MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: Are we losing the middle class?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

Traditionally, most North Americans have thought of themselves as middle class. Many historians argue that it's been the large group of households in the middle — not poor but not rich — who have contributed greatly to the United States' prosperity.

However, many are experiencing the unsettling feeling that the large middle class is disappearing, much like the manual typewriter, rotary phone and VCR. In its place are left the poor and rich, with very little social glue in between.

If this is true, can it bode well for our country and society?

One problem with deciding whether the middle class is disappearing is simply defining middle class. Although scholars, journalists, commentators and politicians all talk about the middle class, there's actually no official definition of the group. So if we can't define middle class, how do we know if it's changing?

One way around this issue is to look at what's happened to households of different income levels over the decades. Some recently released U.S. Census data allow just such an examination, at least from 1967 to 2005.

The Census data are valuable because they allow “apples-to-apples” comparisons. I think you'd agree that in examining income changes over time, it's incorrect to treat, for example, a $35,000 salary in 1967 as equal to a $35,000 salary in 2005. Obviously, price increases between 1967 and 2005 make the purchasing power of $35,000 in 2005 much less than the purchasing power of $35,000 in 1967. Fortunately, the Census folks recognize this and have made the appropriate adjustments to permit direct income comparisons.

The Census data are divided into nine low-to-high income categories in which the incomes in each category have the same purchasing power over time. In looking at the percentage of households in each category in 1967, then in 2005, the Census analysts indeed found some major shifts in the distribution of income, but perhaps not in the way you might expect.

There was a lower percentage of households in each of the three lowest-income categories (household incomes up to $15,000 in today's purchasing power). The percentage of households in these three groups dropped from 21 percent to 15 percent between 1967 and 2005.

There was also a lower percentage of households in each of the three middle-income categories (household incomes between $15,000 and $50,000 in today's purchasing power), with the collective percentage falling from 51 percent to 39 percent. These three income groups constitute one definition of the middle class; so by this calculation, the middle class did shrink!

The biggest surprise — at least to this economist — is what happened to households in the higher-income categories. The percentage of household in each of the upper three income groups — household incomes above $50,000 in today's purchasing power — increased, some substantially. The percentage of households earning between $75,000 and $100,000 doubled in the 38 years, and the percentage of households earning more than $100,000 quadrupled! Together, the share of total households with incomes above $50,000 jumped from 28 percent in 1967 to 46 percent in 2005.

Statisticians call what's happened to household incomes an “upward shift in the income distribution.” More households moved up the income ladder, and those at the top end (upper three income categories) now outnumber those at the lower end (lowest three income groups) by three-to-one.

Yet there are also fewer households in the middle, and with this change has come an increase in income inequality. With fewer middle-class households, the gap between upper- and lower-income groups increased. Other Census data show upper-income households experienced much bigger income gains than lower-income households in recent decades.

So the good news is that while the middle class became relatively smaller since the late 1960s, lower-income households are also a smaller share of all households. And many more households are now in the upper-income categories.

The bad news is that the distance between those who have higher incomes and those who don't widened.

You decide if the net result is a plus or a minus.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html