IMF Working Papers

Income Polarization in the United States

Author/Editor:

Ali Alichi ; Kory Kantenga ; Juan Sole

Publication Date:

June 28, 2016

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

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 3½ percent—equivalent to more than one year of consumption.

Series:

Working Paper No. 2016/121

Subject:

Consumption Disposable income Income distribution Income inequality National accounts Personal income