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How the stock market affects employment (and vice versa)

1/6/2023

How the stock market affects employment (and vice versa)

Anyone who's worked at an executive level in a business can tell you that the economy and employment are inextricably intertwined in a myriad ways. It's like this: Employment determines profit and spending, which influences the economic climate. Likewise, what's happening in the economic landscape shapes how businesses hire and employ people.

There are many key indicators of a country's economic well-being, such as inflation, interest rates and gas prices. We can also look at the stock market and how shares perform to assess a nation's economic health. Similarly, according to Forbes, employment (or unemployment) rates can also shed light on how robust the economy is. So, let's look at how the stock market and employment affect one another, and the impact they have on businesses worldwide.

The stock market for beginners

To understand how the stock market and employment are linked, we must have at least a surface level understanding of what the stock market is and how it operates. In a nutshell, as SoFi Learn explains, the stock market is the purchase and sale of company stocks by private individuals and businesses alike.

In essence, a person (natural or juristic) who buys stock is investing in a company. This kind of security gives the company capital and, when the company turns a profit, investors earn back a percentage of that revenue. You own a share in this company.

Which comes first, the stock market or employment?

Naturally, whether people or businesses can afford to invest in other companies depends on their own financial well-being. Again, this health is determined in no small part by employment. The average person buying stock must be able to afford it. That affordability is a factor that's typically governed by their income, which is determined by their employment status.

Similarly, businesses generally invest in shares when they're able to gamble. Taking that risk is largely dictated by how well they're doing, and that measure is very much decided by their workforce's productivity. Organizations that have the mix and number of actively working employees that's right for them can operate with better efficiency, thus generating more profit.

When companies listed on the stock exchange are able to sell their stocks, they receive capital. This often funds hiring. After all, an organization always needs to pay wages or salaries. So, better stocks performance means a higher chance of companies filling more positions and putting money back into the economy.

Consequently, as explained by Cabot Wealth,  employment and good stock market health are directly proportional: When employment is high, the stock market does well. When unemployment rates soar, the stock market plummets (in this case, they'll be inversely proportional). Strong labor and stock markets mean more money circulates throughout the economy, which is good for economic stability. By contrast, poor employment rates and stock market stagnation can spell disaster for the economy.