What is the Middle Class? & How do we Save it?

The Shrinking Middle Class

Pew Research Center grabbed headlines this past week with their analysis of U.S. Census data in a super-interesting 74 page study. I read through it – all of it. Pew’s biggest eye-opening finding was that the middle class is no longer the majority of the country, having dipped from 61% of U.S. households in 1971 to 50% today. 120.8 million adults are now in middle income class households, while a combined 121.3 million are in lower and upper income classes.

Is the middle class under attack? Should we all be panicked and enraged? Well, in some ways, yes. In other ways, no. Let’s look at the data and start with this…

What exactly is the “middle class”? Pew defines middle class (or as they prefer, “middle-income”) Americans as those with annual household incomes between two-thirds (67%) and double (200%) the national median household income of $62,491 for a household of 3. This equates to a fairly wide range of $46,000 to $126,000. Middle class income can also vary significantly by state (here’s an income class calculator to help you determine where you fall).

In the report, Pew breaks income classes down into the following groups (again, 3-person households):

• Lowest: < $31,402
• Lower-Middle: $31,402 – $41,868
• Middle: $41,869 – $125,608
• Upper-Middle: $125,609 – $188,412
• Upper: > $128,412

Those are um… WIDE ranges. I doubt many 3-person households at $42K in income feel “middle” in terms of purchasing power compared to a “middle” $120K household with 3X the income and an identical family size. I digress.

To the right, you’ll see a graphical depiction of how the middle class has shrunk over the years. “Shrunk” is interesting terminology because the middle class in America today is actually bigger than it has ever been in history in headcount. It’s the middle class share of population that has shrunk, as the overall population has increased notably over time.

Here’s where things start to get really interesting – the lower and upper classes have also increased in number, however, unlike the middle class, they have also increased in overall population share.

I believe that in any good economy, you would like to see upward mobility in income classes. We’ve had some of that. In 1971, 14% of households were upper-middle or upper class. Today, 21% are – a remarkable 50% increase in the share of those income classes. I think we can all agree that is a good thing.

But, not everyone is moving upward. The number of households in the lower and lower-middle classes have also increased – going from 25% of households in 1971 to 29% today. I think we can all agree that is NOT a good thing.

You’ll also notice that both the upper and lower classes are gradually increasing in size over time. This is a long term trend that does not appear to be going away.

What does this all mean?

The most basic interpretation is that the middle class is being hollowed out – those at the bottom of the middle class are moving downward, while those at the top are moving upward. A mix of bad and good all in one. Why is this happening? I’ve got some theories – and there’s some data in the study to back them up.

Income and Wealth by Class

First, let’s take a look at how each of the three classes have done financially, over time, in terms of income and wealth.

Starting with income, it’s worth noting that all three classes are actually making more money, in inflation adjusted dollars, than they were in 1971 (this might be somewhat misleading because there are many more women in the workforce today than there were back then). Notably, all three classes are making less than they were in 2000.

The year 2000 is significant, because in many ways, it was when the U.S. economy peaked. It was the very end of the (first) Clinton presidency and the U.S. had a long streak of 4%+ GDP growth, which resulted in an incredibly fast growing stock market. Since then, of course, we’ve had two major recessions. The first from the tech bubble bursting, the second from the housing bubble/financial crisis. And both have seen very slow recoveries.

The wealth of each class has had a similar trajectory.

Each income class is wealthier than it was in 1971, but is less wealthy than in 2007 (pre-Great Recession). So, despite the middle class shrinking in population share since 1971, its income and wealth has not seen a continual downward trend since then. It’s only really been in the last 15 years that the middle class has really taken a financial hit (the upper and lower classes have as well) in addition to a population share hit.

Economic Changes and Middle Class Demographics

There’s a few key economic and demographic trends going on here.

In the last 15 or so years, we’ve not only seen two major recessions, but we’ve also seen an economic shift from a manufacturing-led economy to an information and services-led economy.

Those who have been able to hold their own with recession-proof careers that offer high job security have done really well. It’s no coincidence that many of these jobs require an advanced education. To this date, only 30% of the country has a bachelor’s degree or higher (and that compares to just 10% in 1971!). It’s become almost a necessity to have a college degree (with all its associated student debt) in order to advance or even simply maintain income class status. And those who do not have one have hit the ceiling at comparatively low wages.

Let’s take a look at the income class trends per demographic groups.

A few things stand out:

• those who are financially successful get married
• the elderly are gaining income (thanks, Social Security)
• those who do not have an advanced collegiate degree fall into the three worst performing demographic groups

That last point is the most key. It’s become almost a necessity to have a college degree (with all of its associated student debt) in order to just maintain income class status in a services-based economy. And those who do not have one have hit the ceiling at comparatively low wages. The days of ascending income class through union-backed blue collar jobs are all but over, unfortunately for many.

I recently declared that there has never been a better opportunity for financial success in history than right now. I believe that is still true (and the increasing upper class size proves it). However, it is also simultaneously true that there has never been a time in recent history where it is as easy to get absorbed into the financial abyss of the lower class. And a lack of education is like jumping face first into that abyss.

Policy Changes to Help the Lower and Middle Classes

Can we all agree that the economic success of this country is dependent on rising wages/purchasing power of all classes (and particularly the two that need it most)?

Look, this isn’t rocket science. In today’s global economy, it is incredibly hard for those without advanced education to:

1. make anything but minimum wage
2. afford an advanced education

It’s time to raise the minimum wage. The wages of the lower and lower-middle classes have perpetually been tied to the floor that is set for them. Ideally, everyone makes a healthy amount more than minimum wage, as the minimum wage is not livable. However, that’s just not the case. And unfortunately, the minimum wage, in inflation adjusted dollars has been temporarily up and down, but has trended significantly lower over the last 50 years (and after being stuck at $7.25 for the last 7 years, minimum wage purchasing power is 30% lower than its peak in the late 1960’s):

It’s no wonder many households have been dropped from the middle class to the lower class since 1971.

Despite political rhetoric, raising the minimum wage has strong bi-partisan support of Americans. In a 2015 national poll:

• 75% of Americans support raising the federal minimum wage to $12.50 by 2020, including
  • 92% of Democrats
  • 73 percent of Independents
  • 53 percent of Republicans
• 63% of Americans support an even greater federal minimum wage increase to $15 by 2020
• 82% of Americans support automatic upward annual adjustments to the federal minimum wage

When lower income classes have more money – they spend every penny of it! That helps the economy.

The second biggest policy change that I think can help reinvigorate the lower and middle classes and our overall economy is a renewed emphasis on making K-12 education better and advanced degrees more affordable for all. Education inflation has far outpaced overall inflation and has made the prospect of getting a degree a commitment to decades of crippling student debt. And it’s nearly impossible to get there if your K-12 education is not up to grade and/or you can’t afford basic day-to-day cost of living. We’ve been our own worst enemy in this regard. In today’s global economy, we need to double down on education if we want to compete and win.

Just these two changes would significantly reinvigorate American’s purchasing power, upward mobility, and the overall economy.

Related Posts:

• The U.S. is the Most Overworked Nation in the World
• Don’t Settle for Anything Less than a Livable Wage
• WalMart Wage Increase Raises the Floor for Low-Wage Worker Pay