Could Habits Make the Labour Income Share Fall?

Abstract

Could habits in the consumption of high-tech goods in leisure activities make the labour income share fall? A competitive equilibrium model is constructed, where consumer utility is separable in conventional consumption and a high-tech good-such as video games or smartphones-whose contribution to utility depends on habit formation. The predictions from this framework is consistent with downward trends in the labour income share. Unlike alternative theories, the model also predicts trends in wages, interest rates and consumption growth that all consistent with the data since the mid-1990s.