Labor Mobility and the Cross-Section of Expected Returns

Abstract

Worker's employment decisions affect the productivity of capital and asset prices in predictable ways. Using a dynamic model, I show that reliance on a workforce with flexibility to enter and exit an industry translates into a form of operating leverage that amplifies equity-holders' exposure to productivity shocks. Consequently, firms in industry with mobile workers have higher systematic risk loadings and higher expected asset returns. I use data from the Bureau of Labor Statistics to construct a novel measure of labor supply mobility, in line with the model, based on the composition of occupations across industries over time. I document a positive and economically significant relation between labor mobility and expected asset returns in the cross-section. This relation is not explained by firm characteristics known in the literature to predict expected returns in the cross-section.

Keywords: Asset Pricing, Labor Mobility, Expected Returns, Cross-Section

JEL Classification: G12