Income Inequality and Political Polarization: Time Series Evidence Over Nine Decades

Rising income inequality and political polarization have led some to hypothesize that the two are causally linked. Properly interpreting such correlations is complicated by multiple factors driving these phenomena, potential feedback between inequality and polarization, measurement issues, and the statistical challenges of modeling non-stationary variables. We find that a more precise measure of inequality (the inverted Pareto-Lorenz coefficient) is more consistently and statistically related to polarization in the short and long runs than the less precise top 1 percent share of income. We find bi-directional causality between polarization and inequality, consistent with theoretical conjecture and less formal evidence in previous studies.