DP13856 Stock Market Wealth and the Real Economy: A Local Labor Market Approach

Author(s): Gabriel Chodorow-Reich, Plamen T. Nenov, Alp Simsek
Publication Date: July 2019
Date Revised: February 2020
Keyword(s): consumption wealth effect, employment, marginal propensity to consume, monetary policy, nominal rigidities, regional heterogeneity, Stock Prices, Time-varying risk premium, wages
JEL(s): E21, E32, E44
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13856

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.