New Report Shows The Middle-Class Is Collapsing, But For The Best Possible Reason


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Guy Bentley Research Associate, Reason Foundation
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The American middle class is shrinking and is now no longer the nation’s economic majority, but all classes are richer than at any point in history.

That’s the counterintuitive finding of the latest paper from the Pew Research Center. The report’s raw numbers show the percentage of Americans living in the middle class, defined as an income between $42,000 to $126,000, has fallen over the past 40 years from 61 percent to 50 percent of the population.

Not only has the middle class been squeezed down to size, but the share of aggregate household income held by the middle class has fallen dramatically, from 62 percent in 1970 to 43 percent in 2014. Over the same time period, the share of income held by the upper class has surged from 29 percent to 49 percent. 

On the surface, Pew’s findings might paint a gloomy picture of America’s economy in the 21st century, with fewer people likely to live in the middle class than in previous generations.

Indeed, this view has been echoed by some of the country’s most well-known politicians. Republican presidential candidate Mike Huckabee claims that “when CEO income has risen 90 percent above the average worker when the bottom 90 percent of this country’s economy has had stagnant wages for the past 40 years, somebody is taking it in the teeth.”

But appearances can be deceiving. It is true that the middle class has been shrinking, but Pew points out that it is not because Americans have been getting poorer.

In fact, one the main reasons there are fewer middle-class Americans is because so many people have moved into upper-income households over the past 40 years. The share of American adults living in upper-income households jumped from 14 percent in 1971 to 21 percent in 2015.

Pew also notes there has been an increase in the proportion of Americans living in the lower income class of four percentage points, however, they are still much better off in dollars and cents terms than their equivalents in the 1970s.

Lower income households have enjoyed a rise is median earnings of 28 percent over the past 44 years, according to Pew. The median income of the middle class soared by 34 percent, 0r $18,710, between 1970 and 2014. The highest income households saw the largest gains with 47 percent.

These numbers also don’t account for the huge increase in the quality of consumer goods and their massive price declines. Furthermore, while the middle class may be holding a lower share of the nation’s household income than it did in the 1970s, the economy is as whole much bigger, meaning the share they do hold is significantly larger.

The Pew Research is timely, coming hot on the heels of a report from the Manhattan Institute (MI) claiming American workers have done far better over the past 40 years than many critics of income inequality have suggested.

The MI paper challenges the view that the link between workers productivity and wages has been broken. Author of the paper and Walter B. Wriston Fellow at the MI Scott Winship, writes that between “1997–2011, productivity rose by 35 percent, aggregate compensation rose by 32 percent, median hourly compensation increased by 20 percent, median female pay climbed by 25 percent, and median male pay grew by 18 percent.”

While the numbers on wages and share of national income may show a rise in inequality since the 1970s, people in all economic classes are absolutely better off than they were 40 years ago.

Instead of targeting the rich with tax hikes that could damage the economy, Winship argues the administration should focus on maintaining a productive economy to ensure workers living standards continue to rise after the hammering they took during and in the aftermath of the 2008 crash.

“President Obama’s Council of Economic Advisors has it right: strong economic growth is a better strategy for raising middle-class incomes than trying to take down the highest earners. Inaccurate ‘charts of doom’ obscure this basic truth,” writes Winship.

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