||This dissertation examines the causes of the dramatic expansion of the U.S. prison population with a specific emphasis on its relationship with the labor market, from both a theoretical and an empirical point of view. It argues that this relationship is shaped by the social polarization between two social classes, the underclass and the middle class. Scholarly literature indicates that members of the underclass are the main group that commits crime, while the middle class is the main group that makes decisions on the punishment intensity meted out for crime. Labor market conditions of these two classes and the inequality between them influence both crime and punishment intensity, and through these channels they also affect the incarceration rate. Based on this background, the dissertation constructs two theoretical models that model the effect of labor-market conditions of the two classes and the inequality between them on crime rate and punishment intensity, and the predictions of this combined model are identified. These predictions are tested based on time series analysis using national-level data and two panel analyses using state-level data for the United States for the 1980-2015 period. Incarceration rate is used as a dependent variable in both analyses, while in panel data analysis, average sentence length is the second dependent variable. Both analyses show that labor market conditions of the two classes and the inequality between them have highly significant effects on the dependent variables, and the sign of the effects confirms the predictions of the theoretical model.