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Business & Economics
The Changing Dynamics of the American Middle Class
The ideal portrait of a middle class household in the United States usually consists of a steady income, a sizable house, a few cars, yearly family vacations, and weekend outings. This image is rooted in the stereotypical family of the 1950s–a nuclear family residing in the suburbs. Until recently, being middle class in the United States was still reminiscent of that post-war generation of American families. But things have changed, and dramatically so. The middle class is shrinking rapidly, with more people moving down the income ladder. Read on to learn more about the status of the middle class in America and the reasons for its decline.
How to Define the Middle Class
There is no universal definition of middle class, but households that make enough money to live comfortably, take vacations, indulge in entertainment, and save for retirement and college funds can be broadly considered to fit the bill. However, the description of “middle class” can include a broad range of figures, depending on the chosen measurement.
The most common measure used to define middle class is income. The New York Times has chosen 50 percent above the poverty level ($35,000) for a family of four as the lowest threshold and $100,000 as the highest income for a middle class family. Pew Research Center presented middle class as households ranging from those who make two-thirds ($40,667) to twice ($122,000) the median income. The U.S. Department of Commerce gives a more narrow range, from $50,800 to $122,000. Meanwhile, the U.S. Census Bureau considers middle class families to be those who fall between $20,600 and $102,000.
Other possible measurements could include occupation, education, social values, or some combination of the above. In addition, regional cost of living is often taken into account when categorizing American households. Interestingly, those who make less than $20,000 or more than $150,000 a year still sometimes consider themselves a part of the American middle class depending on where they live and the expenses they have. Essentially, the cohort is almost impossible to define, as each household has different needs. While some can manage to save for retirement on $20,000 a year, other families that may have an income over $100,000 have to pay larger medical or college bills, resulting in zero savings.
How is the American middle class changing?
The U.S. Census Bureau started to track household incomes in 1967. With some ups and downs, the overall income levels tended to increase over the earlier decades. However, starting in 2010 the American middle class has begun to shrink. As of now, 61 percent of Americans live paycheck to paycheck, 36 percent don’t contribute anything to retirement, and more than 40 percent work in low-paying jobs in the retail and service sectors.
People ages 30 to 44 are less likely to be middle class, while those who are 65 years and older are more likely to be middle or upper-middle class. As many baby boomers are working past their retirement age, and most of them receive Medicaid and Social Security benefits, households containing those who are 65 years and older are the fastest growing share of the contemporary middle class. The number of adults in middle class households decreased from 61 percent in 1970 to 51 percent in 2013. At the same time, the number of adults who now live in upper-income households has gone up from 14 percent in 1970 to 20 percent in 2013. The share of younger adults, ages 18 to 29, who live in middle class households has fallen dramatically, with more of them moving to the lower class due to staggering unemployment rates.
In addition, family status is an important factor in association with income distribution among the American population. Two-adult households are more likely to be upper-middle class due to the fact that both adults are working, thus increasing the overall family wealth. One-adult households are disproportionately lower income for precisely the same reason. The traditional vision of American middle class families–two adults and children–is now on the decline, constituting only a quarter of middle class households. Some of them surely increased their income, moving to the upper-middle class, probably due to the increased number of women in the workforce.
White Americans are more likely than black Americans and Hispanics to live in middle- to upper-income families. In 2013, half of Black households and 43 percent of Hispanic households were lower income.
Location wise, the number of middle class households has decreased in the Northeast, especially in such states as Connecticut, Massachusetts, and New Jersey.
Overall, the dynamics of the middle class in America are changing. In 1967, 53 percent of households were middle class families; in 2010 that share decreased to 43 percent, with some people moving up or down the income ladder.
Why is the American middle class changing?
The middle class in the United States is shrinking for a broad range of reasons that collectively influence the changing dynamics of middle class membership.
The Great Recession
First and foremost, the Great Recession of 2008 resulted in lower incomes, high unemployment rates, and increased numbers of home foreclosures. It’s estimated that the median net worth (the amount by which assets exceed liabilities) was at $120,600 in 2007; after the recession this number dropped to $77,300. Due to long-term stagnation in wages, median household income has decreased from $56,080 in 1999 to $51,017 in 2012. Simply put, after 2008, many middle class families became lower-income families.
Creation of Low-Income and Part-Time Jobs
In the aftermath of the 2008 housing market collapse, many middle-income jobs were lost. In response, low-income jobs were created, adding little wealth to American households. Employment in low-skill jobs increased 110 percent between 1980 and 2009, while available middle-skill jobs have risen only 46 percent. At the same time, more and more Americans are working part time as they cannot obtain full-time employment. In 2012, more than 2.5 million Americans were working part time, the highest number since 1993. Clearly, proliferation of low-income and part-time jobs resulted in the overall drop of middle class incomes. Watch the video below to learn more about low-paying jobs in the United States.
The Growing Income Gap
But not all middle class families moved down the income ladder. On the contrary, some households’ incomes skyrocketed instead. The gap between high-income Americans and everybody else reached its apex during the years following the Great Recession. Simply put, the wealth of upper-middle-class households has increased, while middle- and lower-class families’ incomes have declined or didn’t change at all. The upper class is earning roughly 50 percent of the overall national income and is holding 83 percent of all U.S. stocks. At the same time, lower- and middle class families hold only seven percent of the liquid financial assets, and own less than one percent of the country’s wealth.
While the number of millionaires in the United States has increased 16 percent since 2009, the number of children who live in poverty accounted for 21 percent of all children in 2010, the highest percentage in the last 20 years. The growing income gap is especially evident as the wealth of middle class families has diminished, while upper class families experienced significant boosts in their earnings. Watch the video below to learn more about income gap in the United States.
Shift of Jobs Overseas
As multinational corporations are looking to minimize expenses while maximizing profits, they are shifting their operations overseas. This prompts significant reductions in employment opportunities inside the country as corporations are hiring less in the United States and more in the less-developed parts of the globe. The reason for this is very simple: there are fewer regulations and labor is cheaper. In addition, American companies don’t have to adhere to minimum-wage requirements or pay benefits to the overseas workers, significantly reducing their expenses. It’s estimated that from 1999 to 2008, American companies hired 2.2 million people in other countries, while scrapping 2.1 million positions inside the United States. Not only is it more expensive and difficult to conduct business in the U.S., it’s also much cheaper and more convenient to run a large company abroad.
Increasing Use of Technology in the Workplace
Not only do middle class Americans have to compete with overseas workers, but now they have to compete with computers and machinery. As the use of technology in the workplace rapidly grows, more and more middle class jobs disappear. Now, computers are doing the same jobs that humans used to do decades ago, depleting middle class employment opportunities. Essentially, technology is replacing human labor as computers can complete tasks faster, cheaper, and with more accuracy than human employees. Starting in 2010, the number of people employed as telephone operators, word processors, and typists has declined 63 percent. The share of travel agents has decreased 46 percent, while the number of bookkeepers has plunged 26 percent. In addition, such jobs as check-out cashiers, bank tellers, ticket agents, and secretaries are on the decline, as many businesses use computers instead of employing workers.
One of the recent examples of job technology taking over is “bookBots,” an innovative project at North Carolina State University. Instead of human librarians who retrieve books as students request them, robots are programmed to find requested books, now located within 18,000 metal bins, instead of traditional library shelves. Thus, many middle class jobs are already unavailable to humans due to the reduced costs associated with computerized services and ease of use for consumers. Many professions could become completely extinct due to technological advances and innovative approaches in the workplace.
Decline of Labor Unions
Besides the fact that the American economy is shifting overseas and some professions are going extinct due to the increased use of technology, fewer workers inside the United States are earning union salaries. Historically, labor unions were the most influential advocates for workers’ rights, and unionized workers were the backbone of the American middle class. Now, fewer jobs are unionized, prompting a large-scale decline in the influence and power of American labor unions. In 1983, one in five workers was part of a union; today this is true of only one in ten workers. Unionized workers’ median monthly salary is $10,000 more than that of their non-unionized counterparts. With the decline in labor unions, fewer American workers are earning middle class salaries. Watch the video below to learn more about labor unions and their importance for the middle class.
Increases in ‘Out-of-Pocket’ Expenses and Rising Debt
Middle class households are those families that, besides living comfortably, are able to save money. Many middle class Americans have to pay their college tuition without financial assistance, which is available to lower-income families only. Health insurance is another “out-of-pocket” expense that can be rather costly, as only those who have very low or no income are eligible for government assistance. In 2001, two thirds of American middle class families were able to accumulate savings; in 2010, less than 55 percent were saving money for retirement or their kids’ education.
A large portion of middle class income is going toward paying off student loans and maintaining medical coverage rendering it difficult to save for retirement or to buy a house. Some middle class households are deep in debt. In 1992, the median level of debt for middle class families was $32,200; by 2010 it increased 161 percent, reaching $84,000. The economic pressures that middle class households face today result in downward mobility and accumulation of debt.
Restored Payroll Tax Rate
In 2009, President Obama introduced a temporary measure to stimulate the economy by cutting the payroll tax, which finances Social Security and Medicaid by taking a percentage of income from both employees and employers. Before 2009, the payroll tax constituted 6.2 percent of income; after the changes, middle class Americans received a two-percentage-point break, resulting in a payroll tax of 4.2 percent instead. In 2013, the payroll tax cut expired and middle class households began to receive $84 less in their monthly paychecks, which is around $1,000 in yearly tax withholdings. As lower- and middle class families were the ones who enjoyed the two-percentage-point break the most, they are now the ones who are suffering the most.
Higher Food Prices
Food prices have increased globally and in the United States. On average, there’s been a 6.4 percent hike on most food products, while the price of some essentials such as meat, milk, and eggs is 16-22 percent higher than in previous years. Nevertheless, the income of middle class families is staying the same, constraining food shopping for many middle class households. The median income is increasing only one percent a year, making it difficult to keep up with rising food prices without moving down the income ladder.
Conclusion
The dynamics of the middle class in the United States are changing. Some of the above reasons for the middle class downturn are more serious than others, but all are collectively responsible for the decline in its traditional form. At the same time, technological advances in the workplace are inevitable and most likely will continue to erase traditional service jobs and create new occupations, shifting the middle class around.
Resources
Primary
Pew Research Center: America’s ‘Middle’ Holds Its Ground After the Great Recession
Additional
The New York Times: The Shrinking American Middle Class
CBS Evening News: Food Prices Soar as Income Stands Still
CNN Money: America’s Middle Class: Poorer Than You Think
CNN Money: America’s Disappearing Middle Class
DailyNews: Can Smart Machines Take Your Job?
Forbes: The U.S. Middle Class is Turning Proletarian
Huffington Post: Four Reasons It’s So Hard For the Middle Class to Buy a House
The New York Times: Middle Class Shrinks Further as More Fall Out Instead of Climbing Up
CNN Money: What Happens if the Payroll Tax Cut Expires
Pew Research Center: Are Americans Ready For Obama’s ‘Middle Class’ Populism?
PBS Frontline: The State of America’s Middle Class in Eight Charts
TIME: A Brief History of the Middle Class
USA Today: Middle Class a Matter of Income, Attitude
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