You know the feeling. The S&P 500 index breaks record after record, televisions talk about a “historic boom on Wall Street”, Americans' pension funds swell. And at the same time, the real wages of ordinary workers have barely budged for decades.
Coincidence? No, say economists from three of the most prestigious universities in the US. The connection between the two is direct, measurable — and quite uncomfortable. Simply put: much of the money that the stock market “created” over the past 35 years, is not new money from a growing economy. It is money that used to go to wages and is now going to shareholders.
The study that turned the tables
In 2019, three economists — Daniel Greenwald (MIT), Martin Letau (Berkeley), and Sidney Ludvigson (NYU) — published a paper with the eloquent title „How the Wealth Was Won". It was later published in the Journal of Finance — one of the most authoritative financial journals in the world.
Their account is as follows. Between 1989 and 2017, American companies created about $34 trillion of new stock market wealth. Where did it come from? The authors' answer: 54% of the stock market's growth is due to the redistribution of income from production — from labor to shareholders. Not to innovation, not to higher productivity, not to economic growth. But to the fact that an increasingly larger piece of the total “pie" of the economy goes to profits and an increasingly smaller piece — to wages.
The mechanism is simple and mirror-like: when the share of labor in the added value of the corporate sector falls, the share of profit after taxes grows. And the price of a share is precisely the expected future profits. In a interview for Berkeley, Prof. Lettau puts it bluntly: in the long run, the movement of stock values comes mainly from a transfer of wealth from labor to capital.
And the other way around? The golden years of the worker = modest years for the stock market
Here comes perhaps the most interesting part — because the study also answers the opposite question.
The authors divide the post-war history of the United States into two eras. Between 1952 and 1988 — the era of strong unions, rising real wages and the „American dream" of a single income for the whole family — the stock market created less than half&strong> of the wealth of the following period. But then the real engine is: economic growth, not redistribution.
In other words: when workers received a growing share of the pie, the stock market grew more modestly — but „fairly", along with the economy. When the labor share started to decline after the 1980s, the stock market became disconnected from the real economy and plummeted. The authors call this a "widening gap" between the market and the economy that feeds it.
It's not just in America. And it's not just wages
The skeptic will say: one study is not proof. But it is not one.
In 2022, Dmitry Kuvshinov and Kaspar Zimmerman published in the Journal of Financial Economics the study „The Big Bang", which tracks the stock markets of 17 advanced economies since 1870 — 146 years of data. The bottom line: For more than a century, market capitalization grew in line with GDP. Then, in the 1980s and 1990s, the market capitalization-to-GDP ratio suddenly tripled and stayed high. The key driver of this structural breakthrough? A shift in profits toward publicly traded companies — their share of both GDP and total capital income doubled to the highest level of the entire period.
There's a third piece to the puzzle — this time from the Federal Reserve itself. In 2023, Fed economist Michael Smolyansky published the paper „End of an Era" in which it shows that over 40% of the real growth in corporate profits in the US between 1989 and 2019 is explained purely mechanically by falling interest rates and falling corporate taxes. And the fall in risk-free rates alone explains the entire expansion of the price-earnings ratio. That is, not just "market forces" — but specific policies in favor of capital: lower taxes on profits and cheaper financing.
What does this mean for you
First: when you hear "the stock market is breaking records", this is no longer synonymous with "the economy is doing well". In recent decades, the two have become disconnected — and the difference between them is, to put it bluntly, the share of wages.
Second: here is the inconvenient arithmetic for investors. If economic growth remains slow, the stock market can only repeat its successes if the labor share falls further — that is literally the calculation of Letau and his colleagues. And profits can hardly count on even lower taxes and interest rates, the Fed warns. The two "doping" of the last 35 years are running out.
Third: this also explains why inequality is growing so quickly. Stocks are not distributed evenly — according to the study, the top 5% of stockholders hold 76% of the value of the entire market. When wealth shifts from wages to stocks, it shifts from the many to the few.
One important caveat. These studies are accounting decompositions and structural models, not controlled experiments. They prove that the stock market's growth is explainable by the redistribution to capital — not that a specific law caused it. The closest Smolyansky comes to a causal relationship is with taxes and interest. But the coincidence of three independent studies, three different methodologies and 146 years of data is hard to ignore.
Ultimately, the answer to the question in the title is both simple and disturbing. The 34 trillion did not fall from the sky. A large part of it came from where all money in an economy comes from — from people's labor. It just didn't come back to them this time.
Sources:
Greenwald, Lettau, Ludvigson — „How the Wealth Was Won: Factor Shares as Market Fundamentals", NBER / Journal of Finance Interview with Prof. Martin Lettau, Berkeley Haas Newsroom Kuvshinov, Zimmermann — „The Big Bang: Stock Market Capitalization in the Long Run", Journal of Financial Economics, 2022 Smolyansky — „End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns", Federal Reserve Board, 2023