America's Middle-Class Has Been Shrinking, But It's Because So Many Middle-Income Households Have Become Better Off

by: Mark J. Perry

incomeshares incomeshares2 econ

On his Money Illusion blog, Scott Sumner has a post titled "America's 'middle class' shrinks, as many move into the upper middle class," where he points out a problem with the bottom chart above from the Financial Times, or at least a problem with how that change in US household income over time is described in the article titled "America's Middle-class Meltdown: Core shrinks to half of US homes." Here's how the Financial Times describes the bottom chart above:

America's middle class has shrunk to just half the population for the first time in at least four decades as the forces of technological change and globalization drive a wedge between the winners and losers in a splintering US society. The ranks of the middle class are now narrowly outnumbered by those in lower and upper income strata combined for the first time since at least the early 1970s, according to the definitions by the Pew Research Center, a non-partisan think-tank in research shared with the Financial Times. The findings come amid an intensifying debate leading up to next year's presidential election over how to revive the fortunes of the US middle class.

Here's Scott's critique of that description:

Do you see the problem? The main reason that the middle income group has shrunk is that more and more Americans have incomes above the (arbitrary) cut-off point, and fewer and fewer are either "middle income" or poor. The middle class is shrinking because we are becoming better off.

The top two chart above, featured on CD last December ("Charts of the day: Another look at how America's middle class is disappearing into higher income households") supports what Scott is saying, by showing that America's lower-income and middle-income households have declined as a share of all US households between 1967 and 2014, while the share of high-income households keeps increasing.

Specifically, the top chart shows three income groups: a) low-income households with income of $50,000 and below (in 2014 dollars), whose share of US households declined by 11.4 percentage points from 58.2% in 1967 to 46.8% in 2014, b) middle-income households with income between $50,000 and $100,000 (in 2014 dollars), whose share of all households declined by 5.2 percentage points from 33.7% to 28.5% between 1967 and 2014, and c) high-income households with income of $100,000 and above (in 2014 dollars) whose share increased by a factor of more than three times (and by 16.6 percentage points), from 8.1% in 1967 to 24.7% in 2014.

The bottom chart shows three slightly different income groups: a) low-income now described as households with incomes of $35,000 and below (in 2014 dollars), whose share of US households declined from by five percentage points from 38.7% in 1967 to 33.7% (in 2014 dollars), b) middle-income, now described as households with income between $35,000 and $100,000 (in 2014 dollars), whose share of all households declined by 11.6 percentage points from 53.2% to 41.6% between 1967 and 2014, and c) high-income households with income of $100,000 and above (in 2014 dollars) whose share increased by a factor of more than three times (and by 16.6 percentage points), from 8.1% in 1967 to 24.7% in 2014 (same as before).

Bottom Line: Over the last nearly 50 years, one of the most impressive (and unreported) gains for US households has been the three-fold increase (from 8.1% in 1967 to nearly 25% in 2014) in the share of high-income US households earning $100,000 or more per year, which accounts for the declining share of low-income and middle-income households (by two different measures). Yes, the ranks of the middle-class have been shrinking over the last generation or more as the Financial Times points out. But as Scott Sumner reminds us, and as all three charts above show (despite the Financial Times' misinterpretation of the income trend), America's middle-class shrinkage isn't best described as a "middle-class meltdown" - rather, it's been more of a "middle-class uprising," as average US households have become better off by moving into higher income groups over the last 50 years.