Labor Unions and Asset Prices
University of Aarhus Economics Working Paper No. 2007-5
27 Pages Posted: 6 Mar 2007
Date Written: November 5, 2007
The paper investigates the nexus between labor and financial markets, focusing on the interaction between labor union behavior in setting wages, firms' investment strategy and asset prices. The way unions set wage claims after observing firm's financial performance increases the volatility of firms' returns and the riskiness of corporate ownership. To remunerate this higher volatility and stronger risk, firms' equities have to grant high return. This mechanism is able to offer an explanation of for the "equity puzzle", that is it can explain the difference between equity returns and the risk free rate. It is a welcome result that the simulated excess return is about the empirical estimate and this result is obtained with a logarithmic specification of the shareholders preferences.
Keywords: Equity Premium, General Equilibrium, Union Models
JEL Classification: D81, E24, J23
Suggested Citation: Suggested Citation