The Lost Decade of the Middle Class

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The Pew Research Center has just released their report, “The Lost Decade of the MiddleClass: Fewer, Poorer, Gloomier.” It shows that the American middle class has not only been seriously hurt by the recent recession, but that it has been losing ground for some time.

The report divides households into three tiers: upper, middle and lower. The middle-income tier includes all adults whose annual household income is at least two-thirds of the national median income, but no more than twice that median. (Since larger households need more money to live a middle-class lifestyle, incomes were adjusted for family size before assigning households to tiers.) By that definition, 51% of households are middle-income, while 20% are upper-income and 29% are lower-income.

Between 2000 and 2010, the median income of the middle-income tier fell by 5%, and its median wealth (assets minus liabilities) fell 28%. Households at this economic level have a lot of their wealth in housing, so they were hit pretty hard by the bust in home prices.

But the story of the middle class’s changing fortunes involves more than the recent recession. Deeper changes have been at work for a long time. The report describes these changes in the four decades since 1971:

  • The percentage of households classified as middle-income has dropped from 61% to 51%. Meanwhile, lower-income households have gone from 25% to 29% of the total, and upper-income households have gone from 14% to 20%. This is consistent with the often-noted increase in economic inequality and the “hollowing out of the middle class.”
  • The share of the national income going to middle-income households has dropped from 62% to 45%. Meanwhile, the share going to lower-income households has declined slightly, from 10% to 9%, while the share going to upper-income households has increased from 29% to 46%. We know from other studies that the share going to the super-rich has increased the most.
  • Prior to the 1980s, income gains were much more similar for different income groups than they have been since then. The gains were much larger in the 1950s and 1960s than in the 1970s, but in both cases they were experienced by households at many different levels. In the 1980s and 90s however, gains for middle- and lower-income households were much smaller than those for upper-income households. The 2000-2010 decade was the first decade since World War II in which median income actually fell. So in general, income gains have been slowing down for a long time, except in the upper-income tier.

The report also studied the opinions of a large sample of adults, focusing especially on the 49% who classified themselves as “middle class.” (That percentage is similar to the 51% classified as middle-income by the researchers, but note that the 49% doesn’t include those who classified themselves as “lower middle class” or “upper middle class.”) 85% of these self-described middle-class people said that it’s harder to maintain a middle-class standard of living than it was ten years ago. Although 60% of them said that they were better off than their parents were at the same age, only 43% expected their children to be better off than they are. They were most likely to place the blame for the nation’s economic problems on Congress, banks and financial institutions, large corporations, and the Bush administration, in that order.

The Pew report is more descriptive than explanatory, but we may well ask why the middle class is becoming smaller and more financially insecure. The problems obviously go deeper than the recent financial crisis. I suspect that they also go deeper than some of the most common explanations, such as the downward pressure of globalization on wages because corporations can easily seek out the cheapest labor on the planet. We shouldn’t be so preoccupied with impersonal global forces that we forget the many human decisions that shape investment and employment. Among the issues I hope to explore in future posts are how much we’re willing to invest in education and training, and how well we utilize the talents of our population to create things of greater economic value.

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