On non-robustness of income polarization measures to housing cycles

Abstract

Many previous authors concluded that the middle class is disappearing as income polarization is increasing. Using the housing cycle of 2001--2007 and national panels for Australia, the United States, Germany, and Switzerland, I show that polarization is highly sensitive to housing cycles, affecting the ranking of countries. I then show that including non-monetary income from housing (imputed rent) in income measures stabilizes the ranking. The pattern of change suggests that the middle class in the countries with high housing prices tends to be relatively cash poor but rich in housing. Under these circumstances, the middle class is harder to detect with conventional income measures. As a result, researchers may erroneously conclude that the middle class is disappearing.