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December 12, 2018

Are middle-class incomes falling, flat, or rising? It depends how you measure it, according to one of the papers we summarize in this week’s edition of Class Notes. Plus: the Earned Income Tax Credit improves children’s long-run educational and employment outcomes; and the link between inclusive growth and upfront investments in community colleges and savings accounts for less-wealthy families. A pretty striking chart from Brad Hershbein on the middle-class “double whammy” from the Great Recession, followed by an on-the-nose opinion piece from Branko Milanovic on how income inequality not only hurts growth, but may fuel adversarial politics. 

How different studies measure income inequality: Piketty and company are not the only game in town

We know that income inequality has massively increased, and middle-class incomes have stagnated over the past 35 years. Right? Well, maybe. It depends how you measure it. Stephen Rose shows how important methodological decisions, regarding inflation measures, income definitions, household-size adjustment, and units of analysis, can result in starkly different estimates. Rose shows that prominent studies of income inequality have estimated middle-class income growth to be anywhere from -8 percent to 51 percent. Similarly, estimates of income growth for the top one percent range from seven percent to 120 percent. Bottom line: methods matter.

The long-term impact of the Earned Income Tax Credit on children’s education and employment outcomes

How much does the Earned Income Tax Credit (EITC) help children in the long run? Using state and federal variations in the EITC, Jacob Bastian and Katherine Michelmore find that if a family receives an additional $1,000 when their child is between the ages of 13-18, the chances of completing high school, completing college, and being employed as a young adult all increase. They are also more likely to have higher earnings. Bottom line: money matters.

The changing nature of work calls for enhancing the human and financial capital of children in less wealthy families

As the economy continues to change, how do we encourage inclusive economic growth? Riffing off recent policy changes in his native Canada, Miles Corak argues that two important steps are to make community college free and make education savings accounts more accessible and flexible. As the economy shifted from agrarian to industrial, it was accompanied by free primary and secondary education. A similar shift in education, free community college, is now needed to give people the necessary skills for the changing economy. He further argues for accessible and flexible savings accounts for less-wealthy families. Sen. Cory Booker’s American Opportunity Accounts would be ideal, he says, as they include auto-enrollment and the opportunity to invest in education, a home, or retirement. Bottom line: skills matter.

Top chart

In a new Brookings piece, Brad Hershbein highlights the “double whammy” for the middle class in middle America since the Great Recession. The middle class has seen slower wage growth since the Great Recession, but that’s especially true for those living in the hardest hit metropolitan areas:

Middle class hit hardest in struggling cities

Choice opinion

“We have to go back to the beginning and instead of seeing high inequality as promoting investments and growth, we begin to see it, over time, as producing exactly the opposite effects: reducing investments and growth,” writes Branko Milanovic.


Jared Bernstein interviewed Belle Sawhill about her new book, "The Forgotten Americans," for the Washington Post. Belle discusses why she wrote the book, how some of her thinking has changed over the years, and what advice she would give to the new House majority.

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