On This Dwindling Middle Class

While the economy has surpassed its prerecession peak and is 16% larger than it was a decade ago in real terms, real median household income fell by 7% from 2000 to 2010, per data from the Census Bureau. Additionally, the median household income, $51,006, is lower than that of 1997, when it came to $51,705. It's no wonder folks in the the typical U.S. household have felt they aren't getting ahead.

The Pew Research Center cataloged the issues facing the middle class in a report (PDF) titled, "Fewer, Poorer, Gloomier: The Lost Decade of the Middle Class." Reflecting the above-noted decline in the median household income, 85% of the middle class say that it is "more difficult" to maintain their lifestyle today than it was 10 years ago. Just 9% said it was "less difficult," and 4% said it was "about the same."

There are also fewer people in the middle class. Pew defines the middle class as households with incomes of at least two-thirds of the median income (adjusted for household size, as that has changed over the years) to no more than double the median income. This includes households with incomes from $39,418 to $118,255 in 2010, according to Pew. According to that definition, the middle class constituted 51% of all adults in 2011, down from 61% in 1970. The middle-income tier commanded 45% of the nation's income in 2011, down from 62% from 1970.

Some have moved up, while others have moved down. The upper-income tier rose to 20% of all adults in 2011 from 14% in 1970, whereas the lower-income tier increased to 29% of the adult population, up from 25%. The upper-income tier takes in 46% of national income, up from 29%, while the share of national income going to the lower tier was 9%, down from 10% four decades prior. So the nation has become more polarized when it comes to income and wealth distribution, with more haves and have-nots vs. those in the middle.

What does this mean for economic growth going forward? First, one might look at the growing ranks of the upper-income tier, and construe this as good news -- and it is, in the sense that there are more of them and they earn more money as a group. Still, on an individual basis, their incomes have dipped in real terms. Indeed, from 2000 to 2010, the median income of lower-income households fell by 8% (not annualized), middle-income households lost 5% and upper-income households saw their income decrease by 6%. Aggregate consumer incomes grew over that decade because the population increased.

Consumption patterns may shift as well. Middle-class consumers tend to be, well, consumers. They have more buying power than lower-households, they consume more and they save far less as a percentage of their incomes than do upper-income households. This may have restrained consumer spending from what it would have otherwise been. In other words, having a hypothetically bigger middle class with growing middle-class household incomes might mean a stronger economy than our reality of a growing upper class with shrinking upper-income household incomes.

What is the likely culprit, and how can it be "fixed?" Since incomes across the class spectrum have fallen in real terms, it pays to look at demographics of where incomes have shrunk the most.

The determining factor, it seems, is education. Those with a college degree have seen their incomes dip only modestly in the past decade, while their share in the combined middle- and upper-income tiers shrank by just 1 percentage point. It was this group, moreover, which constituted those moving from the middle- to the upper-income tier. On the other hand, those with just a high school diploma, or less education than that, have seen their incomes shrink the most. They also dropped out of the middle class in disproportionate numbers.

Education is needed to compete for jobs in an increasingly knowledge-based economy. Given globalization, a more educated U.S. workforce with better skills than our competitors is needed to expand our nation's share of global income and wealth, and thus grow our economy.

Yet education is an individual decision that can affect not just a household, but our economy and our national competitiveness as well. The good news is that college enrollment has increased in recent years, perhaps attributable to the weak economy. Still, recent trends for younger adults don't help those in later stages of adulthood who may lack a college degree -- and it is very hard for policymakers to fix workforce education and training by decree or any amount of quantitative easing.