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By Mike Dolan

LONDON, June 10 (Reuters) - The stock market may not be the real economy, but red-hot U.S. stock price gains offer more than a fuzzy feel-good factor for many households. The rise in stock-based worker compensation may help bind the two more closely.

One of the puzzles of recent years has been how a bumpy post-pandemic ride of spiking inflation and interest rates, along with political and trade uncertainty, failed to tip the wider U.S. economy into recession.

Among the many theories - ranging from robust household and corporate finances to tax cuts and a now three-year-old AI investment boom - is that stock market resilience buoyed the so-called wealth effect and kept consumption afloat.

Whatever the merits of that argument, the direct impact of rising stock prices on workers' overall compensation adds another dimension worth examining.

Morgan Stanley shed light on stock-based compensation (SBC) this week in a report that partly quantified the impact.

As equity markets have climbed to record highs, so has aggregate SBC - up 9% annually to a third of a trillion dollars through last year.

"The technology sector is the heaviest issuer of SBC, (but) virtually every sector increased usage of SBC over the year," it said.

The report showed that over the 15 years through 2025, technology firms clearly displaced finance as the heaviest users of stock compensation - with SBC rising across tech services, electronic tech and retail trade alike.

On an annual basis, SBC growth ranges from 8% in manufacturing to 28% in utilities.

But information technology and communications remain the focal point, with the highest concentration of awards. Last year's 25% rise translated to more than $170 billion in expense, equivalent to 3.9% of combined sector revenue.

Certainly, the aggregate picture tallies with anecdotal evidence of outsized tech compensation packages, and may even understate it given some of the more eye-popping stories reported.

This year's wave of IPOs in the AI sector will only see SBC expand further.

On one level, critics argue that SBC is concentrated among the highest earners, and that fixating on it merely amplifies fears of a widening income gulf and a "K-shaped" economy as tech stocks go into the stratosphere.

And yet broad economic indicators, from retail sales to GDP, may simply register SBC-linked income as part of the mix and increasingly as mounting heat.

After all, the top 20% of U.S. income earners account for nearly two-thirds of all consumer spending, and consumer spending makes up nearly 70% of GDP.

'HUMAN CAPITALISTS'

Historically, SBC took off when it was recognized as an expense for corporate accounting and tax purposes 20 years ago. It now accounts for a modest but rising 10% of overall compensation, but that share can be 30% or more in the tech sector.

But if a growing proportion of higher earners who do most of the consumer spending in the economy now have rising income tied to stock performance, then that is at least one reason why Wall Street's fortunes are increasingly tied to those of Main Street, at least from a helicopter view.

What's more, studies in recent years have also linked the rise in SBC to what many see as a puzzling and persistent decline in labor's overall share of national income.

A 2021 paper by academics Andrea Eisfeldt and Mindy Xiaolan and Fed board economist Antonio Falato tracked the rise in equity-based pay since the 1980s, finding that it represented some 36% of total compensation to high-skilled workers in U.S. manufacturing.

Intriguingly, the paper concluded that macroeconomic models of labor's share of national income ignore equity-based compensation, leading to mismeasurement. In manufacturing, including SBC almost eliminates the decline in the high-skilled labor share and reduces the total decline by about one-third.

"The widespread and growing use of equity-based compensation has transformed high-skilled labor from a pure labor input to a class of 'human capitalists'," they wrote.

Those findings have only grown more relevant since.

The stock market clearly does not capture all the complexity, divergence and difficulty of the real economy — nor does focusing on its wealthiest beneficiaries resolve those underlying problems.

But the stock market is increasingly an integral part of the economy, and not just for listed companies, but for a growing number of employees and households getting paid in equity.

And so boom time on Wall Street may well reinforce the very economic fundamentals those stock prices appear to thrive on - but be very careful when it goes into reverse.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)

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