Household Debt, the Labor Share, and Earnings Inequality

Mark Robinson (), Pedro Silos and Diego Vilán
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Diego Vilán: https://www.federalreserve.gov/econres/diego-vilan.htm
Authors registered in the RePEc Author Service: Diego Vilán

No 2025-028, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We show that the secular decline in real interest rates in the United States, which began in the early 1980s and persisted for nearly four decades, reduced the labor’s share of output and the unemployment rate, and increased earnings inequality. We establish this link using a model of frictional labor markets, estimated from household-level data, in which unemployment risk is only partially insurable. Rising debt resulting from lower interest rates reduces the value of unemployment, leading to lower equilibrium wages relative to productivity and a lower unemployment rate. Wage dispersion also rises. The model is consistent with panel-data reduced-form evidence linking unemployment duration, assets, debt, and post-unemployment wages. In the model, a decline in the real interest rate of the magnitude observed in the data generates a decline in the labor’s share of 6 percentage points and in the unemployment rate of 0.3 percentage points. The variance of log earnings rises from 0.66 to 0.75.

Keywords: Labor share; Household indebtedness; Reservation wage (search for similar items in EconPapers)
JEL-codes: E24 E27 J30 (search for similar items in EconPapers)
Pages: 58 p.
Date: 2025-04-09
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-28

DOI: 10.17016/FEDS.2025.028

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