Do Workers and Shareholders Share Business Cycle Risk?

Authors: Roberto Marfè (Collegio Carlo Alberto)

Title: Do Workers and Shareholders Share Business Cycle Risk?

Abstract: This paper verifies whether workers and shareholders asymmetrically share a business-cycle (or higher frequency) component of output. This is the case: labor compensations are less responsive than output to transitory shocks, whereas profits feature larger loadings. In turn, labor- and profit-shares of output are counter-cyclical and pro-cyclical and feature negative correlation. A large component of their variation is driven by business-cycle risk and predicts excess returns of both industry returns and value/size sorted portfolios. Natural implications for asset pricing design are qualitatively and quantitatively investigated.