Income Polarization in the United States

37 Pages Posted: 9 Dec 2016

See all articles by Ali Alichi

Ali Alichi

International Monetary Fund (IMF)

Kory Kantenga

University of Pennsylvania

Juan A. Solé

International Monetary Fund (IMF)

Date Written: June 2016

Abstract

The paper uses a combination of micro-level datasets to document the rise of income polarization - what some have referred to as the 'hollowing out' of the income distribution - in the United States, since the 1970s. While in the initial decades more middle-income households moved up, rather than down, the income ladder, since the turn of the current century, most of polarization has been towards lower incomes. This result is striking and in contrast with findings of other recent contributions. In addition, the paper finds evidence that, after conditioning on income and household characteristics, the marginal propensity to consume from permanent changes in income has somewhat fallen in recent years. We assess the potential impacts of these trends on private consumption. During 1998-2013, the rise in income polarization and lower marginal propensity to consume have suppressed the level of real consumption at the aggregate level, by about 31/2 percent-equivalent to more than one year of consumption.

Keywords: Income distribution, United States, Income inequality, Private consumption, Household expenditure, Middle Class; Middle-Income Class; Income Polarization; Hollowing Out of the Middle Class; Inequality; Marginal Propensity to Consume

JEL Classification: D31, D63, E21, E25

Suggested Citation

Alichi, Ali and Kantenga, Kory and Sole, Juan A., Income Polarization in the United States (June 2016). IMF Working Paper No. 16/121. Available at SSRN: https://ssrn.com/abstract=2882555

Ali Alichi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kory Kantenga

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

Juan A. Sole

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

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