Working Paper: NBER ID: w21487
Authors: Frederico Belo; Xiaoji Lin; Jun Li; Xiaofei Zhao
Abstract: We introduce labor-force heterogeneity in a neoclassical investment model. In the baseline model, we highlight the fact that labor adjustment costs are higher for high skilled workers than for low skilled workers. The model predicts that the negative hiring-expected return relation should be steeper in industries that rely more on high skilled workers because firm's hiring responds less elastically to changes in the discount rate when labor adjustment costs are higher. In an extended version of the model we show that the previous prediction also holds in the presence of additional sources of labor-force heterogeneity such as higher wage rigidity of high skilled workers. Empirically, we document that the negative hiring-expected return relation is between 1.7 and 3.2 times larger in industries that rely more on high skilled workers, than in industries that rely more on low skilled workers. This result is robust: it holds in U.S data, in international data, across sub-samples, and in both firm-level and portfolio-level analyses. Taken together, our results show that labor-force heterogeneity affects asset prices in financial markets.
Keywords: labor force heterogeneity; asset prices; skilled labor; neoclassical investment model
JEL Codes: E13; E22; E23; E24; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher labor adjustment costs (J39) | Steeper negative hiring-expected return relation (G40) |
| 20% increase in hiring rate (J68) | 23% decrease in expected stock returns in low-skilled industries (F66) |
| 20% increase in hiring rate (J68) | 39% decrease in expected stock returns in high-skilled industries (J24) |
| Hiring return spread (high-skilled) (J24) | Hiring return spread (low-skilled) (J69) |
| Failure of CAPM to explain hiring return spread (G19) | More pronounced in high-skilled industries (J24) |