Income Polarization in the United States
IMF Working Papers, June 28, 2016
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Bibliographic details
- Authors: Ali Alichi, Kory Kantenga, Juan Sole
- Published: June 28, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475522501.001
Summary / Abstract
- The paper documents the rise of income polarization—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.
- After conditioning on income and household characteristics, the marginal propensity to consume from permanent changes in income has somewhat fallen in recent years.
- 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.
Data and Methodology
- Uses a combination of micro-level datasets to analyze income distribution dynamics and consumption responses.
- Conditions some analyses on income and household characteristics to estimate changes in the marginal propensity to consume from permanent income changes.
Key Findings
- Long-run trend: Rise in income polarization in the United States since the 1970s, characterized as “hollowing out” of the income distribution.
- Evolution over time:
- Initial decades (post-1970s): More middle-income households moved up the income ladder than down.
- Since the turn of the current century: Most polarization has been towards lower incomes.
- Marginal Propensity to Consume (MPC):
- Evidence that, after conditioning on income and household characteristics, the MPC from permanent income changes has fallen somewhat in recent years.
- Aggregate impact on consumption:
- For the period 1998-2013, combined effects of increased income polarization and a lower MPC reduced the level of real consumption by about 3½ percent.
Policy-Relevant Implications (as presented in the paper)
- The documented trends—income polarization toward lower incomes and a reduced marginal propensity to consume—have material implications for aggregate private consumption and may inform fiscal and social policy debates regarding income distribution and demand support.