Mapping Income Polarization in the United States

IMF Blog, May 15, 2018

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Middle-income households are defined as those earning between 50 percent and 150 percent of the median income.
The share of middle-income households fell from 58 percent in 1968 to 48 percent in 2016.
Of families leaving the middle-income group, a greater proportion fell into the low-income ranks (described as downward hollowing out or polarization) than advanced to upper income levels.
Hollowing-Out Indices were created for each of the 50 U.S. states and the District of Columbia for 2000-2016 to highlight state-level differences in middle-class hollowing out.

Technological progress is measured by job routinization.
International trade is measured by job offshoring.
The study finds that technological progress and international trade together can explain more than half of the rise in income polarization, with broadly equal contributions from each.

Nevada and Arkansas had the greatest increase in polarization during 2000-2016; in these states education played only a small countervailing role while technology and international trade lowered living standards for some middle-income households.
Massachusetts and New Mexico experienced among the smallest increases in income polarization during 2000-2016; in these states technology and international competition had less impact and education did more to keep households in the middle class.
The interplay between job routinization, job offshoring, and household characteristics (particularly education) produces divergent outcomes for middle-income households across states.

Investment in education is identified as an effective, state-level tool to address income polarization.
Better education has had important countervailing effects on income polarization, helping to keep households in the middle class despite forces of technological change and international competition.

Ali Alichi and Rodrigo Mariscal, May 15, 2018 — “Hollowing Out: The Channels of Income Polarization in the United States.”