Polarization and the Middle Class

Abstract

There is an increasing literature that discusses how to measure the middle class. Some approaches are based on an arbitrary definition such as income quartiles or the poverty line. Recently, Foster and Wolfson developed a methodology which lacks of arbitrariness that enables us to compare the middle class of two different income distributions. We apply this new tool jointly with a complementary method - relative distribution approach - to household income data in 1994-2004 and 2004-2010, to analyze the evolution of the middle class and polarization in Uruguay. During the Örst period, which is characterized by an increasing income inequality, we find that the middle class declined and income polarization increased. In the second one, where the Uruguayan economy experienced a recovery from the downturn suffered in 2002, we find that the middle class rose and polarization decreased. However, this last result is attenuated when we do not consider the household income imputation because of the new health system implemented in 2008.

Keywords: income polarization, middle class, inequality, social policies, bipolarization

JEL Classification: D3, D6, I3