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Political Aspects of Household Debt

Author

Listed:
  • Yun K. Kim

    () (Department of Economics, University of Massachusetts, Boston)

  • Gilberto Tadeu Lima

    () (Department of Economics, University of Sao Paulo)

  • Mark Setterfield

    () (Department of Economics, New School for Social Research)

Abstract

The recent literature has shown that income inequality is one of the main causes of borrowing and debt accumulation by working households. This paper explores the possibility that household indebtedness is an important cause of rising income inequality. If workers experience rising debt burdens, their cost of job loss may rise if they need labor-market income to continue borrowing and servicing existing debt. This, in turn, will reduce their bargaining power and increase income inequality, inducing workers to borrow more in order to maintain consumption standards, and so creating a vicious circle of rising inequality, job insecurity, and indebtedness. We believe that these dynamics may have contributed to observed simultaneous increases in income inequality and household debt prior to the recent nancial crisis. To explore the two-way interaction between inequality and debt, we develop an employment rent framework that explicitly considers the impact of workers' indebtedness on their perceived cost of job loss. This is embedded in a neo-Kaleckian macro model in which inequality spurs debt accumulation that contributes to household consumption spending and hence demand formation. Our analysis suggests that: (1) workers' borrowing behavior plays a crucial role in understanding the character of demand and growth regimes; (2) debt and workers' borrowing behavior play an important role in the labor market by in uencing workers' bargaining power; and (3) through such channels, workers' borrowing behavior can be a decisive factor in the determination of macroeconomic (in)stability.

Suggested Citation

  • Yun K. Kim & Gilberto Tadeu Lima & Mark Setterfield, 2017. "Political Aspects of Household Debt," Working Papers 1724, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1724
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    References listed on IDEAS

    as
    1. Barbara A. Butrica & Nadia S. Karamcheva, 2013. "Does Household Debt Influence the Labor Supply and Benefit Claiming Decisions of Older Americans?," Working Papers, Center for Retirement Research at Boston College wp2013-22, Center for Retirement Research.
    2. Alan G. Isaac & Yun K. Kim, 2013. "Consumer and Corporate Debt: A Neo- K aleckian Synthesis," Metroeconomica, Wiley Blackwell, vol. 64(2), pages 244-271, May.
    3. Mark Setterfield & Yun K. Kim & Jeremy Rees, 2016. "Inequality, Debt Servicing and the Sustainability of Steady State Growth," Review of Political Economy, Taylor & Francis Journals, vol. 28(1), pages 45-63, January.
    4. Yun K. Kim & Mark Setterfield & Yuan Mei, 2014. "A theory of aggregate consumption," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 31-49, April.
    5. Soon Ryoo & Peter Skott, 2008. "Financialization in Kaleckian Economies with and without Labor Constraints," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 5(2), pages 357-386.
    6. Michael Kumhof & Romain Rancière & Pablo Winant, 2015. "Inequality, Leverage, and Crises," American Economic Review, American Economic Association, vol. 105(3), pages 1217-1245, March.
    7. Thomas I. Palley, 2002. "Economic contradictions coming home to roost? Does the U.S. economy face a long-term aggregate demand generation problem?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 25(1), pages 9-32.
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    9. Gary Slater, 2012. "Unemployment," Chapters,in: The Elgar Companion to Marxist Economics, chapter 57, pages 360-366 Edward Elgar Publishing.
    10. Thibault Darcillon, 2016. "Do Interactions between Finance and Labour Market Institutions Affect the Income Distribution?," LABOUR, CEIS, vol. 30(3), pages 235-257, September.
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    Cited by:

    1. Dünhaupt, Petra & Hein, Eckhard, 2018. "Financialisation, distribution & the macroeconomic regimes before & after the crisis: A post-Keynesian view on Denmark, Estonia & Latvia," IPE Working Papers 104/2018, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

    More about this item

    Keywords

    Consumer debt; employment rent; cost of job loss; bargaining power; income distribution; growth; stability;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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