring rate, Stock market, Return predictability

JEL Classification: C22, C53, G11, G12, G17