Francesca Brusa (Temple University)

“Human Capital, Unemployment Risk, and Asset Prices”

Abstract

This paper relates the riskiness of human capital to uncertainty in the labour market and documents a role for unemployment as a determinant of human wealth. Starting from the labour market equilibrium outcome, I derive two unemployment-adjusted measures of labour income and rely on U.S. micro-level data to quantify their dynamics over time. Comparing representative workers who differ in their endowment of human capital, I find that the riskiness of human capital is inversely related to human capital holdings. My findings point to inequality in human wealth, the discounted value of future labour income, being worse than the well documented inequality in labour income. Sorting U.S. industry-level portfolios by differential exposure to unemployment risk yields a novel cross-section of average excess returns. I interpret the high risk-premia are compensation for less-income constrained highly educated workers willing to take financial risk beyond hedging their labour income risk.