| Volatility, Labor Heterogeneity and Asset Prices Contributor(s): Federal Reserve Board (Author) |
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ISBN: 1503287122 ISBN-13: 9781503287129 Publisher: Createspace Independent Publishing Platform OUR PRICE: $12.30 Product Type: Paperback Published: November 2014 |
| Additional Information |
| BISAC Categories: - Business & Economics |
| Physical Information: 0.1" H x 8.5" W x 11" (0.31 lbs) 50 pages |
| Descriptions, Reviews, Etc. |
| Publisher Description: This study shows that a firm's reliance on skilled labor is an underlying determinant of its exposure to aggregate volatility risk. I present a model in which firms make hiring and firing decisions in an environment of time-varying aggregate volatility, and face linear adjustment costs that increase with the skill of a worker. In the model, an increase in aggregate volatility slows a firm's labor demand reaction to changes in economic conditions, reducing its ability to smooth cash flows. The rise in aggregate volatility has a more pronounced impact on firms with a high share of skilled labor because their labor is more costly to adjust. Therefore, the compensation for volatility risk and its contribution to risk compensation increases with a firm's reliance on skilled labor. I empirically test the implications of the model using occupational estimates to construct a measure of a firm's reliance on skilled labor, and find a positive and statistically significant cross-sectional relation between the reliance on skilled labor and expected returns. In times of high aggregate volatility, firms with a high share of skilled workers earn an annual return of 2.7% above those with a high share of unskilled workers. This spread reduces by one third in times when volatility is back to normal. |