On non-robustness of income polarization measures to housing cycles

A cross-country comparison of the middle class as measured by income polarization indices is
commonplace in welfare economics. Using the 2001–2007 housing cycle and data for Australia,
the United States, Germany, and Switzerland (and an array of methods, including triple-difference
design), I show that polarization indices based on disposable income are unreliable. The cycle
changes the relative importance of non-monetary income from housing (imputed rent), particularly
for middle-income households. Therefore, to ensure that convenient income measures do not
misrepresent the size of the middle class, researchers should verify the absence of swings in
housing prices during their study period.