Household indebtedness, distribution, and bargaining power under distribution-induced technological change: a macroeconomic analysis

We present a stylized model to explore the interaction between household debt, functional income distribution, and technological change. We assume that weak labor bargaining power allows firms to set their mark-ups in order to meet a target profit rate. At a low wage share, workers’ households are assumed to have limited flexibility in meeting financial goals, so household indebtedness tends to rise as the wage share falls. Rising indebtedness further lowers labor's bargaining power, a phenomenon that was observed in the wave of financialization that began in the late twentieth century. Thus, rising debt levels allow firms even greater freedom to raise their target profit rate. We find that the dynamics can be either stable or unstable, with the potential for a self-reinforcing pattern of rising household indebtedness and falling wage share, consistent with trends in the US from the 1980s onward. The unstable cycle can be triggered by increased willingness by workers to incur debt and rising influence of household indebtedness on labor's bargaining strength and income distribution. The model can shed some light on widely observed trends over recent decades regarding household indebtedness, inequality, and technological changes in the US, and potentially in other OECD countries.