Explaining the K‑Shaped Economy: What’s Behind the Divide?

Chakrabarti, Rajashri; Pham, Thu; Pierce, Beckett; Pinkovskiy, Maxim L.

doi:10.59576/lse.20260501b

Discussion Paper

Explaining the K‑Shaped Economy: What’s Behind the Divide?

Abstract: In our companion post, we used a new module of our Economic Heterogeneity Indicators (EHIs) to shed light on how recent retail spending growth has been driven by high-income households. This fact is consistent with the popular press’s idea of a “K-shaped economy” in which higher-income households experience faster growth in spending than lower-income households. In this post, we dive deeper into the reasons behind this divergence by analyzing for which goods this trend holds true and ask whether it can be explained by changes in wages, inflation, or wealth. We find that, since 2023, wealth has increased the most for high-income households, while inflation has risen the most for low-income households, with both factors helping explain the fact that real retail spending rose the most for high-income households. In contrast, earnings display a more mixed pattern, though earnings of the highest earners have grown more rapidly than earnings of the lowest earners.

JEL Classification: D1; D3; E21; E24; H0;

https://doi.org/10.59576/lse.20260501b