Working Paper: NBER ID: w25959
Authors: Gabriel Chodorow-Reich; Plamen T. Nenov; Alp Simsek
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 Market Wealth; Consumption; Labor Market; Local Labor Market Analysis
JEL Codes: E21; E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in local stock wealth (G19) | increase in local employment in nontradable sectors (J68) |
| increase in local stock wealth (G19) | increase in local payroll in nontradable sectors (J39) |
| increase in local stock wealth (G19) | no significant effect on tradable sectors (F69) |
| 1% increase in local stock wealth (G19) | 0.077 basis point increase in local employment (J68) |
| 1% increase in local stock wealth (G19) | 0.218 basis point increase in local payroll (J39) |
| 20% increase in stock valuations (G19) | at least 17% increase in aggregate labor bill (J39) |
| 20% increase in stock valuations (G19) | at least 0.75% increase in aggregate hours (J38) |
| increase in local stock wealth (G19) | increase in household consumption (D10) |