Labor mobility is the flexibility of workers to walk away from an industry in response to better opportunities. I develop a model in which labor flows make bad times worse for shareholders who are left with capital that is less productive. The model shows that firms face greater operating leverage by providing flexibility to mobile workers. I construct an empirical measure of labor mobility consistent with the model and document an economically significant cross‐sectional relation between mobility, operating leverage, and stock returns. I find that firms in mobile industries earn returns over 5% higher than those in less mobile industries.

This paper shows that product market competition has two opposing effects on asset returns. The first relates to the pro-cyclical nature of the value destruction from expansion of competitors, which lowers exposure to systematic risk in more competitive industries. The second is related to the narrower profit margins due to competition, which increase exposure to systematic risk. We find that the first effect dominates the second, so that firms in more competitive industries generally earn lower asset returns. Our results are robust to using five alternative measures of competition and to controlling for the sample selection bias of publicly-listed firms.

The relative size and inflexibility of labor expenses lead to a form of operating leverage, which we call labor leverage. We derive a set of conditions for the existence of labor leverage even when labor markets are frictionless. Our model provides theoretical support for the use of firm-level labor share as a measure of labor leverage. Using Compustat/CRSP and confidential Census data, we provide evidence for the existence and for the economic significance of labor leverage: high labor share firms have operating profits that are more sensitive to economic shocks and have higher expected returns.

We document that the aggregate hiring rate of publicly traded firms in the U.S. economy negatively predicts stock market returns and long-term cash flows, and positively predicts short-term cash flows. In addition, through a variance decomposition, we show that the time-series variation in the aggregate hiring rate is mainly driven by changes in discount rates and short-term expected cash flows, with no contribution from variation in long-term expected cash flows. We estimate a neoclassical dynamic model with labor market frictions and show that labor adjustment costs and time-varying risk are essential for the model to replicate the empirical patterns.