Human Capital in a Time of Low Real Rates

Paymon Khorrami and Jung Sakong
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Jung Sakong: https://www.chicagofed.org/people/s/sakong-jung

No WP 2025-15, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We argue that a long-term low real rate environment can increase labor income inequality, amplify the emergence of the working rich, and reduce intergenerational mobility. We provide a simple model with endogenous human capital accumulation and credit constraints to demonstrate this causal link. The mechanism operates through a tilting of the human capital gradient: wealthy households, more so than poor households, will increase human capital investment in response to low rates. Normatively, these tilting responses to low rates are inefficient, but higher capital taxes are not an ideal response. We find empirical support for our tilting mechanism over the last 60 years in the U.S. Quantitatively, we show that the endogenous human capital investment response to low interest rates can account for a 17% rise in cross-sectional labor income variance (higher inequality) and a 7% higher parent-child labor income intergenerational elasticity (lower mobility).

Keywords: Human capital; Income inequality; intergenerational mobility; working rich; Low interest rates; Borrowing constraints (search for similar items in EconPapers)
JEL-codes: D30 E21 E22 E24 E25 (search for similar items in EconPapers)
Pages: 51
Date: 2025-08-08
New Economics Papers: this item is included in nep-dge and nep-fdg
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DOI: 10.21033/wp-2025-15

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