Job postings and aggregate stock returns

Abstract

The job openings-to-employment ratio ($\mathrm{JOE}$), defined as the number of job postings divided by the employment level, is among the strongest known predictors of the equity premium. We find that $\mathrm{JOE}$ outperforms a broad set of over two dozen popular predictor variables in both in-sample and out-of-sample forecasting tests. Forecasts based on $\mathrm{JOE}$ also produce gains of 2.91% in annualized certainty equivalent return and 0.20 in annualized Sharpe ratio relative to forecasts based on the historical mean equity premium. The empirical results are consistent with a standard production-based asset pricing model with labor inputs and search frictions.