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May 21, 2018

Mapping Income Polarization in the United States

When it comes to income inequality among American households, outcomes have varied widely across the 50 U.S. states.  The impact of international competition gets a lot of the blame, along with automation, in states that have fared the worst. 
That has contributed to a backlash against free trade on the national level. Yet the states possess an effective tool of their own to address income polarization—investment in education.
In our study Hollowing Out: The Channels of Income Polarization in the United States, we show that middle-income households have shrunk as a proportion of the population since the 1960s. Those earning between 50 percent and 150 percent of the median income represented just 48 percent of total households in 2016, compared with 58 percent in 1968.

Of those families leaving the middle-income group, the proportion falling into the low-income ranks, which we describe as downward hollowing out or polarization, was greater than those advancing to upper income levels.
But the 50 states haven’t felt these effects uniformly. We created Hollowing-Out Indices for each of the states for 2000-2016 to highlight these differences.
The chart of the week, shown above, breaks down the 50 U.S. states and the District of Columbia into three groups, based on how severely their middle class has experienced downward income hollowing out during 2000-2016.
Our research found that technological progress, measured by job routinization, and international trade, measured by job offshoring, can explain more than half of the rise in income polarization, with broadly equal contributions. Household characteristics, particularly better education, have had important countervailing effects on income polarization. Our state-by-state breakdown shows how the interplay between these forces has led to different outcomes for middle-income households, depending on where they live.
Take Nevada and Arkansas, for example, two states that had the greatest increase in polarization during 2000-2016. In these states, education played only a small countervailing role as technology and international trade lowered living standards for some middle-income households.
On the other extreme, take for example, Massachusetts and New Mexico. Technology and international competition have had less impact on income polarization in these two states than in Nevada and Arkansas. Meanwhile, education has done more to keep households in the middle class, making Massachusetts and New Mexico among the states that have experienced the smallest increases in income polarization during 2000-2016.
Technological progress and globalization have had positive effects, generating higher living standards, more productivity and faster growth. Yet, our work shows that they also have had important, and sometimes detrimental, side-effects on income distribution and household welfare. They are not the only factors at work, though. Investment in education can equip middle income households to withstand the hollowing-out forces of a changing global economy.
IMFBlog is a forum for the views of the International Monetary Fund (IMF) staff and officials on pressing economic and policy issues of the day. The IMF, based in Washington D.C., is an organization of 189 countries, working to foster global monetary cooperation and financial stability around the world. The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board. (More by IMFBlog here)  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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