The Federal Reserve Board published research analysing how the secular decline in US real interest rates since the early 1980s affected wages, unemployment, and earnings inequality. Using a frictional labor market model estimated on household-level data with only partially insurable unemployment risk, the paper finds that lower real rates reduced labor’s share of output and the unemployment rate while increasing earnings inequality. The mechanism runs through household balance sheets: lower interest rates lead to rising debt, which reduces the value of unemployment and lowers equilibrium wages relative to productivity, alongside higher wage dispersion. The model is presented as consistent with panel-data reduced-form evidence linking unemployment duration, assets, debt, and post-unemployment wages. Quantitatively, a real-rate decline of the magnitude observed in the data implies a 6 percentage point fall in labor’s share, a 0.3 percentage point decline in the unemployment rate, and an increase in the variance of log earnings from 0.66 to 0.75.
Federal Reserve Board 2025-04-09
Federal Reserve Board research ties decades-long fall in US real interest rates to a lower labor share and higher earnings inequality
The Federal Reserve Board's research examines the impact of the secular decline in US real interest rates since the 1980s on wages, unemployment, and earnings inequality. The study finds that lower real rates reduced labor’s share of output and the unemployment rate while increasing earnings inequality, driven by rising household debt and wage dispersion. Quantitatively, the decline in real rates led to a 6 percentage point fall in labor’s share, a 0.3 percentage point drop in the unemployment rate, and an increase in earnings variance from 0.66 to 0.75.