مقاله سال ۲۰۱۶

۲ Wage rigidity is an important determinant of firms’ risk and cost of capital. Sticky 3 wages (wages that are imperfectly correlated with the marginal product of labor) create 4 an additional source of risk for the firm. This implies that firms, industries, regions, 5 or time periods with especially high or rigid wages are therefore especially risky. In 6 particular if wages are sticky, then wage growth should negatively forecast future stock returns because falling wages are associated with even bigger falls in output, and with 2 increases in operating leverage. This paper indeed finds this to be the case in aggregate, 3 industry, and U.S. state level data. Furthermore, this paper finds that industries and 4 U.S. states with higher wage rigidity have a stronger relationship between wages and 5 returns.

Sticky wages are an important and widely studied feature of labor markets (Calvo 7 (1982), Taylor (1983), Taylor (1999), Shimer (2005), Hall (2006), Gertler and Trigari 8 (2009)), however their asset pricing implications have received less attention. Danthine 9 and Donaldson (2002) and more recently Favilukis and Lin (2015) have shown that 10 they can improve the asset pricing implications of a production economy, while Gourio 11 (2007) shows that they may help explain cross-sectional differences in returns as well. 12 This paper shows that in the presence of sticky wages, wage growth becomes a state 13 variable and negatively forecasts future returns. This forecastability is stronger in times 14 periods, industries, or regions where wages are more rigid, or where the labor share is 15 high.

This paper starts with a simple model to illustrate the intuition of the key mechanism. 17 The key feature of this model is that wages are not equal to the marginal product of 18 labor, as in standard models. Rather, as in Shimer (2010), wages follow an autoregressive 19 process where the innovation is related to the marginal product of labor. Therefore, 20 wages are backward looking. In bad (good) times, output falls (rises) but wages do not 21 fall (rise) by as much as output, which makes equity riskier because of relatively higher 22 wage obligations by the firm. This model shows that wage growth negatively forecasts 23 future stock returns if wage rigidity is present, with stronger forecastability if rigidity is 24 stronger and no forecastability if the wage is equal to the marginal product of labor. The 25 simple model also implies that wage growth and labor share are negatively correlated 26 and that labor share positively forecasts stock returns due to the operating leverage 27 effect.