Rising Income Polarization in the United States

IMF Blog, June 28, 2016

Source details

Author: Ali Alichi
Publication date: June 28, 2016
Core insight: Since the 1970s the number of U.S. middle-income households, as percent of total, has been shrinking, producing increasing income polarization that has weakened consumption and the U.S. economy’s growth.

Middle-income households are defined as those whose real incomes are within 50 to 150 percent of the median income.
Households with incomes below this range are viewed as low income and above it, high income.
Income polarization measures moves out of the middle of the income distribution into the tails; income inequality measures the distance between the low- and high-income groups.

The population share of middle-income households shrunk from about 58 percent of total in 1970 to 47 percent in 2014.
Over 1970–2000, more middle-income households moved into high- rather than low-income ranks; since 2000 the pattern reversed.
Since 2000:
- only a quarter of one percent of households have moved up to high income ranks;
- 3¼ percent of households have moved down from middle to low-income ranks.
Polarization trends are robust to different cut-offs for defining middle income and to excluding the top 1 percent or disaggregation by age, race, or education.

The income share of middle-income households fell from about 47 percent of total income in 1970 to about 35 percent in 2014.
The income share of high-income households increased over the same period.
The income share for lower-income households has remained flat at around 5 percent of total national income over the entire period.
Low wage growth in recent years—partly a result of the drawn out recovery but also because of lower labor market dynamism—has contributed to these trends.

Low- and middle-income households have higher marginal propensities to consume than high-income households; loss of income in these groups can lower aggregate consumption, with high-income groups able to provide only a partial offset.
Evidence suggests that, after controlling for income levels, the responsiveness of consumption to income gains for most of the income distribution has weakened in recent years, putting further downward pressure on consumption.
The combined effects are estimated to translate to about 3½ percentage points of lost U.S. consumption over 1998–2013—equivalent to more than one year of total consumption growth.

Middle-income share of population: about 58 percent in 1970 → 47 percent in 2014.
Middle-income definition: 50 to 150 percent of median income.
Since 2000: only a quarter of one percent moved up; 3¼ percent moved down from middle to low.
Middle-income income share: about 47 percent in 1970 → about 35 percent in 2014.
Lower-income income share: around 5 percent throughout.
Estimated lost consumption: about 3½ percentage points over 1998–2013 (more than one year of consumption growth).

More analysis is needed on economic policies that could affect middle-income households by spurring upward mobility of low and middle income earners.
Further research is needed to understand root causes of income polarization and devise policies to:
- mitigate the pattern of polarization toward the lower part of the income distribution;
- ensure the bulk of the population is achieving improved living standards over time;
- tackle the social and macroeconomic consequences of polarization toward the lower part of the income distribution.

Source: Rising Income Polarization in the United States — IMF blog, June 28, 2016.