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Business and Finance

Specialized Human Capital, Unemployment Risk, and the Value Premium


In this article, the authors want to see either specialized human capital’s negative shocks are listed under the stock return’s cross section. These shocks are calculated by studying the employment growth of that industry where the human capital is. The industries in which there is a contract in employment the risk for value factor is higher than the industries where employment grows. Results show that the companies where employment growth is higher have lower expected returns than companies where growth rate is lower. The premium for the big, small and micro stock is extensive for employment growth. CAPM cannot explain the premium but value minus growth risk factor is inversely related to portfolio payoff.

For a household earning and living human capital is important. But as the human capital is only specialized in one field or industry most of the time, it is risky for the household to invest in the same industry they are working in as that industry could be a dying one because of technological advancements, for example, a journalist is specialized in a particular industry i.e. media industry which is becoming obsolete with the social media advances. The portfolio of their investments should be diversified rather than just buying stock of that dying industry. The investors in industries where employment is contracting, are in a risky place to face value risk factor than those who have investments in industries where employment is expanding. Where employment is contracting, the employees should avoid buying the stocks and evade from value investment strategy and they should buy the stocks in the industries where employment is expanding.

Authors have proposed a specific measure by using employment growth to check shocks at the industry level for specialized human capital. Employment will contract if the industry is getting obsolete. With the contraction in employment, specialized human capital will be at risk. If you have skills for more than one industry, you will face only a loss of income but can work in another company or industry than industry-specific human capital will not be facing any risk. Employment growth is used to measure shocks for human capital instead of using wage growth because when an industry faces distress, the decrease in the income of the workers can be measured by wages but those who are unemployed we can not measure their reduction in income through wage growth.

The data has been collected from the databases of U.S stock markets. Data for employment is collected from the U.S BLS and QCEW for the measurement of salaries and wages of employed workers. Employees working for a specific industry that are specialized human capital must avoid investing in stock in that particular industry. Regression model has been used for data analysis in this article and the cross-sectional predictive regression model is also applied to measure the relationship between expected returns and employment growth. Cross-sectional predictive regressions show unfavorable results for the firms that have a strong impact on small stocks. A large pool of small stocks will be obtained due to dominating the effect of micro and small stocks for the reason of massive market capitalization. Therefore, it is essential to building the impact on various groups of market capitalization by a pervasive predictive variable. In this study predictive regressions have been applied separately to determine the impact of the predictive variable for different market groups. As a whole, it has been inferred that for all size groups the predictive power is pervasive for industry employment growth. There is a negative link between expected returns and employment growth of a firm as observed through cross-sectional predictive regressions. Interestingly if the returns are calculated by CAPM, assets with higher returns will be linked with higher industry employment growth. Market beta is low for the industries that have low employment growth. Market beta is high for the industries with high employment growth and statistically, the value is greater than 1.

In this article, the results have shown the strong and consistent link between specialized human capital with value premium. Workers do not like to invest in stocks whose payoff is associated with a decreased shock in its industry-specific human capital. Employment growth has been taken in order to measure the shocks for specialized human capital. I observe industries that possess employment contraction are considerable exposure to value premium in comparison to industries that have employment contraction. In this study hedging portfolios as well as cross-sectional predictive regressions have been used. Expected returns are higher for industries where employment growth is low as compared to firms that possess higher employment growth. Among many forms of market capitalization, return premium of the firm is pervasive that is corresponding to industry-specific human capital.

This research can be used by investment managers as it allows them to understand that they need to invest in a portfolio of different industries as the risk in investing in one industry where the employment is contracting is higher as compare to the industries where employment is expanding because the risk is low in those industries. They should invest in industries where the employment growth is low as expected return in such industries is higher and they should avoid investing in industries where employment growth is higher. Investors may find from the study that workers feel reluctant for value investment strategy as with the technology advancement there will be obsoleting jobs and industry specified skills which will have a negative shock to industry-specific human capital. The workers affected with these negative shocks avoid investing in shares of these companies. Investment managers can also avoid such negative shocks by investing in a portfolio of different industries.


Jank, S. (2014). Specialized human capital, unemployment risk, and the value premium.



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