Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324854 
Year of Publication: 
2025
Series/Report no.: 
Working Paper No. WP 2025-15
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
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 US. 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).
Subjects: 
Human capital
income inequality
intergenerational mobility
working rich
low interest rates
borrowing constraints
JEL: 
D30
E21
E22
E24
E25
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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