The Pew Research Council tells us the American middle class is in decline, suffering through a “lost decade” that has left its members “fewer, poorer, gloomier.”
There’s one problem with the assessment, says Scott Winship of the Brookings Institution. It “badly misrepresents the economic standing of the middle class.” Winship explains in the latest National Review.
[T]he biggest shortcoming of the PRC analysis is that, like the Krueger figures that preceded it, it conceives the middle class in relative terms: meaning that, as Americans become wealthier, the price of admission to the middle class increases over and above the increase in the cost of living. If inflation-adjusted median household income rises by 20 percent, then the entry point to the middle class does too. In the PRC study, it took $9,500 more in income — after adjusting for increases in the cost of living — for a family of three to make it into the middle-income group in 2010 than it did in 1970. In 100 years, Americans will likely be much richer than they are today. Yet the share of the population calling itself middle class will probably remain large, because people will define themselves relative to their peers. If the share of Americans who consider themselves lower or lower middle class ends up somewhat higher than it is today but everyone is much better off in absolute terms, will that be a problem?
It is possible to defend PRC’s definition of the middle class by noting that relative status matters to people — one wants to “keep up with the Joneses.” Economist Robert Frank has catalogued studies showing that people’s happiness depends not just on their absolute level of material well-being but also on their standing compared with others. But it is far from clear that relative inequality matters as much to people as their absolute level of income, and in any case PRC makes no effort to defend its definition.
The definition had the odd consequence that “middle-income” adults became scarcer, and “lower-income” adults more prevalent, even though the median income within each group rose by around 30 percent over the 40-year study period. When I reran the PRC analyses but kept the lower boundary of the middle class at its inflation-adjusted 1970 level, I found that the share of adults poorer than “middle income” declined from 25 percent in 1970 to 18 percent in 2007. That is, even as the fraction of American households making less than two-thirds of the current-year median held steady or rose, the share making less than two-thirds of the 1970 median fell significantly.
