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The middle class is shrinking, but that is because people are getting richer

We keep hearing from politicians that “the middle class is shrinking”. This is all in an effort to push for redistributive policies that take income from the very wealthy. According to these politicians, the size of the middle class is shrinking because the middle class is saddled with taxes that high-income earners or corporations tend to escape. Additionally, they contend that the middle class has not been able to share in the benefits of economic growth that tend to accrue to the very wealthy.

But looking at the numbers the story is not quite so right. Yes, the data supports the fact that the middle class is shrinking. But it is not for the same reason that we hear from politicians. According to the data, the middle class is shrinking because people are moving up. According to a recent report by Brookings Institution, “…while the benefits of economic growth have not accrued equally, they have not gone solely to the top 1%. The upper-middle class has grown. Second, the main reason for the shrinking of the middle class (defined in absolute terms) is the increase in the number of people with higher incomes.”

Generally, we have seen the share of people in the upper income grow while the share of people in the low levels of income has declined.

The literature on the shrinking middle class

There has been a heavy consensus among researchers that the middle class is shrinking. This is not a new trend.  And for the most part, research is in agreement that the middle class is shrinking because more people are moving up the economic ladder. According to Cato, “since 2016, the United States has had more wealthy households than middle‐​class households and the share of low‐​income households has reached a historic low.”

This can be seen in reported income 

According to the most recent data from the U.S. Census Bureau, in 2018, over 30 percent of U.S. households earned over $100,000 (i.e., the upper class). Fewer than 30 percent of households earned between $50,000 and $100,000 (i.e., the middle class). The share of U.S. households making at least $100,000 has more than tripled since 1967, when just 9 percent of all U.S. households earned that much (all figures are adjusted for inflation).

In 2018, the share of households earning less than $50,000 (i.e., the lower class) dropped below 40 percent for the first time since the U.S. Census data on this metric started to be collected in 1967. Back then, 54 percent of households earned less than $50,000.

Brookings Research

Most research that deals with mobility and inequality uses cross-sectional data. Cross-sectional data generally looks at different types of individuals at one particular point in time. Because people are always moving in between different income groups, cross-sectional data makes it hard to analyze true economic mobility.

This new report by Stephen Rose at the Brookings  Institution gets around that issue by relying on longitudinal data that tracks the same people over different periods of time to analyze how they have fared.  This gives a better idea of income mobility over time. Additionally, most studies define the middle class in relative terms. This study defines income levels in absolute terms.

For the study, the author divides people into 5 income levels (in 2018$) for a family of three. FPL stands for the Federal Poverty Level.

i) Poor and Near Poor (PNP): <$32,500 (x1.5 FPL)

ii) Lower middle-class (LMC): $32,500 to $54,500 (x1.5 to x2.5 FPL)

iii) Middle middle-class (MMC): $54,500 to $108,500 (x2.5 to x5 FPL)

iv) Upper-middle-class (UMC): $108,500 to $380,500 (x5 to x17.5 FPL)

v) Rich: >$380,5001

The author finds that,

…the higher income classes expanded significantly during the first period. Between 1967 and 1981, the upper middle class tripled in size (from 6% to 18%) and the MMC grew by 3 percentage points (from 47% to 50%). Offsetting these gains were a correspondingshrinkage of the lower middle class (LMC) from 31% to 20% and the poor/near-poor (PNP) from 16% to 11%.

Education matters more for upward mobility

Additionally, education has been a big driving factor in upward mobility. To be specific,

the biggest improvement has been seen at the top of the education ladder. In the later period, 55% of those with at least a BA were in the UMC, and another 4% counted among the rich – up from 36% and 1% in the earlier period. These results are consistent with the rising BA earnings premium over the last 40 years (Hamilton Project 2017).

Conclusion

A shrinking middle class is a bad thing if people are moving down the economic ladder. But this is not what is happening for the case of the United States. The data shows that more and more people are moving up the economic ladder. And contrary to popular opinion, the economic pie is not flowing just to the richest among us, as it is mostly claimed. And that is something that should be viewed positively.

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