The good news about the shrinking middle class

NICK EICHER, HOST: Coming up next on The WORLD and Everything in It: middle class money.

For years, politicians and pundits on the left have predicted the death of the middle class. They claim the rich are just getting richer and more people are slipping into the low-income bracket.

MARY REICHARD, HOST: But recent analysis of U.S. census data shows that the middle class may indeed be dwindling, but not for the reasons people think. Anna Johansen is here now to talk about it.

Good morning, Anna.


REICHARD: Tell us about this data and what it has to say about the middle class in the United States.

JOHANSEN: This analysis is from a report by Mark Perry at the American Enterprise Institute. He looked at U.S. household income levels over the past 50 years. In 1967, only 9 percent of households made over $100,000 a year. But now, that’s up to 29 percent. So one out of every three households. That means the middle class is shrinking as families make more money and move into higher income brackets.

REICHARD: That sounds like good news. What’s behind it?

JOHANSEN: According to Perry, it’s a product of the U.S. free market, innovation, and technology. He calls it the “prosperity-making machine.” We’ve seen the average salary go up, and also new industries emerging that create higher paying jobs. So the overall system is becoming more prosperous. 

REICHARD: Is that true across the board, or just for the middle class?

JOHANSEN: It’s true across the board. In Perry’s analysis, you can see the low-income bracket shrinking too. Over the past 50 years, people have been moving up to higher groups—from low income to middle income, from middle to high. 

REICHARD: Does that mean the cost of living is also going up?

JOHANSEN: Not necessarily. The numbers in this particular report don’t specifically address that. And we do see some areas of the country where a high cost of living makes it hard for the middle class. For example, California has really high housing prices. But Perry says overall, the price of goods has gone down. Things like cars and computers are cheaper now—while average salaries have gone up. So people can afford a higher standard of living than in the past.

REICHARD: What about income inequality? We’re hearing a lot about that on the campaign trail right now. Are rich people really just getting richer?

JOHANSEN: That depends on who you ask. Income inequality looks at the total amount of money people have in the United States. And then it basically asks, do we see a very few people at the top possessing the majority of money? One study by the Economic Policy Institute said that the top 1 percent took home 21 percent of all the income in the United States. People don’t generally like that. That’s where you get all the rhetoric about the 1 percent. People worry that gap is just going to grow. Maybe the top 1 percent will take 25 or 30 percent of U.S. income. But Perry says that’s not happening. In his analysis, he says the top 5 percent of U.S. households still have the same share of U.S. income they had back in the 90s.

REICHARD: Some people disagree with that and cite numbers that seem contradictory.

JOHANSEN: There are a lot of studies that measure similar things, but you have to make sure you’re comparing apples to apples. For example, you have to define what you mean by middle class. For this study, Perry defined it as households making between $35,000 and $100,000. You also have to define what you mean by income. You’d think that would be obvious, but it isn’t always. If you’re a researcher, you can look just at a paycheck. But you can also look at the value of government benefits and health insurance and all kinds of things. 

REICHARD: Do you have an example?

JOHANSEN: Sure. There was one study by an economist named Richard Burkhauser. He looked at household income from 1979 to 2007. Based just on paycheck, the bottom bracket lost income. They became less prosperous. But when Burkhauser looked at the broader picture and included things like government benefits and health insurance, that lower bracket actually saw their income go up 25 percent.

REICHARD: It sounds like those brackets are pretty flexible.

JOHANSEN: Yes. When we’re just looking at numbers, it’s easy to think of them as static. We get stuck looking at one snapshot. But things are actually very dynamic. People don’t stay in one income bracket forever. They get educated, get married, get a job, have kids, get a better job, retire. Life circumstances are always changing and households move between income brackets as they progress through the years. College students don’t have a lot of income and might get ranked in a low-income bracket. But they don’t stay there. They move up the ladder. So it’s not like people at the low end of the scale are stuck there forever while the rich just get richer.

REICHARD: Upward mobility is still the American way, it sounds! Thanks so much, Anna. 

JOHANSEN: You’re welcome!

(Photo/Creative Commons)

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One comment on “The good news about the shrinking middle class

  1. Scott Bass, CFP says:

    Comparing $100K in 1967 to $100K today is not a fair comparison. According to the Bureau of Labor Statistics consumer price index, prices in 2017 are 633.89% higher than average prices throughout 1967. The dollar experienced an average inflation rate of 4.07% per year during this period, meaning the real value of a dollar decreased. In other words, $1 in 1967 is equivalent in purchasing power to about $7.34 in 2017, a difference of $6.34 over 50 years. Therefore, a consistent comparison should be a $100K income in 1967 to an income of $734K in 2017. I don’t believe $100k was middle class in 1967 and I don’t believe that $734K was middle class in 2017. Perry defines middle class as beginning at $35K per year. I don’t believe most families making $35K per year would consider themselves as middle class. Perry also states cars are cheaper now, but the average price of a car in 1967 was $2,750 while the average price of a car in 2017 was $31,400. Even after adjusting for 633.89% inflation cars were still almost twice as expensive in 2017 and they were in 1967. The data in this research just doesn’t add up for me.

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