The Disappearing Middle Class

We hear a lot about the disappearing middle class.

The popular narrative is that the middle class is falling behind the upper class and is struggling to stay out of the lower class.

One of the facts we hear is that the middle class is actually now the minority group in America. There are more in the upper and lower classes than there are in the middle.

This chart from the Pew Research Center is an example.

Credit: Pew Research Center

However, when you take a closer look at the data you see that most of the loss to the middle class has come about because a good number of households have moved from middle income to upper income over the last 50 years.

In 1967 only 9.0% of U.S. households earned over $100,000 per year (in 2017 dollars). In 2017 that number has climbed to 29.2% of all households.

Those making less than $35,000 has also fallen. From 37.2% of all households in 1967 to 29.5% in 2017.

It is pretty remarkable when you see the numbers. The Middle Class is disappearing but the biggest reason is that more and more of the group have moved to the Upper Income group.

If this is true why does it seem that the middle class is being squeezed?

A big factor is that the above measure is based on household income. Yes, there are more households making upper incomes. However, it is often taking two household members to earn it.

You can see the change in the number of two-earner households since 1967 in this chart from the Tax Foundation.

Less than half of households had two-earners in 1967. Today it is two-thirds.

Another factor that is not considered is the cost of living. Income is one thing. The cost of living is something altogether.

The fact is that $100,000 in 2017 dollars is actually only equal to about $13,600 in 1967. In other words, less than 10% of households made more than that amount in 1967!

However, despite that, the money went a lot further because of a number of factors. For example, taxes took a much smaller share of income in 1967, particularly payroll, property and sales taxes.

Another reason is that Americans simply want more today. It does not matter what income level people have, most today want to live like they are in the upper income group.

Few cars in 1967 had air conditioning, automatic windows or leather seats. None had a moonroof, drink holders, a navigation system or rear view camera. These are all nice conveniences but they also cost money.

No where is the expansion in expectations higher between 1967 and 2017 than the size of our homes.

This chart shows the average house size (in square feet) from 1920 to 2014.

Consider that the average floor area per person has more than doubled since the 1960's-1970's until today.

The middle class may be being squeezed financially. However, we are not being squeezed into smaller houses or vehicles. Our housing and transportation has been substantially upgraded. The same can be said for our communication and healthcare options. We have computers, cell phones and the internet that we did not have 50 years ago. We have MRI's, CT scans and scores of prescription drugs that did not exist in 1967.

All of this takes a lot more money. The cost of living according to our expectations today is a lot higher than it was in 1967.

Many are having to work harder to keep their heads above water despite a substantial increase in household income. However, the cost of living, in the manner we need and want today, seems to be increasing at an even faster rate.