One of the hottest topics in the current election cycle is in regards to the middle class. The common narrative is that the middle class in America is collapsing and all of the candidates have offered their own method of reversing the trend. Recommendations have varied from increases to minimum wage, to a complete overhaul of the tax system, to free education for all. While I won’t even pretend to know what the optimal system is, I do find it helpful to take a step back and understand what the data says.
Who is the Middle Class?
The best place to start is with a survey released by the Pew Research Center whose data is typically the most quoted source of information in regards to the middle class. Their definition of middle class is those who earn between 67%-200% of the national median income. For example, for a family of three in 2014 to be considered middle class, they would need to earn roughly between $42,000 and $126,000 per year.
With that definition adjusted historically for the median wage, we can track what percentage of Americans have qualified as middle class over time. According to Pew’s data, we can see that the middle class shrinks from 61% of the population in 1971 to 50% of the population by 2015.
Where are they going?
As you can see in the chart to the right, the middle has slowly eroded over the past several decades by about 11%. An interesting observation here is the breakdown of where that 11% went. While there has been an increase of about 4% of our population into the lower tiers, the other 7% actually moved into the upper tiers. Seeing a greater amount of Americans able to earn more is a welcomed trend, however, it is disappointing in a modern economy to see a growing proportion of our population slide into the lower tiers at the same time.
Why are they so mad?
The fact that more Americans are ending up in a higher income tier versus a lower tier may feel surprising given the public outcry in the last few years. From various points of social unrest (ex. Occupy Wall Street and Tea Party) to strong political support (Trump and Sanders), most of the nation still feels upset at their current state of economic being.
My observation of that angst is two-fold. First is that income is increasing faster in the upper tiers than the lower tiers, 47% in the upper, 34% in the middle, and 28% in the lower since 1971. This dispersion is magnified particularly for those who find themselves sliding out of the middle and into lower tiers. This is especially true in particular industries such as retail and manufacturing that have seen 8.7% and 7.8% of their workforce move from middle to lower tiers since 1971.
The second reason causing the angst and one that I think is often ignored is that most Americans are simply worse off than they were about a decade ago. Every tier including the upper tier has had their net worth fall from 2007 on average. However while the upper tier is starting to make headway on recovering, the middle and lower tiers have significantly further to make up.
The upper tier has only about 12% more to go to make it back to their 2007 highs in net worth. However, the middle and lower tiers have 64% and a whopping 93% respectively more to go to make it back to their 2007 highs. So why has the upper tier done so much better in recovering their losses? It has to do with how they carry their wealth. The middle and lower tiers have nearly 50% of their wealth tied up in real estate, most typically their primary home. Home prices have still not recovered on average and have a long way to go in many cities across the nation. Stocks, on the other hand, have recovered far above the 2007 highs and the upper tiers have more of their net worth tied up in the capital markets.
So what can/should be done?
Unfortunately, this is where my expertise ends and where those involved in public policy hopefully begins. As a democracy, it is important that we at least start with an understanding of the data to help us decide who to put into office to help tackle these difficult issues. If you want to learn more, please see the source below for the Pew Research Study. If you would like to see what tier you fall into for your specific location, check out the income calculator link below.
Income Calculator (Am I middle class?):
Pew Research Center "The American Middle Class is Losing Ground" Dec. 9, 2015. http://www.pewsocialtrends.org/files/2015/12/2015-12-09_middle-class_FINAL-report.pdf.