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Income Polarization in the USA (1983-2016): what happened to the middle class?

Khan, Haider and Schettino, Francesco (2018): Income Polarization in the USA (1983-2016): what happened to the middle class?

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Abstract The rise in inequality in the US over the last few decades has been well documented. However, the effects of inequality on polarization and middle class in particular are less well studied and understood. We employ Relative Distribution tools (Handcock and Morris, 1998) on the well known PSID longitudinal dataset in order to provide a detailed analysis of the US income distribution during the period 1983 to 2015. The main result shows a hollowing out of the mid-range deciles with a corresponding fattening of the highest ones. Thus the analysis confirms the hollowing out of the middle class in the US over the last few decades---starting with the age of Reaganomics. Analyzing further the “pure distribution” effect (i.e., depurated by the growth one), we find that this typical polarization profile emerged over time but especially in the 1990s and the 21st century. The typical hollowing out of the central deciles of the US income distribution has been indeed accompanied by “fattening” of both tails of income distribution with greater weight going increasingly to the bottom deciles. There are even some signs of acceleration of this trend recently. We also find some preliminary evidence for intersectionality, i.e. race, class and gender working together in a vicious cycle.Policies to counteract these tendencies must be anti-polarization policies along with those of relatively more egalitarian growth. However, the current policies including tax policies are headed in exactly the opposite direction.

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