The U.S. middle class is shrinking. Since 2000, more middle-income households have fallen into lower rather than higher income bracket. Combined with real income stagnation, this polarization has had a negative impact on the macroeconomy, hampering the main engine of U.S. growth: consumption. It is estimated that over 1998–2013, the U.S. economy has lost the equivalent of more than one year of consumption growth due to increased polarization.
The U.S. middle class—those households with 50–150 percent of median disposable income—has been shrinking. Middle-income households declined by 11 percentage points (from 58 to 47 percent) of the total U.S. household population between 1970 and 2014. In other words, the U.S. income distribution has been polarizing, or hollowing out, as middle-income households became richer or poorer (see Figure 1).
From 1970 to 2000, this polarization was mainly good news because more households moved into upper income ranks (with disposable incomes higher than 150 percent of the median) than slipped down (with disposable incomes lower than 50 percent of the median). Since 2000, however, the story has reversed. More middle-income households have fallen into lower-income than higher-income brackets.
Falling into a lower income bracket takes a toll on households, especially at a time when average real (after-inflation) incomes have been broadly stagnating. At the aggregate level, the hollowing out has damaged the economy in recent years by hampering consumption—the main engine of U.S. growth. Lower consumption in the world’s largest economy also hurts its trading partners, as well as many other countries through global production and financial chains.
Ali Alichi, Kory Kantenga, and Juan Solé, 2016, “Income Polarization in the United States,” IMF Working Paper 16/121. (Washington, DC: International Monetary Fund).
Bigot, Régis, Patricia Croutte, Jörg Muller, and Guillaume Osier, 2012, “The Middle Classes in Europe: Evidence from the LIS Data,” Luxembourg Income Study, No. 580.
Danninger, Stephan, 2016, “What’s Up with U.S. Wage Growth and Job Mobility?” IMF Working Paper 16/122 (Washington, DC: International Monetary Fund).
Lueth, Erik, and Murtaza Syed, 2006, “Chapter, Rising Inequality and Polarization in Asia,” in Regional Economic Outlook, Asia and Pacific, September 2006. (Washington, DC: International Monetary Fund).