Growth and distributional impact of expanding middle-income group on household consumption: evidence from China

An expanding middle-income group is considered a proxy for optimizing the income distribution structure. We develop a framework to investigate the marginal impact of growth of the middle-income group on consumption level and inequality in the economy by adopting statistical decomposition methods, and simulate the impact of the expansion of the middle-income group on household consumption under different scenarios. Our findings, based on Chinese data, show that the expansion of the middle-income group is instrumental in mitigating consumption inequality, yet its effect on the consumption level remains uncertain. Thus, we explore expansion strategies for boosting consumption and reducing inequality by simulating the “income-neutral expansion” and “bottom-driven expansion” scenarios in the context of the middle-income group’s expansion. In comparison, the expansion of the middle-income group should be driven by the upward mobility of low-income group, rather than the shrinkage of high-income group or a mere result of structural shifts. This strategy places greater emphasis on the need for accelerated income growth among the lower-income strata.