NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Labor-Force Heterogeneity and Asset Prices: the Importance of Skilled Labor

Frederico Belo, Xiaoji Lin, Jun Li, Xiaofei Zhao

NBER Working Paper No. 21487
Issued in August 2015
NBER Program(s):Asset Pricing

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.

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Document Object Identifier (DOI): 10.3386/w21487

Published: Frederico Belo & Jun Li & Xiaoji Lin & Xiaofei Zhao, 2017. "Labor-Force Heterogeneity and Asset Prices: The Importance of Skilled Labor," The Review of Financial Studies, vol 30(10), pages 3669-3709.

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