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

109 Pages Posted: 24 Jun 2019 Last revised: 13 Feb 2020

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: February 12, 2020

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.

Keywords: stock prices, consumption wealth effect, marginal propensity to consume, employment, wages, regional heterogeneity, time-varying risk premium, nominal rigidities, monetary policy

JEL Classification: E44, E21, E32

Suggested Citation

Chodorow-Reich, Gabriel and Nenov, Plamen and Simsek, Alp, Stock Market Wealth and the Real Economy: A Local Labor Market Approach (February 12, 2020). Available at SSRN: https://ssrn.com/abstract=3406107 or http://dx.doi.org/10.2139/ssrn.3406107

Gabriel Chodorow-Reich

Harvard University Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
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6174963226 (Fax)

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

Plamen Nenov

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Alp Simsek (Contact Author)

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

50 Memorial Drive E52-552
The Morris and Sophie Chang Building
Cambridge, MA 02142
United States
617-2585630 (Phone)

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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