Monday, April 14, 2014

The Hollowing Out of America's Middle Class

The growing disparity between the rich and poor in America is accompanied by the disappearance of the middle class.  Even with the recovery of the economy since 2008, an ever-shrinking number of Americans classify themselves as "middle class".

According to a recent poll by Pew Research Center, the number of Americans that classify themselves as "middle class" is just above the percentage that classify themselves as "lower class" as shown on this graph:

Note that as recently as 2011, more than half of Americans defined themselves as middle class; by January 2014, this had dropped to 44 percent, a drop of 8 percentage points.  

Data from the Census Bureau helps to explain why there has been this change in perception.  While the prices of necessities including food, fuel, housing and other key needs rises continuously, albeit at levels that are relatively tame when compared to the inflationary pressures of the past, real median household income is stalled as shown on this graph:

In 2012, real median household income was $51,017, basically level with the median of $51,100 in 2011.  This is 8.3 percent lower than in the year before the Great Recession; in 2007, the real median household income was $55,627.  In fact, if we go all the way back to 1999, the real median household income of $56,080 was 9.0 percent higher than it was in 2012.  Looking back even further, in 1989, the real median family income was $51,681, $664 higher than it was in 2012!  Since that time, the consumer price index has risen from 188.6 to 337.2 (where December 1977 equals 100), up by 78.8 percent.  It's no wonder that Americans are less willing to describe themselves as middle class.

Pew defines the middle-income tier as all adults whose annual household income is two-thirds to double the national median which, in 2012, would be incomes between $34,011 and $102,034.  In 2011, the middle-income tier included 51 percent of all American adults, down from 61 percent in 1971.  This has meant that these adults have been pushed into both higher and lower income tiers.  In fact, the upper-income tier rose from 14 percent of all adults in 1971 to 20 percent of all adults in 2011 and the lower-income tier rose from 25 percent in 1971 to 29 percent in 2011.  The middle-income tier now takes in 45 percent of America's total household income, down from 62 percent in 1971.  The upper-income tier now takes in 46 percent of America's total household income, up substantially from 29 percent in 1971.

 A recent study by Raj Chetty et al showed that one of the most important characteristics at play in upward economic mobility is the size of the middle class as shown on this graph:

Where a region has a larger middle class, that region's low-income children are more likely to be upwardly mobile. 

In large part, it was the middle class that built America.  While many Americans who lean to the right politically tend to give all of the credit to America's wealthiest for creating jobs, it is, in fact, the middle class that has created the most jobs over the past decades.  When you compare the purchasing power of tens of millions of middle class consumers to the purchasing power of several thousand of America's wealthiest entrepreneurs, it is quite clear that it is the consumer demand sourced from the rapidly disappearing middle class that has actually kept Americans "at work".  With that in mind, perhaps, in part, we can draw a link between the rather lukewarm economy since the end of the Great Recession to the shrinking of the consuming middle class.

1 comment:

  1. In principle, for any nation seeking fairness and equal opportunity for its people to grow and prosper inequality is an issue. Today wage stagnation is in part contributed to the financial crisis. During the Bush-era cheaper credit papered over the problem for a while and set America up for a terrible crash.
    Avoiding a repeat requires fixing the structural drivers of widening inequality. It is economic insanity to create systems where people are almost encouraged to surrender and drop personal responsibility and transfer it to the state. More on this subject below.