IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article

Earnings Inequality and the Equity Premium

  • Walentin Karl

    ()

    (Sveriges Riksbank)

In this paper, we document a 75 percent increase in stockholders' share of aggregate labor income in the U.S. from 1962 to 2000 using data from Survey of Consumer Finances. Our decomposition of the increase in stockholders' share of aggregate labor income documents that one half is due to the equi-proportional increase in participation and one quarter each is due to the non-proportional part of the changes in stockmarket participation and changes in the income distribution, respectively. The change due to the labor income distribution is driven entirely by the increase in the share of labor income accounted for by the top labor income decile. Using a simple model with limited stockmarket participation, we present a mechanism for how the increase in stockholders' share of aggregate labor income has affected the ex ante equity premium (i.e. the discount rate applied to equity). The mechanism works through the composition of income of stockholders. The resulting decrease in the equity premium is 44 percent, which roughly coincides with the historical change in the post-1951 equity premium implied by the simple dividend growth model in Fama and French (2002).

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.degruyter.com/view/j/bejm.2010.10.1/bejm.2010.10.1.1939/bejm.2010.10.1.1939.xml?format=INT
Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 10 (2010)
Issue (Month): 1 (November)
Pages: 1-23

as
in new window

Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:36
Contact details of provider: Web page: http://www.degruyter.com

Order Information: Web: http://www.degruyter.com/view/j/bejm

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Hanno Lustig & Stijn Van Nieuwerburgh, 2006. "Can Housing Collateral Explain Long-Run Swings in Asset Returns?," NBER Working Papers 12766, National Bureau of Economic Research, Inc.
  2. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  3. Tano Santos & Pietro Veronesi, 2006. "Labor Income and Predictable Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 1-44.
  4. Laurent Calvet & Martin Gonzalez-Eiras & Paolo Sodini, 2001. "Financial Innovation, Market Participation and Asset Prices," Harvard Institute of Economic Research Working Papers 1928, Harvard - Institute of Economic Research.
  5. Kim, Chang-Jin & Morley, James C & Nelson, Charles R, 2004. "Is There a Positive Relationship between Stock Market Volatility and the Equity Premium?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 339-60, June.
  6. Martin Lettau & Sydney Ludvigson & Jessica A. Wachter, 2005. "The declining equity premium: what role does macroeconomic risk play?," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  7. Audra J. Bowlus & Jean-Marc Robin, 2004. "Twenty Years of Rising Inequality in U.S. Lifetime Labour Income Values," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00279656, HAL.
  8. George M. Constantinides & John B. Donaldson & Rajnish Mehra, . "Junior Can't borrow: A New Perspective on the Equity Premium Puzzle."," CRSP working papers 457, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
  10. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  11. Giorgio Primiceri & Thijs van Rens, 2002. "Inequality over the business cycle: Estimating income risk using micro-data on consumption," Economics Working Papers 943, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2004.
  12. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "The Cross-Sectional Implications of Rising Wage Inequality in the United States," CEPR Discussion Papers 4296, C.E.P.R. Discussion Papers.
  13. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
  14. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  15. M. Fatih Guvenen, 2003. "A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation or Cross-sectional Heterogeneity?," RCER Working Papers 499, University of Rochester - Center for Economic Research (RCER).
  16. Llubos Pástor, 2001. "The Equity Premium and Structural Breaks," Journal of Finance, American Finance Association, vol. 56(4), pages 1207-1239, 08.
  17. Francisco Gomes & Alexander Michaelides, 2005. "Asset pricing with limited risk sharing and heterogeneous agents," LSE Research Online Documents on Economics 24649, London School of Economics and Political Science, LSE Library.
  18. Dew-Becker, Ian & Gordon, Robert J, 2005. "Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income," CEPR Discussion Papers 5419, C.E.P.R. Discussion Papers.
  19. Hui Guo, 2003. "Limited stock market participation and asset prices in a dynamic economy," Working Papers 2000-031, Federal Reserve Bank of St. Louis.
  20. Krueger, Dirk & Perri, Fabrizio, 2005. "Does income inequality lead to consumption inequality? Evidence and theory," CFS Working Paper Series 2005/15, Center for Financial Studies (CFS).
  21. Juan Carlos Hatchondo, 2008. "A quantitative study of the role of wealth inequality on asset prices," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 73-96.
  22. Polkovnichenko, Valery, 2004. "Limited stock market participation and the equity premium," Finance Research Letters, Elsevier, vol. 1(1), pages 24-34, March.
  23. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina, 2001. "The Declining U.S. Equity Premium," NBER Working Papers 8172, National Bureau of Economic Research, Inc.
  24. Chris I. Telmer, 1991. "Asset Pricing Puzzles and Incomplete Markets," Working Papers 806, Queen's University, Department of Economics.
  25. Poterba, J.M. & Samwick, A.A., 1996. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Working papers 96-2, Massachusetts Institute of Technology (MIT), Department of Economics.
  26. Campbell, John, 2008. "Estimating the Equity Premium," Scholarly Articles 3196339, Harvard University Department of Economics.
  27. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
  28. Jack Favilukis, 2007. "Inequality, Stock Market Participation, and the Equity Premium," FMG Discussion Papers dp602, Financial Markets Group.
  29. John Heaton & Deborah Lucas, 2000. "Stock Prices and Fundamentals," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 213-264 National Bureau of Economic Research, Inc.
  30. Christian Gollier, 2001. "Wealth Inequality and Asset Pricing," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 181-203.
  31. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  32. Juan Carlos Hatchondo, 2005. "A quantitative study of the role of wealth inequality on asset prices," Working Paper 05-12, Federal Reserve Bank of Richmond.
  33. Andrew B. Abel, 2006. "Equity Premia with Benchmark Levels of Consumption: Closed-Form Results," NBER Working Papers 12290, National Bureau of Economic Research, Inc.
  34. Kim, Chang-Jin & Morley, James C. & Nelson, Charles R., 2005. "The Structural Break in the Equity Premium," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 181-191, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:36. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.