Who’s Afraid of a Shrinking Middle Class?

5846918999_7a6aaafd15_bA common sentiment with the American progressive movement is the idea that the middle class in this country is shrinking. It is true that there are fewer households classified as “middle class” today than in the past. However, it’s misleading to construe this fact as anything to be worried about. As Brookings Institution Fellow Scott Winship, states in the National Review, “[T]he share of households with income that puts them in the middle class or higher was 76 percent in 1970 and 75 percent in 2010, which is statistically indistinguishable. In other words, the middle class only declined because part of it moved into a higher class.

So why all the concern from the left if many people are actually getting wealthier? Well, according to a National Bureau of Economic Research study entitled “A Second Opinion on the Economic Health of the Middle Class,”[T]here are several key variables which researchers often fail to properly adjust for when analyzing class incomes.” These factors include:

  1. The effect of economic transfers (payments that don’t arise out of current productive activity, such as Social Security benefits) on household income.
  2. The effect of taxes.
  3. Changes in household size.
  4. And the monetary value of healthcare.

As an OECD paper puts it: “What ultimately matters for people is their income after taxes and transfers, which largely frames their consumption possibilities. The best and most comprehensible available income measure is household disposable income that has been adjusted for household size and for publicly provided in-kind transfers, such as public spending on education and healthcare.” When all these factors are considered, here’s how the size of each income class has changed since 1979:

Income growth from 1979-2007:

  • The Bottom Quintile (or 20% ) grew by 26.4%
  • The 2nd Quintile grew by 25%
  • The 3rd Quintile grew by 36.9%
  • The 4th Quintile Grew by 40.4%
  • And the top 20% grew by 52.6%

When individuals increase their incomes past a certain point, they actually change quintiles and are no longer accounted for in the lesser one. Their measured benefit is then observed only as an increase to the higher quintile, rather than as an increase experienced by people from the lower one. This leads to false assumptions about economic growth and wealth inequality, as individuals view this as wealth increasing solely for the higher classes.

Rather than becoming increasingly impoverished, “the share of American families earning incomes above $75,000 more then doubled” from 1967 to 2009.

Even if we were to define lower income as anything under $50,000, middle income as $50,000-$100,000 and upper-income as anything over $100,000 a year, we can still see U.S. households moving out of the “lower-income” category and into the “upper-income” one over recent years.

The Congressional Budget Office indicates as well that, “for households in the three middle income quintiles (from the 21st through the 80th percentile) incomes actually grew 40% from 1979 to 2007.

The conclusion that household income has actually drifted upward is supported as well by data from the U.S. Census. Data collected from 1967-2013, concludes that the percentage of households falling in the bottom half of household earnings, that is, those who earn less than $75,000 a year, declined. Indeed, none of the lower segments increased as a share of overall households while higher segments did.

So the real reason why the middle class is “disappearing” is not due to shrinking incomes pushing people into lower classes but rather to increased incomes pushing people into higher ones! This should not be alarming to anyone, and it certainly isn’t cause for concern.

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