On Wednesday CNNMoney reported that it had been “a rough 10 years for the middle class.” Median household income, when adjusted for inflation, has actually gone down in the last ten years. Since most Americans tend to define themselves as being in the middle class, this is clearly a cause for worry. The numbers indicate that in 1990, the median household income was about $48,000. By 2000 it had risen, in real terms, to $53,164. However, in 2010 the median household income had dropped all the way to $49,000, resulting in a real loss in household purchasing power.
Am I Actually In the Middle Class?
This is a fair question. Over 75% of Americans consider themselves to be in the middle class. However, since this concept of the is mostly a social construct, they are really just saying that they know people that are both richer and poorer than they are. Heck, I just made that 75% statistic up. It seems to be just as valid as the claims people make about the term. Politicians, economists, pundits, and reporters use the middle class and its misfortunes as a rallying cry. Whether trying to rally voters, business owners, or television viewers, the middle class concept has been widely used to inflame passions and create social change.
Middle Class Definitions
CNNMoney’s definition of the middle class, as used in their report, is actually fairly narrow. To quantify the middle class CNN took the median household income in America over the last ten years and measured it. Median household income in America is actually only one household. While median is a better number than the mean in this instance, this number still doesn’t capture the income skew in America.
Investopedia.com, normally a good resource for financial definitions, provides only a verbal definition explaining that the middle class is the central piece of America’s social hierarchy. There is no income definition, no percentages, and nothing that could help you quantify whether you are in this group or not.
ForeignPolicy.com wrote a piece on the myth of the middle class which highlighted the varying conceptions of the term across the world. Some definitions consider those making as little as $10 a day to be part of the middle class. For a concept as widely used as the middle class, it is certainly vaguely defined.
The Real Importance of a Drop in Median Household Income
Despite the title of CNNMoney’s piece, there is a lot of economic value to be gleaned from the fact that real median household income fell in the past decade. First, these numbers seem to indicate that the income skew in America continues to increase. Despite policies intended to benefit the middle class, the richest in America continue to garner more of the wealth. With GDP rising over the last decade, if median household income has dropped that indicates that the concentration of income and wealth at the top is increasing.
The numbers also indicate that sectors that employee middle class workers have contracted in the past decade. The housing sector, which employed a number of people in America whose income was near the median income, could account for some of the losses. Other job losses in other sectors, automobile manufacturing for instance, have also forced median income down. As companies continue to push manufacturing and service jobs overseas, those in the middle of America’s social strata will continue to be strained.
The Way Forward
As you look for economic indicators to gauge the direction of the economy, median household income is one good measure to look at. However, you want to also consider GDP growth in general, interest rates (and the yield curve), jobs data, and of course changes in government policy. Thinking of yourself as being middle class may provide you with some emotional benefit, but ultimately it is the major macroeconomic indicators that dictate where the economy is going. Be wary of blanket claims made about the middle class unless they are backed up by the proper macroeconomic statistics.