Yes, The American Middle Class Is Shrinking: Here’s How

Despite what gossips like Ben Shapiro may say, America’s middle class is shrinking.

It’s not a myth.  There’s no way around it.

You want proof?  I won’t give you rhetoric, I’ll give you statistics.

Here’s how America’s middle class is struggling.

Income Inequality Is Rising

Income inequality’s probably the best place to start.

Why?

Because the income distribution tells us a lot about who’s relatively rich, and who’s relatively poor—and who’s getting richer or poorer.

Inequality can be encapsulated in a measure called the Gini Coefficient.  What you need to know is that the closer the number is to 1, the more inequality exists—the closer to 0, the more equality.

Don’t get me wrong, too much at either extreme is bad, because it’s artificial (the government is needed to maintain it).

There’s a happy, naturally occurring medium (common across Western liberal democracies) that rests roughly between 0.25 and 0.45—this norm is rarely violated for long.

America long obeyed this “rule”.  Between 1950 and 1974 the GC actually dropped from 0.421 to a historic low of 0.394.

However, since then, income inequality has been increasing steadily—exceeding the “stability range” by the mid-1990s.  This means that the incomes of the richest Americans have increased much faster than those of the middle class (the trend reversed).

America’s now one of the most unequal countries in the Western world (GC of 0.48)—it’s roughly as unequal as it was during the 1920s.

Unless you’re the Great Gatsby, this isn’t a good thing: most Americans are relatively worse off than they were in the 1970s.

gini coefficient chart

Middle Class Wages Have Stagnated

Let’s look at American incomes in greater detail.

For most Americans, wages have been falling (in real terms) since 1973.

In 1973 the median hourly wage was $4.14, while in 2014 it was $20.74.  Looks good right?  Wrong.  Although it went up in nominal terms (the number got bigger), in real terms (what you can buy with it), it went down.

If we convert 1973’s median hourly wage into 2014 dollars, it works out to $22.07— which is 6.4% higher than 2014’s median wage ($20.73).

That may not sound like a lot, but it is; over a year it’s almost three grand. 

real vs nominal US wages

That being said, not all wages went down.  Since 1974 most of the economic gains have gone to the top 20% of earners, which is why inequality has been increasing.

If today’s income was dispersed like it was in 1973 (before our manufacturing sector was hollowed out), then the average middle class household would earn a whopping $90,943 per year, as opposed to $74,434—an eye-popping difference of $16,509 per household.

You could buy a new car every year with that money.

American’s Household Consumption Has Declined (Relatively)

The facts show that earnings have stagnated for most Americans, and this drives increasing income inequality, but what does that look like in terms of consumption?

Most pundits (again, like Ben Shapiro) point to the fact that modern Americans enjoy more material comforts than their ancestors did in the 1970s.  Sure, fair enough.

But it’s important that we recognize that this is the result of (1) better technology and (2) a rising tide that raised all boats.

Simply put, there were no iPhones in the 1970s, nor laptops, or anything else we take for granted.  Likewise, better technology has enabled us to make more stuff with less effort, which has caused more prosperity.

But my point isn’t that Americans are worse off today than in 1970s, my point is that they’re relatively worse off—in other words, I’m concerned with where the middle class should be, not where they are.

With that in mind, let’s look at American household spending.

Families Are Spending More Just To Survive

Between 1901 and 1985, the portion of their income that the mean American household spent on wants, as opposed to needs (food, clothing, shelter), increased from 20.2% to 48.6%.

In other words, they were spending less on survival, and more on enjoyment—living standards improved.

However, since then, this pattern stagnated.  You can see in the below graph that mean household spending on needs has been stuck around 50% for decades.

It gets worse.

If we look at the median, as opposed to the mean, (which is skewed less by consumption at the top), we find that spending on needs has actually been increasing since the 1980s.

In fact, it is now down to 36.7%—a level not seen since the 60s.

This represents a reversal of centuries worth of real economic growth—ever since the Industrial Revolution people have been working more efficiently (making more with less), and have therefore spent smaller proportions of their income on survival.

If I had to summarize America’s declining middle class in one statistic, it would be this:

 

declining middle class chart

You can really see the divergence between the mean and the median when it’s plotted independently.

difference between median and average consumption

Finally, it’s worth measuring the impact of this income disparity in tangible goods.

Let’s use McDonald’s Hamburgers, bottles of Pepsi, and Hershey’s chocolate bars in our example.

In 1985, a year’s worth of work at the median wage bought you way more than in 2014—if that’s not an ugly statistic, I don’t know what is.

And don’t forget, as bad as it is for the middle class, it’s even worse for the next generation.

Millennials are getting completely screwed.

consumption pictogram

America’s Middle Class Jobs Are Drying Up

America’s middle class overwhelmingly works for a living—their standard of living is predicated upon maintaining good employment.

This has become an issue, especially since 2000.

If we look at something called the labor force participation rate, which is the percentage of people not in the labor force relative to those who are, we find that it’s been dropping steadily.

As of 2015, it was 62.7%—down 5% from its peak in 2000.

This is the lowest it’s been since 1977 (before women were fully integrated into the workforce).

This is one of the proximate reasons for the middle class decline.  When fewer people are earning money, households become more fragile, and have (generally) smaller surplus incomes.

All told, the real unemployment rate is upwards of 13%—a far cry from the ~5% the government claims.

labor force participation chart

Of course, the issues are deeper than that.  Not only are fewer people working, but more and more Americans are working at worse and worse jobs.

Part of this is because America’s manufacturing industry (which provides higher-than-average wages and benefits) has been hollowed out.  And the service industry jobs which took their place are more volatile (they either pay really well, or really poorly—there are more designers, but also many more waiters).

Basically, we’re losing middle class jobs, and replacing them with elite or working class jobs.

Since 2000, America’s lost over 5 million manufacturing jobs.

Furthermore, if these people found new jobs, they took an average pay cut of  17.5%.

At the end of the day, fewer people are working, and many middle class jobs have been replaced with low-income jobs—this is driving America’s middle class decline.

Why?  Offshore outsourcing.

US manufacturing employment numbers

Why Is America’s Middle Class Shrinking?

I have written extensively on this subject already: the topic requires its own articles (linked).

There are many reasons, but in short, offshoring and economic globalization is the main culprit (although immigration and the proliferation of fiat currency are also significant factors).

Either way, I think it’s safe to say that America’s middle class is in bad shape—hopefully President Donald Trump’s proposed infrastructure investments and tariffs will right the ship.

Time will tell.

Select Sources:

Bureau of Labor Statistics. “Civilian labor force participation rate by age, gender, race, and ethnicity.” Accessed June 5, 2016. http://www.bls.gov/emp/ep_table_303.htm

Chao, Elaine L. 100 Years of US Consumer Spending, Data for the Nation. New York: US Department of Labor, 2006.

Federal Reserve Bank of St. Louis, “All Employees, Manufacturing.” Accessed Nov 20, 2016. https://fred.stlouisfed.org/series/MANEMP

Hipple, Steven F. “People Who Are Not in the Labor Force: Why Aren’t they Working?” Bureau of Labor Statistics: Beyond the Numbers (4), 2015.

Maddison, Angus. The World Economy: Historical Statistics. Paris, OECD Publishing, 2003.

Olver, Lynne. “The Food Timeline.” Accessed July 15, 2016. http://www.foodtimeline.org/foodfaq5.html#

Townhall.com “The Major Trends in US Income Inequality Since 1947.” Accessed June 10, 2016. http://finance.townhall.com/columnists/politicalcalculations/2013/12/05/the-major-trends-in-us-income-inequality-since-1947-n1757626/page/full

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About Spencer P Morrison 40 Articles
JD candidate, writer, and independent intellectual with a focus on applied philosophy, empirical history, and practical economics.Author of "America Betrayed" and Editor-In-Chief of the National Economics Editorial.

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