A Labor Capital Asset Pricing Model

Lars-Alexander Kuehn, Mikhail Simutin, Jessie Jiaxu Wang
2013 Social Science Research Network  
We show that labor search frictions are an important determinant of the cross section of equity returns. In the data, sorting firms based on their loading on labor market tightness, the key statistic of search models, generates a spread in future returns of 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make optimal employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time variation in
more » ... the labor force participation rate. Firms with low factor loadings are not hedged against adverse labor force shocks and thus require higher expected stock returns. JEL Classification: E24, G12, J21
doi:10.2139/ssrn.2348526 fatcat:a6adaj5zpzgpnoiunlnpslwqra