Has the Stock Market Become Less Representative of the Economy?
The firms listed on the stock market in aggregate as well as the top market capitalization firm contribute less to total non-farm employment and GDP now than in the 1970s. A major reason for this development is the decline of manufacturing and the growth of the service economy as firms providing services are less likely to be listed on exchanges. We develop quantitative measures of representativeness showing how firms’ market capitalizations differ from their contribution to employment and GDP. Representativeness is worst when the market is most highly valued and worsens over time for employment, but not for value added.
We thank Leandro Sanz for excellent research assistance. We are grateful for comments from Harry DeAngelo, Craig Doidge, Andrei Gonçalves, and seminar participants at the Ohio State University and Tulane University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.