Stock and Labor Market Synchronization and Income Inequality: Evidence from OECD Countries

Abstract

This paper formally tests how the synchronization of stock and labor markets can affect income inequality. The responsiveness of stock and labor markets to a monetary expansion is different, i.e., a stock market, in general, tends to respond much faster than labor market. When there is monetary expansion, stock market participants (usually the rich) can enjoy capital gains quicker than labor market participants (usually the poor). However, if a labor market is more synchronized with a stock market, the capital gains a rich can enjoy in a stock market would be faster matched by labor market response, leading to a shrinking income inequality. We empirically confirm the prediction with different synchronization measures, controlling endogeneity issues.