Stock Market Wealth and the Real Economy: A Local Labor Market Approach

55 Pages Posted: 17 Jun 2019

See all articles by Gabriel Chodorow-Reich

Gabriel Chodorow-Reich

Harvard University Department of Economics

Plamen Nenov

BI Norwegian Business School

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2019

Abstract

We provide evidence of the stock market wealth effect on consumption by using a local labor market analysis and regional heterogeneity in stock market wealth. An increase in local stock wealth driven by aggregate stock prices increases local employment and payroll in nontradable industries and in total, while having no effect on employment in tradable industries. In a model with consumption wealth effects and geographic heterogeneity, these responses imply a marginal propensity to consume out of a dollar of stock wealth of 3.2 cents per year. We also use the model to quantify the aggregate effects of a stock market wealth shock when monetary policy is passive. A 20% increase in stock valuations, unless countered by monetary policy, increases the aggregate labor bill by at least 1.7% and aggregate hours by at least 0.75% two years after the shock.

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Suggested Citation

Chodorow-Reich, Gabriel and Nenov, Plamen and Simsek, Alp, Stock Market Wealth and the Real Economy: A Local Labor Market Approach (June 2019). NBER Working Paper No. w25959. Available at SSRN: https://ssrn.com/abstract=3405146

Gabriel Chodorow-Reich (Contact Author)

Harvard University Department of Economics ( email )

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HOME PAGE: http://scholar.harvard.edu/chodorow-reich

Plamen Nenov

BI Norwegian Business School ( email )

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Norway

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://https://economics.mit.edu/faculty/asimsek

National Bureau of Economic Research (NBER) ( email )

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HOME PAGE: http://https://economics.mit.edu/faculty/asimsek

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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