The stock market and aggregate employment
We study the interactions between the stock market and the labor market. When aggregate risk premiums are time-varying, predictive variables for market excess returns should forecast long-horizon growth in the marginal benefit of hiring and thereby long-horizon aggregate employment growth. Consistent with this logic, we document that long-horizon payroll growth and change in unemployment rate are predictable with risk premium proxies. Lagged payroll growth and change in unemployment rate also forecast stock market excess returns.
We thank Federico Belo for helpful comments. A portion of the paper was completed in August 2009 while Lu Zhang was visiting Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, whose hospitality is gratefully acknowledged. An Internet Appendix with supplementary results is available at the authors' Web sites. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.