Has Growing Inequality Contributed to Rising Household Economic Distress?

Abstract

The personal bankruptcy rate increased more than fourfold in the last quarter century. Other measures of economic distress, particularly foreclosure and credit default rates, also increased sharply. A possible explanation for this is greater household indebtedness. Household debt relative to income, however, did not even double over the same period, suggesting that the aggregate increase in household economic distress was disproportionate to the rise in household debt. We consider if the simultaneous increase in income inequality has contributed to the rise in household economic distress, Specifically, we hypothesize that greater inequality led to a larger expansion of credit, especially in the form of credit card debt, among low and moderate income households than among higher income ones. This expansion of disproportionately more expensive credit may have contributed to the growth in household economic distress. Based on data from 1980 to 2004, we find robust evidence for a link between inequality and credit card debt and between credit card debt and economic distress.