Abstract:

The paper aims at the empirical investigation of the substitution effect between labour compensation and household debt across the sample of OECD countries over the period 1996-2016. The results of the research indicate a relatively strong and statistically significant negative association between labour compensation and debt as the sources of financing the aggregate consumption and investment expenditure of the household sector in the examined countries. These findings suggest that a substantial increase in household indebtedness experienced over the last decades by both developed and emerging economies around the world might be partially attributable to a strong downward pressure on wages inherent in competitive markets. Over the long run average labour compensation in the majority of the OECD countries has not been able to keep up with productivity growth. Simultaneously, the deregulation of the credit market and falling interest rates prior to the global financial crisis increased the availability of debt, allowing household aggregate demand to grow faster than labour compensation and to improve households’ standard of living by substituting sluggish income growth with debt.