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Household debt, the labor share, and earnings inequality

Author

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  • Robinson, Mark
  • Silos, Pedro
  • Vilán, Diego

Abstract

We show that the long-run decline in U.S. real interest rates since the early 1980s reduced the labor share of output and the unemployment rate, and modestly increased earnings inequality. Using a frictional labor market model with uninsurable unemployment risk, estimated using household survey data, we find that falling interest rates raise household debt and lower the value of unemployment, reducing wages relative to productivity. The model accounts for 21% of the observed decline in the labor share and 12% of the rise in earnings inequality from 1982 to 2018. It also successfully matches reduced-form evidence on unemployment duration, assets, and post-unemployment wages.

Suggested Citation

  • Robinson, Mark & Silos, Pedro & Vilán, Diego, 2026. "Household debt, the labor share, and earnings inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:dyncon:v:189:y:2026:i:c:s0165188926000989
    DOI: 10.1016/j.jedc.2026.105352
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    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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