How the Middle Class Is Shrinking

It’s not about to disappear, but financial strains are reshaping American society.

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Woodstock. The moon landing. The escalating war in Vietnam. The year 1969 was momentous enough, yet in retrospect it seems to have represented one additional pivot point in U.S. history: the high-water mark for the middle class.

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As America limps to the end of the first decade of the 21st century, the middle class that once formed its core strength seems to be in tatters. The manufacturing jobs that once helped millions get ahead have been in sharp decline for a decade, and now number one-third less than they did in 2000, despite a growing population. Wages have fallen as jobs have migrated overseas, with the typical family's income, after inflation, down 5 percent since 2000. News headlines warn that the middle class is becoming "extinct" or being "wiped out of existence." Elizabeth Warren, the head of the government's new financial watchdog agency, has been warning of a middle-class meltdown for a decade, and said recently that "the system is broken and it's crushing families all across this country."

The rhetoric may be overheated, but the latest data confirms that the middle class is in a rut, to say the least. The total number of middle-income families has stayed relatively steady over the last several years, but with population growth, there are proportionately fewer middle earners today than there were 10 years ago. Compared to the year 2000, the middle-income bracket is about 4 percent smaller than it might otherwise be, after adjusting for population growth and inflation. And the low-income bracket is about 7 percent bigger. Still, incomes typically fall during a recession, and it's oversimplistic to say that everybody leaving the middle class is permanently consigned to something worse. Plus, many longer-term gains in living standards are still in place. So while the middle class is clearly under stress, millions of Americans are still much better off than they were 20 or 30 years ago.

The first challenge when evaluating the fate of the middle class is to figure out what the term means in the first place. There's no set definition, and most economists agree that it includes intangibles such as financial stability, aspirations to get ahead, and various comforts. Since those are hard to quantify, the most definitive way to measure the health of the middle class is by income, and the percentage of all earners who fall between the highest and lowest earners—the "middle."

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With help from economist Heidi Shierholz of the Economic Policy Institute, I analyzed Census Bureau data that breaks down household income into nine brackets, going back to 1967, and is adjusted for inflation, which allows apple-to-apple comparisons from year to year. To represent the middle class, I chose three middle brackets that include household income ranging from $35,000 to $99,999. The latest data, from 2009, shows that households with income in that range account for 43.7 percent of all households. That percentage has been shrinking over time. Here's the percentage of all households that middle group, adjusted for inflation, has represented in various years:

2009: 43.7 percent

2000: 45.6 percent

1990: 47.9 percent

1980: 49.3 percent

1969: 53 percent

I listed the figure for 1969 rather than 1970 because that year represented the peak percentage for the middle-income brackets. If you defined the middle class more broadly, and lowered or raised the income threshold (or did both), the peak year would change, but only by a few years. In general, the middle brackets were fattest in the late '60s and early '70s.

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People tend to measure their well-being based on short-term changes, not long-term ones, so it makes sense to compare today's incomes with those in 2000. If income breakdowns today were the same as they were in 2000, here's what would be different:

There would be about 7 million fewer people living in households with incomes below $35,000.

There would be an additional 5.8 million people living in middle-income households.

There would be an additional 1.5 million people living in households with incomes over $100,000. (The numbers don't balance out perfectly because of rounding.)

So compared to 2000 levels, the low-income bracket has swelled, the middle bracket has shrunk, and the upper bracket has shrunk too, though by less. People constantly move up and down on the income scale, and everybody who left the middle bracket didn't automatically fall into the lower bracket. But the numbers make it clear that proportionately fewer people are in the middle bracket, and more people are in the lower bracket.

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It's important to point out that the latest numbers come at the end of a recession, so comparing them with figures from 2000—the tail end of a boom—may exaggerate the gloom. And looking at longer-term changes shows some other important trends that might be more encouraging. Here's the percentage of income represented by the lowest group, the one earning less than $35,000:

2009: 36 percent

2000: 33.7 percent

1990: 37 percent

1980: 40.3 percent

1969: 39.5 percent

So while the low-income group has been getting bigger in recent years, it's still lower today than it was every year between 1967 and 1998. If you put the lower- and middle-income data together, it might seem puzzling: Compared to the '70s and '80, the middle income group today is smaller, but so is the lower-income group. So if people have been leaving both groups, where have they been going?

Upward, that's where. Here's the percentage of households with incomes over $100,000, again, adjusted for inflation:

2009: 20.1 percent

2000: 20.6 percent

1990: 15 percent

1980: 10.4 percent

1969: 7.6 percent

The biggest income change since the late '60s, in fact, hasn't been in the low- and middle-income groups. It's been a huge jump in both the percentage and the number of high-income households. In one sense, that's great news, because the people joining that group have been coming from the lower brackets. That's because the growing U.S. economy has created vast amounts of new wealth over the last 40 years and propelled millions of Americans into high-income households.

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The bad news is that the vibrant growth has fizzled, for the time being at least, and fewer Americans seem to be benefiting from what growth there is. Plus, much of the added wealth over the last couple of decades came from women working more, which raised household incomes but also masked problems like fewer jobs and falling pay for manufacturing workers. There's also a much bigger gap between middle and high earners today than there was in the '60s and '70s, which means the wealthy are capturing a larger and perhaps unfair share of the nation's wealth. "The middle class is a lot farther away from the very top than they were 40 years ago," says Shierholz. "So even if typical households were gaining ground in absolute terms, they'd be losing out relative to households at the top."

A middle-class revival depends on two things: A healthy and growing economy that creates more wealth for everybody, and middle earners able to capture a share of the new wealth that's at least proportionate to their size as a group. It might seem improbable, but if America's middle class is as durable as we'd like to believe, then it may already be mounting its own comeback.

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  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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