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Labor Rigidity and the Dynamics of the Value Premium

Roberto Marfè ()

No 466, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper documents that (i) the labor-share is a strong predictor of both the value and duration premia, (ii) these premia are highly correlated, and (iii) the labor-share does not forecast the component of the value premium orthogonal to the duration premium. A simple equilibrium model with labor rigidity and heterogeneity in cash-flow durations rationalizes these stylized facts. The economic channel is a term-structure effect: labor rigidity boosts short-run dividend risk because wages are more responsive to permanent than transitory shocks. This leads to downward-sloping equity risk and to a cross-sectional duration premium. In turn, value firms earn a compensation over growth firms which is predicted by labor-share variation.

Date: 2017
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Related works:
Working Paper: Labor Rigidity and the Dynamics of the Value Premium (2016) Downloads
Working Paper: Labor Rigidity and the Dynamics of the Value Premium (2015) Downloads
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