UC Berkeley

This dissertation explores the intersection between labor and financial markets, in which labor mobility plays a fundamental role. Unlike physical assets such as buildings or machines, human capital can actually walk away from the firm as employees and managers switch employers. The interaction between labor mobility, firm risk and human capital has been remarkably under-researched until now. The main question of this broad project is how differences in the flexibility of workers to find employment across different industries--labor mobility--affects the owners of human and physical capital. The three parts of the dissertation look at this question from different angles.

The first part, Labor Mobility and the Cross-Section of Expected Returns, focuses on the effect of labor mobility on the degree of operating leverage of a firm and thus on asset returns. I construct a dynamic model where worker's employment decisions affect the productivity of capital and asset prices in predictable ways. The model shows 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 an 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 cross-sectional relation between measures of labor mobility, operating leverage, and expected asset returns. This relation is not explained by firm characteristics known in the literature to predict expected returns.

The second part, Aggregate Asset-Pricing Implications of Human Capital Mobility in General Equilibrium, extends the model in the first chapter to consider the general equilibrium implications of labor mobility. The setup is based on a multi-industry dynamic economy with production. The extended model shows that mobility of labor affects not only cash-flows, but also aggregate risk, and the equity premium. This part considers two different types of human capital. Generalist human capital can move between industries, while specialized human capital and physical capital cannot. The greater relative mobility of human capital relative to physical capital affects how aggregate risk in the economy is split between these two components of total wealth. The model shows that aggregate consumption and wealth increase when human capital is more mobile. However, at the same time, aggregate risk and the equity risk premium also increase under human capital mobility.

I assume that the workforce in the economy is exogenously given in the first two chapters of this dissertation. This assumption is relaxed in the third chapter, Investments in Human Capital and Expected Asset Returns, where I endogenize the composition of occupations to discuss the interaction between human capital investments and labor mobility. This chapter focuses on the decision of workers to acquire different types of costly human capital with different degrees of associated labor mobility. This part introduces a two-sector general-equilibrium model with production and investments in human capital (i.e. education). Ex-ante identical workers face a trade-off between breadth and depth in the acquisition of industry-specific labor productivity. This chapter derives sufficient conditions for the existence of mobile workers. When these conditions are met, a fraction of workers chooses to acquire mobile but less productive generalist skills, even when labor risk can be fully hedged in financial markets.