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

Author

Listed:
  • Gabriel Chodorow-Reich

    (Harvard University)

  • Alp Simsek

    (Massachusetts Institute of Technology)

  • Plamen Nenov

    (Norwegian Business School (BI))

Abstract

This paper uses a local labor market analysis to provide evidence on the stock market consumption wealth effect. Our empirical strategy exploits regional heterogeneity in stock market wealth to identify the causal effect of stock price changes on labor market outcomes. An increase in stock wealth increases county employment and payroll in nontradable industries, as well as in total, while having no effect on employment in tradable industries. We use these responses to calibrate a model with stock market shocks and consumption wealth effects in a heterogeneous geographic setting. Combining the data and model, we find that a one dollar increase in stock wealth increases household spending by around 2.8 cents per year. A 20% change in stock valuations, unless countered by monetary policy, affects the aggregate labor bill by at least 0.85% and aggregate employment by at least 0.26% two years after the shock.

Suggested Citation

  • Gabriel Chodorow-Reich & Alp Simsek & Plamen Nenov, 2019. "Stock Market Wealth and the Real Economy: A Local Labor Market Approach," 2019 Meeting Papers 1240, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1240
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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