The blog of the Urban Institute
December 16, 2015

How is the middle class really faring?

December 17, 2015

The argument that the middle class is shrinking and losing ground has held the media’s attention, but a new report from the Pew Research Center actually shows that the middle class’s incomes are rising rather than declining. Further, The American Middle Class Is Losing Ground demonstrates that among people who leave the middle class, two-thirds move into the upper limits of their income category.

What a “shrinking middle class” really means

Pew defines middle class as households between two-thirds and 200 percent of median income where household incomes are reported in family-of-three equivalents. In the various editions of my publication Social Stratification in the United States, I tie the definition of the middle class to a specific standard of living and define the middle class as those in households with incomes between 1.75 and 4.25 times the poverty line. The difference between my “absolute income” approach and Pew’s “relative income” approach can be seen in the following hypothetical example: if everyone’s incomes went up by 20 percent in real terms, the size of the middle class would shrink as more households passed 4.25 times the poverty line and the size of Pew’s middle class could stay the same. In essence, Pew’s “shrinking middle class” reflects a widening of the income distribution—not a decline in living standards.

In fact, Pew’s study reports that since 1970, the middle-income group had 34 percent real gains in standard of living. While this rate is not as high as the 47 percent increase in the upper-income group, it differs from the stagnation found in Thomas Piketty and Emmanuel Saez’s well-publicized data from Capital in the Twenty-First Century.

The finding of absolute growth and declining share of income reflects that though the middle class’s slice of the economic pie is smaller, the total pie is much larger such that a smaller slice is ultimately still more pie. Similarly, in other Pew surveys, most people report that their standard of living has risen: when asked how their current consumption compares with their parents at a similar age, between 60 and 65 percent of people say that they live better than their parents and most of the rest say that they live at the same level.

Furthermore, Pew’s reported middle-income rise is not as high as the rise found in a study by the Congressional Budget Office (CBO). One of the main differences between the two studies is that the CBO counts employer-provided benefits and government Medicare and Medicaid as part of a household’s income because it allows these families to consume resources even if they aren’t making a cash purchase, while Pew’s does not.

As spending by employers and government on health care has skyrocketed over these decades, this increased consumption leads to much higher income growth. One sign of the benefit of this added spending is that the life expectancy of Americans increased from 70.8 years in 1970 to 78.7 years in 2010—a benefit that shouldn’t be neglected.

The trends for lower-income groups are mostly positive

Other findings in the report show positive gains for low-income populations. For example, 54 percent of Americans over age 65 were in the lower-income group in 1970 while only 36 percent were in this group in 2014; even that low-income group had real income gains of 28 percent.

While the report clearly shows that the long-run trends have been mostly positive—more income and more people moving up into their high-income group, it also shows data on wealth holdings that show that many Americans still have not recovered from the long and large decline associated with the financial crisis of 2008. Despite the fact that the United States has had stronger economic growth since 2009 than virtually all Western European and Asian industrialized countries, people are understandably anxious and hoping for stronger economic growth soon.

The report got a lot of media attention (here, here and here)  because it highlighted economic bad news, but the data present a much more mixed picture than the title reflects.

Pedestrians brave the cold during their morning commute, Friday, Feb. 20, 2015, in New York. Photo by John Minchillo/AP


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