Title: The Effect of the Run-Up in the Stock Market on Labor Supply
Abstract: Introduction and summary There are many anecdotes of people who quit their job after having their stock market increase dramatically. This article assesses whether these anecdotes represent isolated incidents or whether the stock market has significantly affected U.S. labor supply. There are two main reasons why this is an important question. First, quantifying the effects of stock market fluctuations may help forecast future variation in labor force growth, employment, and unemployment. If the stock market suddenly dropped, it is possible that many people would rapidly reenter the labor market in order to rebuild enough to finance their retirement. This would cause the number of potential workers in the economy to increase. If the number of new jobs grew more slowly than the number of new workers, short-term unemployment problems would result. This would exacerbate the potential unemployment problems caused by more conservative hiring practices of employers after a market downturn. Second, we are interested in evaluating the extent to which the consumption response to variations in stock prices is consistent with economic theory. Current estimates of the marginal propensity to out of stock wealth, that is, the wealth often described in the popular press, range from .01 to .05. This means that each additional dollar in stock increases consumption one to five cents annually. The estimate more consistent with simple economic models that posit that people eventually their (see Poterba, 2000) is .05. If a dollar increase in stock results in only a one cent increase in consumption, then 99 cents would be saved until next year. Assuming the 99 cents earns a 3 percent post-tax rate of interest, it would grow to approximately $1.02 next year. Therefore, people would not eventually all of their wealth, contrary to the simple economic models. If the post-tax interest rate is 3 percent, people must have a marginal propensity to of at le ast .03. Poterba (2000) suggests .04 as a reasonable lower bound. However, these simple economic models assume that labor supply does not respond to variations in wealth. If much of the stock market goes toward affording people increased leisure in addition to increased consumption of market goods, then the .01 estimate for the marginal propensity to market goods may be consistent with economic models that account for the effect of on labor supply. People would eventually consume all of their wealth, but mostly in the form of increased leisure. If individuals three cents worth of leisure in the form of reduced earnings (that is, their earnings drop by three cents each year) in addition to a one cent increase in consumption of market goods in response to a $1 increase in wealth, then total consumption would be four cents in response to a $1 increase in wealth. This story is perfectly consistent with the theory that individuals eventually all their wealth. In this article, we present estimates of the size of the increase in in the U.S. economy from 1994 to 1999. Recent stock returns are high by historical standards. We also show that growth rates in stock prices are difficult to predict. Therefore, most of the recent increase in caused by rising stock prices represents an unanticipated increase to national wealth. We estimate that every dollar held in stocks on December 31, 1994, resulted in $1.12 in unanticipated shocks if those stocks were held until December 31, 1999. We estimate that the unanticipated component of the increase in national from 1994 to 1999 was $5.8 trillion in 1999 dollars. In order to understand how many people may have been affected by the run-up in the stock market, we examine the distribution of stock market in the economy. The more concentrated the distribution, the fewer people whose labor supply will be directly affected by stock market variations. …
Publication Year: 2000
Publication Date: 2000-12-22
Language: en
Type: article
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Cited By Count: 65
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