The Middle Class is Shrinking Because Many People are Getting Richer

Newspaper headlines trumpeted that the middle class is shrinking but to a large extent that is because people are moving into the upper middle class not because they are getting poorer. By one measure, the middle class has shrunk from 38% of the US population in 1980 to 32% today but at the same time the upper middle class has grown from 12% to 30% of the population today.

Josh Zumbrun at the WSJ has an excellent piece on new research from the (liberal-leaning) Urban Institute and elsewhere:

upper middle

There is no standard definition of the upper middle class. Many researchers have defined the group as households or families with incomes in the top 20%, excluding the top 1% or 2%. Mr. Rose, by contrast, uses a more dynamic method similar to how researchers calculate the poverty rate, which allows for growth or shrinkage over time, and adjusts for family size.

Using Census Bureau data available through 2014, he defines the upper middle class as any household earning $100,000 to $350,000 for a family of three: at least double the U.S. median household income and about five times the poverty level. At the same time, they are quite distinct from the richest households. Instead of inheritors of dynastic wealth or the chief executives of large companies, they are likely middle-managers or professionals in business, law or medicine with bachelors and especially advanced degrees.

Smaller households can earn somewhat less to be classified as upper middle-class; larger households need to earn somewhat more.

Mr. Rose adjusts these thresholds for inflation back to 1979 and finds the population earning this much money has never been so large. One could quibble with his exact thresholds or with the adjustment that he uses for inflation. But using different measures of inflation, or using higher income thresholds for the upper-middle class, produces the same result: substantial growth among this group since the 1970s.

Comments

There are so many ways to look at this. Some people have Income. Some have wealth. Some have neither. This is a very positive chart, and an optimist might say it explains falling labor participation. Why work so much if high incomes let you build wealth?

Still, there is a line at the local soup kitchen, a few miles from $10M homes. This might not be the only chart that explains America.

"Why work so much if high incomes let you build wealth?"

Yes, that's probably an accurate statement. I think it explains the loss of the teenage work force more than anything else.

My father dropped out of school in 10th grade to go to work full time to buy food for his family. I worked during the summers and after high school for spending money, insurance and gas. My cohorts kids play video games.

OK, teenage workforce. What about the rest of the workforce?

What's the question exactly? Why do wealthy people work?

"Still, there is a line at the local soup kitchen, a few miles from $10M homes. This might not be the only chart that explains America."

not really a chart, imo

Do we have any hardship numbers? What would a parallel graph of hardship look like?

You sound unhappy about this.

The trick is how to soften this story up for a nation of complainers, which is what we are fast becoming.

Also, the chart has poor people on it. They're the red bar.

Despite reading economics I have not squashed the last of my empathy.

Yeah, you're empathetic signalling is coming through loud and clear.

I read about a guy who just won the lotto. I was so happy for him, but then I reflected on all those poor souls who didn't win. I'm not gonna lie- I broke down a little. Sad.

Do you have to be a sociopath to disbelieve that other people feel empathy?

I didn't say you felt empathy. I said you signaled empathy.

The gist of the article is that the middle class is mostly expanding up. This has been obvious to me for a long time, but it is almost never pointed out, because everybody and their brother has a story nowadays about how they're being screwed over by shadowy forces. Just inspect the comments below for a random sampling.

So anyway, interesting story. But along comes anon, a propos of nothing, to mention that there are still poor people. No shit, dude. The graph even says so.

"everybody and their brother has a story nowadays about how they’re being screwed over by shadowy forces."

Trump's new campaign slogan! Something's going on"

Bernie supporters hardest hit, but they'll never hear about it.

What do you mean by "The trick is how to soften this story up for a nation of complainers,"?

The anon sounds more levelheaded to me.

as stated above, the details escape me on this particular post, yet the trend is undoubtedly true, and stated subtly here if anything.

Yep, things are much better under Obama than they were under Reagan.

All the Republicans and conservarives who want to go back to the policies and economy of Reagan want to make your life worse!

You're replying to a bot.

And you to a slightly more complex one.

I just got an idea for my next movie!

I already wrote the script.

wealth is subjective, and for many miscues, relative

get a classical-liberal education, you always have currency to take with you

b n educated, means always living upper middle-class, yet by no means is that inclusive to all who receive n education.

albeit, we all owe our courage to the lower classes, in this evolving masterpiece; which is we, talking 2u

i'll play some tunes too :)

I took the other side of this debate vs AEI's Mark Perry here:

http://www.wcvarones.com/2013/07/is-middle-class-disappearing-into-upper.html

Perry used a rather ridiculous definition of "upper class." This one looks better.

It looks to me from that lchart that Mark Perry didn't define 'upper class'.

He seems to have used the US Census terminology of "family income categories: a) $25,000 and under, b) $25,000 to $75,000 and c) $75,000 and over."

The cited Rose definition of 100k-300k for a family of three in Fairfax County, Virginia would mean the average household in Fairfax is upper middle class, which sounds about right. Keep in mind that if you make 200k a year you'll be lucky if you can keep 30k, after taxes and expenses. A better measure of being rich is net worth (assets minus liabilities). There, to be in the 1%, as my family is, you need a minimum net worth of 8M USD, last I checked, it may be 9M now.

PS--I'm told--and I find this hard to believe--that new houses in desirable northern VA suburbs are going for $2M, for 'modest' balloon frame wooden construction (not stone, marble, concrete, brick etc like they build here in Europe). Can this be true? For say a modest 8000 sq. ft. lot? I find it hard to believe. I would have thought the price was more like 1.2M, but no, I'm told it's 2+M. If so, we're even richer than I thought, since we'll soon be building such houses on undeveloped land we own. {Ray rubbing his greedy little hands together}

If you already own the land, and if the land is suitable for development, and such development is of the type and in the area where two million dollar homes are built on a eight thousand square ft lots, you already have that wealth. Economically, the construction of the structure is a small business in which you are the owner and, if you choose, the operator. You shouldn't expect much more than the return-on-capital expected for the risk you're taking and the wage labor commensurate with your skill as a contractor.

And yet you live in the Philippines raising chickens and selling their eggs?

@Thomas - thanks, but this is a weird neighborhood that Zillow has not priced correctly, near the Orange line DC Metro.

@ Dmitri Helios (ur name means Bill Sun in Greek): that's a hobby. I don't raise eggs, just meat.

"For say a modest 8000 sq. ft. lot?"

Here's a link to the google results for "8000 sqft": https://www.google.com/search?q=8000+sq+ft&source=lnms&tbm=isch&sa=X&ved=0ahUKEwiX8PL82rrNAhXE7yYKHUFrA78Q_AUICCgB&biw=1920&bih=955#imgrc=_

Now tell me that is "modest".

LOT! My 2400 sqft patio home on a 7200 sqft LOT is modest compared to your googling.

He said "lot" you googled for house size. To put it another way, a 1/4th acre lot is around 11,000 square feet.

Doofus, there is no measure of "extended family wealth". Just because your parents and uncles and aunts and grandparents combined have $8M doesn't mean you're in the 1%

@Cliff - Yes it does. The person whose name appears on the title and on the money instrument, as well as the stock brokerage controls the wealth. The Chinese do this all the time, putting multiple names on such instruments. Sorry you come from a poor nuclear family, I can't help it your folks bought into that 1950s-60s ideology. They probably also have nothing in your name, so you leave home at 18 yo and 'find your way' (snicker).

Huh? Didn't you say just the other day your own parents cut you off?

You can add me and my family to the list of things you are clueless about

Doesn't this seem low?

A completely average high school teacher makes ~$56k and that's excluding any summer work, or high benefits like extra vacation and pensions. An average accountant, not even a fancy specialized accountant, makes ~$53k. Most middle managers make at least that. All of those professions put a dual income household over $100K into upper middle class territory.

Most assistant professors make over $100K. It's not unusual for senior programmers with over ten years of work experience to make $100K. I know non-exceptional psychiatrists that make at least $300K per year.

It's ambiguous what you mean by "low." But if you mean, "Doesn't the 100k income threshold seem low?", then I would respond, Isn't that precisely the conclusion, that a couple consisting of an average high school teacher and an average accountant can now be upper middle class?

It's a what-me-rich statement.

Massimo,
As a fourth year psychiatry resident I'm interested in the last part of your comment. what cities are offering such salaries? I get job offers for 300k/yr, but they're all in west Texas or North Dakota. Any city >1million people has starting offers around 210k.

You're talking about starting offers. He's talking about middle of the road, mid career psychiatrists.

If someone starts at $210K, I can imagine them hitting $300K after a decade or two.

A private practitioner who operates as a "pill mill" can certainly top 300K once the word gets out on the street.

Yeah, the problem in America is that everyone's getting so rich. Thanks Alex... great post.

The research is from Steven Rose at the Urban Institute -- a leading liberal think tank.

Yeah those liberals. Always saying that America is great because of the rich.

Great, another economic model that sets out to prove something and accomplishes that by creative, arbitrary definitions of key terms.

The definition of "upper middle clas" is a bit wonky: median wages have been stagnant since the 70s while prices on a number of key indicators (e.g. housing, university tuition) have been outstripping inflation for decades.

So according to this definition, an "upper middle class" family is one that can barely afford a mortgage on a semi-detached house in a rundown neighbourhood of a large city, and that can't at all afford to send any of its children to university without significant financial aid.

Wow, being "upper middle class" sure isn't what it used to be!

They may be basically bidding each other up on real estate properties and basically getting nowhere for most purposes, but hey, they can buy 20 smartphones a year, each of which with a thousand times the computing power of the spaceship that went to the moon. Which means they're rich, right?

What's not very promising in this area of inquiry is that it's very rare to see the optimist and pessimist case in the same article for changes in wages over time.

So 20% of the population has done relatively well over the last generation or two (ignoring the facts of supremely high cost increases in real estate and tuition, etc.) But what about the other people whose wages have stagnated or worse?

Everyone can't have the top positional goods. Thanks for the insight, Bernie.

For the daft, living in a large city is a luxury and a positional good. Propose a liberal should move to a sprawling property in rural America and said liberal will quickly become concious of the priviledged class membership their 'brownstone imitation' provides them.

Living in cities is necessary to get work and/or start a career. It is not a luxury for most, it is a necessity. Unless you're talking NYC, LA, etc., which are places to compete to be at/near the top of various industries - living there is not in and of itself a luxury for most.

Duh.

The point is that more money doesn't mean more wellbeing if the main expense (real estate) eats up all the additional income.

"They may be basically bidding each other up on real estate properties and basically getting nowhere for most purposes"

No. The supply of good neighborhoods and prosperous communities is not fixed -- except where geography and/or development restrictions make it so. Otherwise, supply of luxury houses and developments will expand to meet demand (as it has in the city where I live). And that dynamic applies even more so to the major size increases and quality improvements in housing compared to the 1970s. Nobody has to compete for a fixed supply of hardwood floors, recessed lighting, master suites, etc.

I want to disagree here, although somewhat for fun. If it is true that neighbors are innately or by choice representable on a spectrum of good neighborliness, and if it is true that matter cannot occupy the same space as other matter, it is necessarily true that there is a limited availability of good neighborhoods which should optimally proceed as concentric circles radiating from the best neighborhoods to the worst.

Good neighborhoods aren't determined by the size, comfort and quality of the homes, but rather by the quality of the people who live in them. Real Estate is a hopelessly zero-sum positional good.

Having less dependents in your family (a low birth rate) helps by this metric. A college educated couple where both spouses work with no kids will show up as upper middle class even when starting their career. So is the raise of the upper middle class really just the declining birthrate?

And once this couple has kids and one spouse stops working, they drop out of the middle class again, for a few decades. Delaying childbirth would the raise upper middle class share...

They'd drop out of the UMC but stay in the MC. Also, increasingly one spouse doesn't stop working, not for a "few decades" anyway.

"Also, increasingly one spouse doesn’t stop working, not for a “few decades” anyway."

That's not true; the SAHM rate has been rising for two decades, with only a small dip associated with the recession. Like divorce rates, it's one of those "trends" that reversed a long time ago but hasn't quite hit popular consciousness yet.

http://www.pewsocialtrends.org/2014/04/08/after-decades-of-decline-a-rise-in-stay-at-home-mothers/

Defining for class by income might suck, but it was chosen by the left. Coincidentally, full accounting of class would result in Ivy-educated folks writing for Buzzfeed or Gawker or the NYT or working on HRCs staff for $50,000/yr in NYC, redistributing income to a plumber in Indiana who makes $90,000 per year. I'm sure that the left ignoring education, prestige, political and media access, and the frequency and intensity of physical pain in employment in discussions of inequality is a complete coincidence not at all related to their collective preference for air-conditioned sinecures.

If this failure to consider all facets of class is ameliorated, I look forward to taxing Bernie, JMU professors, and unemployed social science PhDs at their fair, fully-inclusive redistributive rate; 95%, 70%, and 35% respectively.

plumber in Indiana who makes $90,000 per year

I hesitate to outright call this a meme, in the derisive 4chan sense, but I have been looking into the numbers recently and there are mighty few plumbers who make $90,000. Especially outside of large urban areas where cost of living is correspondingly high. (BLS has the 90th percentile wage for Indianapolis metro area "plumbers, pipefitters, and steamfitters" as $74,090.). I suspect that gags like this one or the old "I'm a Ph.D. and my plumber makes more than I do!" genre ignore that 1) the poorer party got their academic credentials in underwater basket weaving from Slippery Rock State and 2) the poorer party is 20-30 years younger than the tradesman.

I'm sure the oft-quoted number is nonsense, but there really are a hell of a lot of folks with PhDs making very little money. The more successful poorly-paid PhDs are making very little money doing a postdoc or two so one-day, they can get the job they have spent a decade training for. The less successful ones are in non-tenure-track teaching jobs at low pay, with no job security and often with really lousy hours (because they have to take those jobs at several different colleges in order to stitch together a living).

This is a decent point, if a bit overstated. There are a lot of leftist elites that don't make much money, but get a lot of prestige/recognition, free travel, fun parties, and other untaxed perks. So it's kind of natural that they design re-distributive policies that don't touch their precious dinero.

It's possible for people outside these glamour professions to work the tax code too though. I live in NYC where top tax rates are already very high (4% NYC + 9% NYS + 40% Fed = 53% plus payroll taxes, sales taxes, etc.). My company makes a lot of money and spends a lot on perks. If rates go higher they'll spend even more. The employees know that if this marginal money was paid out as income it wouldn't amount to nearly as much. Currently, we get catered breakfast and lunch, in-office free convenience store, ski trips, tickets to movies and sporting events, parties, restaurant nights, massages, gym membership, recreational events like bowling and rock climbing, etc.

This is one of the fundamental issues with super high (60+%) tax rates. They won't generate nearly as much revenue as progressives hope because businesses will spend more on employees directly.

"My company makes a lot of money and spends a lot on perks. If rates go higher they’ll spend even more. The employees know that if this marginal money was paid out as income it wouldn’t amount to nearly as much."

Yet NYC has plenty of people who earn far in excess of $100,000 per year so this seems to be overstated. There are limits to what you can spend on employee perks before the IRS calls BS. The things you describe strike me as less of a tax dodge and more of a relatively inexpensive (for a big company with huge profit margins anyway) way to increase loyalty and satisfaction among staff. Silicon Valley companies are famous for giving employees all sorts of perks in exchange for getting 12-hour work days out of them.

"4% NYC + 9% NYS + 40% Fed = 53%"

You are aware that, thanks to the existence of marginal tax rates, this is not how it works, correct?

Anyway, I suspect Ricardo has hit upon the real reason why your company offers so many "perks." It strikes me as very, very hard to believe that a company would spend money on free massages rather than raises, unless those massages also serve the purpose of making long hours more bearable. And the idea that employees would prefer that because evil high taxes is frankly ridiculous - I'd rather get a 10k raise, even if only 5k winds up in my pocket, than some stupid forced socialization with coworkers or a store where I can save two bucks on a cup of coffee.

p(comment is worthless | it contains "the left") >= .75

If your job comes with genuine "prestige, political and media access," you aren't going to stay in the low five figures for very long unless something goes very wrong with your career.

The "poor and near poor" share dropped to its lowest levels in the mid to late 90s. Probably due to the appreciation in their stock portfolios due to the dot.com bubble.

I doubt it, since this chart is based on income and not wealth.

Of course, by reaching so far down in defining "upper middle class", the result is to capture a large number with zero or very low net worth. As Saez and Zucman have shown, while income inequality in America has grown, wealth inequality has soared. For the "upper middle class", wealth usually is tied to a house, and while the price of houses has at times risen, at other times it has collapsed and with it the net worth of the "upper middle class". As for the appropriate income level for defining "upper middle class", I would raise it at least to the level of the social security wage base. When an income earner's marginal tax rate drops by over 12%, it becomes much easier to save and add to wealth. I should point out that the marginal income tax rate for the "upper middle class" (28% to 33%) is not much lower than the marginal income tax rate for the highest income earner (39.6%). Indeed, for the "upper middle class" earning below the social security wage base ($118,500), their combined marginal tax rate (28% plus 12.4% = 40.4%) exceeds the marginal tax rate of the highest income earner (39.6%). [I have, among other things, excluded the Medicare tax (because it is so often avoided by high income earners) to keep it simple and to keep the focus on the meaning of "upper middle class".]

Agreed.

I'd really like these charts to separate income from wealth.

Most of the increase in wealth at the top isn't declared on their annual tax returns. It's unrealized gains ballooning in their investment portfolios, securities and real estate. As this savings glut causes yields to compress to almost nothing for the average saver, their family offices and private equity can chase higher returns of which ordinary investors can't imagine.

"When an income earner’s marginal tax rate drops by over 12%"

Due to various phase-outs, that is not usually the way it turns out. At the SS wage base you have massive credits and deductions that bring your AGI well below that 28% bracket. Going from $100k to $200k may spike your effective tax rate from under 10% to 25%

When you are talking saving, it's not the marginal rate that matters anyway, it's the effective rate.

Has anyone ever gone up to someone and said, "Look at these charts I have. You're wealthier than you think you are. What do you say to that?" "I say 'Thank the L--d' for those charts. I do feel wealthier. Cheers, Friend." People decide things like how wealthy they are, etc., for themselves. What they'd really say about those charts I'll refrain from repeating.

Obama has, but nobody buys it.

Conservatives attack Obama's claims because they want to go back to the massive welfare state in the 80s when welfare was so generous you could easily afford Cadillac convertibles and the very expensive gas they guzzled, driving around with furs and gold to show off.

The poor on welfare were much better off then because who can afford a caddy convertible and furs today, other than the ultra rich who are friends of Donald?

When I am employed I am upper-middle class. When I am unemployed I am living-off-my-savings middle class.

Since I still have a long time to retirement, and since it takes longer and longer each time that I look for work, I must admit that I experience anxiety about my employment and economic situation.

If there are a lot of other people like me, then that would explain why at least people have a negative perception of the economy despite whatever rosy statistics are available.

Is this just a story of the rise of the 2-earner family?

No. That happened earlier. The female labor-force participation rate is basically unchanged in the U.S. for the last 30 years.

Except for Clinton's second term most of the increase was more than 30 years ago.

It's not the labor-force participation rate that is the driving force; Its the improved job quality for women since '79 in a post-industrial economy, plus improved (or least relatively high) marriage rates for people making above-median incomes. Households in the top 1% of income have the most earners per household, those in the bottom quintile, the least.

No, if you read the report you can divide by the sqrt(3), so you can be rich with just $202,312.14/year as a single person.

Since the social status utility of wealth is zero-sum, it doesn't really matter in which direction the middle class is shrinking. As long as inequality is increasing, social utility is decreasing.

Hypothetically, if Bill Gates moved to Iceland and established residency, Icelandic income inequality would sky rocket. How does that make Iceland worse?

By pricing them out of things they used to enjoy and no longer can afford to.

How exactly? What could Bill Gates possibly buy and use in such quantities that it would price Icelanders out of any market? On the other hand, Icelanders are currently a bit worried about being priced out of Reykjavik. By tech titans? No, by tourists looking for AirBnb rentals:

http://www.telegraph.co.uk/travel/iceland-to-restrict-airbnb-rentals-to-cope-with-tourism-surge/

Can you specifically list the items that Bill Gates presence would deny to the other 50,000 Icelanders?

Sure he'd build a big estate, but the loss of land would seem to be insignificant.

I thought "Bill Gates" represented an upper-middle class growing from 15% of the population to 30%. I did not understood that you really were asking about the impact of adding a single billionaire to a population of a few hundred thousand.

Yeah sorry, I see my post was a little confusing in context. I was actually replying to the wealth inequality driving social inequality statement.

I understand how a large amount of people getting poorer will cause social inequality and unrest. But I've never understood the mechanism of how large amounts of wealth drive social inequality. Particularly with 1st generation, directly earned wealth.

Around Seattle all the waterfront properties are 5 million+. There are only a few hundred of these and the supply is inelastic. Of course Bill Gates only owns one of these...

Zero-sum is probably an exaggeration, but you're onto something here.

To paraphrase Jim Donald, cars have gotten a lot safer since 1972, but nobody really cares about safety except Ralph Nader, and a working class guy could take his girl for a ride a lot more easily in 1972 than in 2010.

For the full jim effect you need to add "a working class guy could take a girl for a ride somewhere remote and rape her in 1972 than in 2010.

Is the top 20% really so self-conscious that it has to call itself the "upper-middle-class?"

What is so middle about it?

Why not just call it the upper class and the one above it the top class?

When everyone you know earns and spends just exactly the same as you, aren't you middle class, with some people you don't know either richer, or poorer than you.

I love it. The myopia of self-segregation!

Traditionally, the Upper class has enough wealth that they don't have to work. Whereas the middle class does have to work. Everyone in the Upper Middle class is still firmly Middle class for most of their life by that definition.

For many people in this top fifth or so of the population, whether they have to work is at least partially a function of how much they choose to spend.

"For many people in this top fifth or so of the population, "

I'm not sure what 'many' means in that context. But a household in the 80-90% wealth bracket in the US has a net worth of $650K. That's going to generate about $25-35K per year in income. Sure, a household can get by on $2-3K per month, but I wouldn't consider that Upper Class.

https://en.wikipedia.org/wiki/Wealth_in_the_United_States

No one's stopping you....

The British do this better, I think it was Orwell who illustrated how finely class minutiae works there by describing his family growing up as 'lower-upper-middle class'. Or maybe it was someone writing about him.

Mr. Thin-Skinned prefers to think of himself as "No-Class."

Simple demographics? As a share of the population, we have more older, high-earning people at the tail end of their careers working longer hours than ever before. Often these are small households of Boomers whose kids have moved out. I don't dispute this analysis, though I wonder how much this phenomenon has to do with the apparent growth of the upper before class.

spicey mustard, ham sandwich on levi's rye, seeded, bread

So, a person making $22k, according to this chart, is in the lower middle class.

I never knew that making just over the minimum wage propelled you in the middle class.

And, according to this article, the upper middle class begins at $58k,

$58,000 for an individual is a very respectable salary, Bill. Your privilege is showing again, Bill.

Thomas, Oh, give me a break. No one in this post even knew that these were the cutoffs for the lower middle class, or upper middle class.

If you think these numbers aren't relevant to the story, then why should you object to their disclosure.

You're not just presenting values neutrally, you are also judging them too low

English translation please.

$22,000 is 50% higher than the minimum wage and is higher than the ppp gdp per capita of 129 countries. The figure $22,000 presumably doesn't include transfers or implicit subsidies in general spending. Would it make you feel better to think about all the gun-toting, Bible-clinching rural whites who earn this wage, Bill?

I can tell you where to get all you can eat curry buffet in Calcutta for about 25 cents. Or for some supremely amazing stuff, there are options in the $2-3 range.

PPP is less comparable than most people think. Consider that a Western-style apartment in Mumbai costs as much as NY, but for the living standard that most people are used to you can get by pretty OK on $100 a month.

Only in Tabarrok World ™

Goalposts. Keep. Moving. I thought the 1% took all gains everywhere?

Charles Hugh Smith has good thoughts suggesting the middle class threshold is much higher:

http://www.oftwominds.com/blogdec13/middle-class12-13.html

http://charleshughsmith.blogspot.com/2016/06/what-does-it-take-to-be-upper-middle.html

BLS says mean income for plumbers is $55,000. If we assume some proportion of them are just starting out as plumbers' helpers at $15/hour, that suggests that there are at least some plumbers making more than $80,000.

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