An Empirical Investigation of the income share of the middle class

Abstract

The scientific evaluation of the relationship between growth, redistribution,

and the income share of the middle class is still in its infancy. This article

aims to investigate how the drivers of economic growth impinge on market

income distribution and how the middle class has a role in deciding the level

of redistribution. Our strategy is to dodge the reverse causality problem,

stemming from the bi-directional relation between income distribution and

growth, by exploiting the peculiar feature of different indicators of income

dispersion focused on the middle income group. The findings reveal that

market forces and redistributive policies are both pivotal in shaping the

evolution of income dispersion and in particular the income share of the

middle class, over the growth process. The ability of redistributive policies

to counteract the ongoing increase in income inequality seems to depend

not only on the political pressure exerted by an impoverishing median voter

but also on the expansion of fiscal revenues after sustained Gross Domestic

Product (GDP) growth.