Middle Class May Be Experiencing Greater Income and Wealth Erosion than Many People Think

ST. LOUIS – The country’s middle class may be under greater financial pressure than many people think, according to the latest edition of In the Balance, a periodic publication from the Federal Reserve Bank of St. Louis’ Center for Household Financial Stability.

Authors William Emmons and Bryan Noeth, senior economic adviser and policy analyst at the center, present two ways of measuring the financial health of the middle class. The first method – the one traditionally used by economists – simply ranks all families by their income (or wealth) and then looks at those in the middle to gauge how the middle class is faring. Among the problems with this method, the authors say, is that families can be classified as middle class one year and not the next; they could also qualify as middle class in income but not in wealth (net worth). 

Based on their earlier work analyzing the demographic determinants of income and wealth during the last quarter century, the authors propose a definition of the middle class using demographics – age, educational attainment and race or ethnicity. Using this method, the middle class is most likely to be composed of families headed by someone at least 40 years old who is white or Asian with exactly a high school diploma or by someone who is black or Hispanic with a two- or four-year college degree.

Using their demographic definition of the middle class, the authors find that the typical middle-class family has been slipping down the income and wealth rankings since 1989, when their data begin. The median middle-class family had income and wealth levels in 2013 well below the levels they experienced in 1989, while the median income and median wealth within the entire population was little changed during that period. Using the more traditional method, the median income rose slightly while the median net worth of American families declined a small amount between 1989 and 2013.

The authors conclude: “In effect, the bar has been rising to remain near the middle of the income and wealth distributions. The growing importance of college degrees and other advantages more commonly enjoyed by white and Asian families are contributing to significant downward pressure on the relative standing of less-educated and historically disadvantaged minority families. A simple rank-based definition of the middle class cannot shed light on any of these or the other important forces shaping the economic and financial lives of American families.”

To read the entire edition, see https://www.stlouisfed.org/publications/in-the-balance/issue11-2015.