Labor Heterogeneity and Asset Prices: The Importance of Skilled Labor

Frederico Belo and Xiaoji Lin
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Frederico Belo: University of MN

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We show that heterogeneity in the composition of the labor force affects asset prices in financial markets in important ways. Theoretically, we combine a standard model of labor heterogeneity (Acemoglu, 2002) with a standard neoclassical q-theory model with labor adjustment costs. We then show that the negative expected return-hiring rate relation documented in previous studies is steeper in industries with higher labor adjustment costs. Using the overall industry level of labor skill as a proxy for the industry specific size of labor adjustment costs, we provide empirical support for this prediction. The negative expected return-hiring rate relation is twice as large among industries with higher labor skills than in industries with lower labor skills. In addition, we uncover a novel unconditional labor skill return spread. Firms in industries with more skilled labor have on average higher stock returns than firms in industries with low skilled labor, but this difference is only large across small firms. According to this result, firms with higher labor skills labor tend to be more risky because skilled labor is more costly to adjust, which in turn affects the firm's sensitivity to aggregate shocks in the economy.

JEL-codes: E22 E23 E44 G12 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-lab and nep-mac
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Citations: View citations in EconPapers (5)

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Working Paper: Labor Heterogeneity and Asset Prices: the Importance of Skilled Labor (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2012-25

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