Co-movement of skill premium and stock prices

Abstract

We examine the empirical phenomenon of co-movement of skill premium and share prices by appealing to the techniques of co integration. The US data (1984--2010) reveals that stock prices and skill premium are co integrated indicating a long run relationship. We carry out a further investigation into panel data of six OECD countries (1984--2005). The stock price and the skill premium are found to be co integrated in this panel data, too. We posit that the co-movement of skill premium and stock prices is driven by unexpected technological progress. Building on a three sector model of endogenous growth through Schumpeterian creative destruction a la Aghion and Howitt (1992, Econometrica: 60(2)), we reconcile these two apparently different ideas in a single model. Our model demonstrates that technological revolution can lead to rise in both skill premium and stock price at the same time. We calibrate our model based on the US data and find that a large part of the change, quantitatively speaking, is explained by our model.