Searching for the Supposed Benefits of Higher Inequality: Impacts of Rising Top Shares on the Standard of Living of Low and Middle-Income Families

This paper uses US state panel data to explore the relationship between the share of income held by affluent households and the level of income received by low and middle-income households. A rising top share of income can potentially lead to increases in the incomes of low and middle-income households if economic growth is sufficiently responsive to increases in inequality. A substantial literature on the impacts of inequality on economic growth exists, but has failed to achieve consensus, with various studies finding positive impacts, negative impacts, and no impacts on growth from increased levels of income inequality. This paper departs from that literature by exploring the effect of inequality on the standard of living of middle-income and low-income households. In the context of rising inequality, increased overall growth is not necessarily a suitable proxy for standard of living, since growth patterns are not always uniform for the entire income distribution. The results of this study indicate that increases in the top share of income (whether of the top 10 percent or top one percent) lead to declines in the actual incomes (and earnings) of low and middle income households.