U.S. Middle Class Losing Ground

U.S. Middle Class Losing Ground

The New York Times recently reported that the American middle class, long the most affluent in the world, has experienced much lower income growth over the last 30 years as compared to citizens of other advanced countries, and has now given up much of its lead. The wealthiest Americans, on the other hand, have been outpacing many of their global peers, and the poor are now earning less than the poor in much of Europe.

The data was compiled by LIS, a cross-national data center in Luxembourg which maintains a publicly-available database of income, wealth, employment, and demographic data from a large number of countries for comparison purposes. The income data used in the analysis, often referred to as disposable household income, includes income received from working, from investments, and from direct government subsidies such as retirement or unemployment benefits. Income and consumption taxes are subtracted to provide a true net after-tax comparison, and an adjustment for the different relative costs of common items such as cars and food corrects for purchasing power (although the latter differences tended to be relatively small among high-income countries).

However, there are two categories of income that were not counted. One is health care provided by a government or employer. Since Americans receive less comprehensive health benefits than many other countries, we are forced to use more of our disposable income on health care. So we may actually have fallen farther behind than the data suggests. The second factor excluded from the income definition is capital gains. This is a significant source of income for many wealthy individuals. As a result, many of the estimates for top incomes are probably low.

The analysis appears to support the contention of the so-called 99% that the rich are getting richer while the poor – and even the middle-class – are getting poorer. Although economic growth in the United States continues to be stronger than in many other countries, only a small percentage of American households is fully benefiting from it. Median per-capita income in Canada pulled into a tie with median per-capita United States income in 2010 ($18,700, or $75,000 for a family of four after taxes). Median incomes in Western European countries still trail those in the United States, but the gap in several — including Britain, the Netherlands and Sweden — is much smaller than it was a decade ago thanks to double-digit growth there as compared to virtually zero growth in the U.S. Only in European countries hit hardest by the recent financial crises, such as Greece and Portugal, have incomes fallen sharply in recent years.

If things look bad for the American middle class, they’re looking worse for the poor. A family at the 20th percentile of the income distribution in this country makes significantly less money than a similar family in Canada, Sweden, Norway, Finland, or the Netherlands. Thirty-five years ago, the reverse was true.

The findings appear to contradict commonly cited economic statistics such as per capita gross domestic product (GDP) that continue to show that the United States has maintained its lead as the world’s richest large country. The reason is those statistics are averages, which do not capture the distribution of income. The biggest share of recent income gains in this country has been flowing to a relatively small group of high-earning households, leaving most Americans failing to keep pace with their counterparts around the world.

The report cites three factors that are alleged to be driving much of the weak income performance in the United States. First, educational attainment in the United States, especially among younger workers, has risen far more slowly than in much of the industrialized world over the last three decades, making it harder for the American economy to maintain its share of highly skilled, well-paying jobs.

A second factor is that companies in the United States distribute a smaller share of their bounty to the middle class and to the poor than do similar companies elsewhere. Top executives make substantially more money in the United States than in other wealthy countries. Labor unions are weaker and consequently unable to negotiate higher wages for employees.

Finally, governments in other developed countries are more active in setting higher minimum wage requirements and in redistributing income to raise the take-home pay of low- and middle-income households.

Beyond these possible contributing factors, one could certainly argue that a root cause is the globalization trend that has played out over the last generation. The rise of communication technologies such as the internet have enabled world trade and job outsourcing to explode. Worldwide income equalization is one inevitable consequence, and being at the top, American incomes had nowhere to go but to stay flat or drop. Whatever the causes, the stagnation of income has left many Americans dissatisfied with the state of the country. According to the Times, only about thirty percent of people polled believe the U.S. is headed in the right direction.

Even if you are among those who have prospered over the last several decades, this shift should be of concern to you as well. History has shown that in countries without a strong middle class, the likelihood of major social unrest increases significantly. One only has to visit certain Latin American countries to observe what life can be like when there are rich and there are poor, but few citizens in the middle. How would you enjoy living in a beautiful home surrounded by barbed wire? And needing bodyguards whenever you went out?

Income inequality is the kind of long-term economic challenge that does not lend itself to simplistic sound bite-oriented solutions. One can only hope that government and corporate leaders are up to the task of recognizing the problem and then of addressing it.

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