FRBSF Economic Letter

97-07; March 7, 1997

The "Shrinking" Middle Class?

Introduction

A vibrant middle class is often cited among the benefits of our competitive economic system. It is argued that a large and growing middle class is an antidote to poverty, an incentive for individuals to work and improve their economic position, and an answer to those who worry that the disparity between the top and bottom of the income distribution in the U.S. is too large. Yet, as we entered the last decade of the 20th century there was fear that the middle class in the United States was shrinking. Despite seven years of sustained economic growth, the decade of the 1980s closed with a smaller portion of the population in the middle of the income distribution than had been there at its beginning (Danziger and Gottschalk 1995).

At the heart of the fear is a belief that the majority of the lost middle fell to the lower part of the income distribution, increasing income inequality and "immiserating" the middle class. However, few studies of this topic have done more than speculate that the middle diminished because it slipped downward to the lower part of the income distribution. Yet, it is the direction of this movement that determines whether the decline of the middle class during the 1980s should be added to our list of social concerns.

This Economic Letter reports on recent research by Burkhauser, Crews, Daly, and Jenkins (1996) (hereafter BCDJ); which examines changes in the distribution of real family income and pinpoints movements of the U.S. middle class over the 1980s. Contrary to conventional wisdom, BCDJ find that the shrinking of the U.S. middle class during the 1980s was primarily due to improvements, rather than to declines, in economic well-being. They show that the majority of the middle class that vanished did so by increasing its income. That is, the great majority of working families under age 62 as well as older families in the middle of the income distribution were better off at the end of the decade (1989) than were their counterparts at the beginning (1979). Only those living in families under age 62 and dependent on social assistance lost ground between 1979 and 1989. Thus, while inequality unquestionably increased and the size of the middle class declined during the 1980s, the decline occurred through disproportionate increases, rather than through large-scale reductions in economic well-being.

Tracking Income Growth and Income Inequality

Most studies of income growth and inequality rely on annual data from the March Current Population Survey (CPS). The CPS is a monthly survey of a nationally representative sample of more than 50,000 households and contains detailed questions about household composition and sources of income. Traditionally, these data have been used to calculate indices of inequality--for example the Gini index and the Theil coefficient--which summarize the degree to which the income distribution departs from perfect equality (see Motley 1997 for a more detailed discussion of the Gini index) and cross-over points, or the percentile point in the income distribution where real income is the same over two years. Comparisons of these measures over the 1980s indicate that income inequality increased during the decade, and that the gains from economic growth were not uniformly distributed throughout the population. However, because these measures summarize an entire distribution with one value, they do not reveal whether increases in inequality during the 1980s were due to the rich getting richer, the poor getting poorer, or the middle class moving uniformly or disproportionately into one end or the other of the distribution.

To address this issue, BCDJ analyze the CPS data by employing a statistical technique that draws a picture of the entire U.S. income distribution in a given year. They use these pictures to pinpoint movements of the middle class over the 1980s and to document the effects of those movements on income inequality. Since the CPS data do not allow for tracking the progress of individuals over time, their findings are based on comparisons of various income groups in each period--groups which may or may not include the same individuals.

Winners and Losers in the 1980s

BCDJ examine the consequences of longer-term economic growth by comparing the distribution of real income at the two peaks in the 1980s business cycle. Family income, rather than an individual measure, is used to account for the fact that most people share resources with other coresidents. To control for the fact that $20,000 a year provides a higher standard of living for a single-person family than it does for individuals belonging to larger families, family income is adjusted by family size. The simplest way to make this adjustment is to divide total family income by the number of individuals living in the family. To account for the possibility that economies of scale exist for larger families ("two can live more cheaply than one") BCDJ assume that a family of two requires 1.4 times the income of a family of one and that each additional person increases the family's income needs by 0.25. All incomes are valued in 1989 dollars using the CPI.

Figure 1 plots the proportion of the population at each level of income in 1979 and 1989. To provide some benchmarks for evaluating these distributions, BCDJ cut the distributions at three income points. The first and last points (lines A and C) are where the 1979 and 1989 income distributions intersect. The lower intersection point is at $4,725 for a single person family, or 75 percent of the U.S. poverty line; the upper intersection point is $30,615 for a single person family, or approximately five times the poverty line. These values correspond to higher incomes for larger families; for instance, for a family of four the lower and upper intersection points correspond to $9,450 and $61,230, respectively. The remaining point (line B) represents twice the U.S. poverty line, or $12,622 for a single person.

The path of the middle class during the 1980s can be traced by determining the magnitude of the shift in population mass from inside the middle class income boundaries into the tails of the distribution. All that is required for this exercise is a definition of middle class. Definitions of middle class are diverse in the economics literature, so BCDJ use two definitions designed to represent the broadest and narrowest concepts of a middle income class. The narrowest definition includes individuals with incomes between twice the poverty line--line B--and the upper intersection point--line C--and is denoted the "conceptual" middle class. Although the placement of line C is primarily a visual convenience, in terms of income-to-needs, the income range defined by B to C includes families with incomes between twice the poverty line and approximately five times the poverty line. The broadest definition, denoted the "intersected" middle class, encompasses all individuals between the two intersection points, A and C.

Figure 1 shows that between 1979 and 1989 income inequality in the United States increased and that the middle class, under either definition, shrank. However, Figure 1 also reveals that the middle class shrank not by adding to the ranks of the poorer but by adding to the ranks of the richer. The "shrinking" middle class, under either definition, did not move equally into the two tails of the distribution. Instead, the vast majority of middle mass movement was to the right (higher real incomes) rather than to the left (lower real incomes). More precisely, under the conceptual middle class definition, 92 percent of the loss in the middle mass shifted right, whereas only 8 percent shifted left. Using the intersected middle class definition, 77 percent of the middle mass shifted right and 23 percent shifted left. The asymmetric middle class slide to the right unquestionably increased income inequality, but did so through disproportionate increases in economic well-being, not through the "immiseration" of the middle due to a large-scale shift to the left.

Figure 2 summarizes this by showing how the population mass pictured in Figure 1 was redistributed over the two peaks of the 1980s business cycle. Figure 2 uses the conceptual middle class definition to divide the population into three income groups: below the middle, in the middle, and above the middle. Consistent with other studies, Figure 2 shows that the population mass below the middle income class remained relatively constant during the 1980s. The conceptual middle class population declined throughout the 1980s, from 50.5 percent of the population in 1979 to 45.4 percent in 1989, but the movement was almost entirely to the right. The percentage above the middle class boundary increased from 17.2 percent to 21.9 percent, representing an improvement in economic well-being.

To get an idea of the family characteristics associated with these shifts in income distribution during the 1980s, BCDJ repeat the analysis in Figure 2 for three different family types. Figure 3 depicts the results for younger working families (under age 62), older families (age 62+), and younger social assistance families (under age 62). For younger working families the drop in the middle of the income distribution was quite large, with the great majority of the decline moving to the upper tail of the distribution. The experience of older families over the period was similar. Not surprisingly, economic growth was not as beneficial to the population receiving social assistance benefits. The poverty rate among younger families dependent on social assistance transfers swelled over the decade, indicating that those dependent on social assistance in 1989 were much less likely than their 1979 counterparts to sustain incomes in the middle range.

Conclusions

While inequality increased in the United States between 1979 and 1989, a great majority of Americans were economically better off at the peak of the business cycle in 1989 than they had been at its earlier peak in 1979. The largest share of the increase in inequality over the 1979-to-1989 period was due to positive but unequal income gains in the middle of the income distribution, not to disproportionate losses by the middle class.

This analysis suggests that the 1980s were not as unlike previous decades as might be suggested by the current emphasis on rising inequality and a shrinking middle class. Despite rising inequality, growth did improve the economic well-being of most of the population. To be sure, a portion of the population was left behind during the recovery, but contrary to some fear, the vast majority of the middle class that vanished did so not by being left behind, but by moving forward.

Mary C. Daly
Economist

References

Burkhauser, R.V., A.D. Crews, M.C. Daly, and S.P. Jenkins. 1996. Income Mobility and the Middle Class. Washington, DC: AEI Press.

Danziger, S. and P. Gottschalk. 1995. America Unequal. Cambridge, MA: Harvard University Press.

Motley, B. 1997. "Inequality in the United States." FRBSF Economic Letter. 97-03.

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