Does Inequality Harm the Middle Class?

In contrast to those earlier papers, we explicitly focus on middle class individuals, a distinction that is important if the true effect is heterogeneous

Liliana Winkelmann

2010

Scholarcy highlights

  • Income inequality is a divisive issue in society
  • With a cardinal utility function Ui = u(yi), where yi is own income, the usual concavity assumption implies that, from a distributional perspective, aggregate welfare is maximized under complete income equality
  • We follow the lead of previous tests for negative inequality effects based on individual level data, where a measure of individual well being was regressed on the income of a person and on income inequality – typically the Gini coefficient or a quantile ratio – defined over an appropriate reference region
  • The size of the coefficient at the municipal level is about -0.4. This estimate indicates that one additional luxury car registration per 1000 inhabitants lowers predicted financial satisfaction on average by 0.4, or, at the mean income satisfaction of 7.3, by 5.5 percent
  • As to the inequality indicators, we find overwhelming and robust evidence that middle class household heads adjust their response to the make-ends-meet question upward as inequality goes up
  • What are the social costs of inequality? While common sense suggests that increasing economic inequality unequivocally harms the poor, it may or may not benefit the middle class and those who are even better off
  • On one hand, increased inequality lowers income satisfaction of middle class individuals, ceteris paribus, for given own income

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