Squeezing the middle class

There is growing concern over both income inequality and the plight of the middle class. But most studies of these questions rely on cross-sectional data, rather than tracking the same people over time.

In this paper I examine changes in income and class position over two fifteen-year periods (1967 to 1981 and from 2002 to 2016). Specifically, for individuals aged 25 to 44 at the start of these periods, I use data from the Panel Study on Income Dynamics (PSID) to examine:

• Group Income growth (average)
• Individual Income losses and gains
• Changes in the size of income classes
• Transitions between income classes
• Income class composition by race
• Income class composition by education

Comparing the two periods, the main findings are as follows:

• The median income growth experienced by prime-age Americans over a fifteen-year period has been cut by almost two thirds, from 27% to 8%.
• The proportion experiencing a large income loss has more than tripled, from 4% to 12%.
• The upper middle class has expanded significantly, while the “middle” middle class (MMC) has shrunk from 50% to 36% .
• Income growth at the top of the distribution has been almost twice as fast as in the middle (48% at the 95^th percentile, compared to 26% at the median).
• Upward mobility out of poverty has declined, from 43% to 35%.
• Downward mobility from the MMC has doubled, from 5% to 11%.
• The proportion of Black Americans in the upper middle class has increased significantly, from just 1% to 14%. But large race gaps remain: 39% of whites are in the upper middle class or higher.
• More education has become more closely associated with a higher income; 59% of those with a BA+ are in the upper middle class or higher, up from 37%.

The analyses presented here confirm the broadly accepted picture of rising income inequality and slowing income growth for middle-class Americans. But a few additional points are worth drawing out. First, while the benefits of economic growth have not accrued equally, they have not gone solely to the top 1%. The upper middle class has grown. Second, the main reason for the shrinking of the middle class (defined in absolute terms) is the increase in the number of people with higher incomes. Third, while there has been some narrowing of racial income gaps, and an improvement in the position of Black people in particular, they remain wide. Fourth, education matters more than ever in terms of securing a place in a high or even middle income bracket. Fifth, there has been a significant increase in the number of Americans experiencing downward mobility. Sixth, the growth of median incomes for working-age adults over a fifteen-year period has declined sharply.

The advantage of using longitudinal data is that it tracks the actual economic trajectory of individuals over time. It may therefore provide a better guide to how Americans, especially those in the middle class, experience their own economic position and progress. People are likely to use their own economic history as a benchmark for their progress, as well as an assessment of how well other people are doing. The big winners in recent decades have been those in the mainly college-educated upper middle class. Slower income growth for of the rest of the population, combined with a heightened risk of losing economic ground over time, may help explain the current discontent of many in the American middle class.

Read the full report.

The author gratefully acknowledges the participants at the Brookings seminar “Stalled or Rising? Examining Intragenerational Mobility in the U.S.” especially Stephanie Aaronson who acted as discussant to the paper, as well as Richard V. Reeves, Ariel Gelrud Shiro, Becca Portman, and Hannah Van Drie.

The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. He is not currently an officer, director, or board member of any organization with a financial or political interest in this article.