Is The Middle Class Really Disappearing?

By Andrew Beattie | October 11, 2010 AAA
Is The Middle Class Really Disappearing?



The chances are better than 50-50 that you identify yourself with the middle class. You can take some comfort in the fact that you are in the majority, but you may be dismayed to find out that your ranks are diminishing. In fact, if the doom sayers are to be believed, you're vanishing faster than ever. What does this mean? Let's take a look at this popular sound bite in a little more detail. (Are you middle class or do you just think you are? Find out in 6 Signs You've Made It To The Middle Class.)

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What Is The Middle Class?
Nailing down the definition of middle class can be as frustrating as folding water. At one time, middle class was synonymous with working class, another definition that is as clear as mud. Working class meant the people who worked in factories and lower-level office jobs. They were able to afford a home, a car, a TV and had a company pension to look forward to. Middle class life has all the same trappings – with some modern updates like a home entertainment system and a computer – but the job description has been scrapped.

In a way, dropping working class as a definition was an unfortunate move. The working class was making progress in terms of real income, and some were even moving into tax brackets that were considered "professional" territory. Instead of a specific type of job, we now have income thresholds – and this is where it gets sticky.

The Sliding Scale
There are many ways to measure the middle class. One is to simply put the population on a bell curve according to income and set a lower and upper number that contains half the population. This is how you get definitions of middle class like a household earning between $30,000 and $130,000 annually. Presumably, the household with the extra $100,000 in income will be living a very different life than the household with only $30,000, so the bell curve is further cut up into brackets of upper, lower, and middle middle-class. Using this type of measurement, the middle-class can never vanish, but the internal mix will fluctuate as the number of people within each middle-class bracket changes.

In short, the bell curve measure doesn't allow for the vanishing middle class. It will chase average incomes lower or higher, keeping people securely in their place. During the asset bubbles in the late '90s and 2004-07, many people who would have previously been considered "upper class" or "wealthy" were swept into the middle class as the bell curve caught up with them. The reverse has been true since the mortgage meltdown, leaving some people who feel like they're middle class suddenly in the wealthy category (or at least "well-to-do").

The Lifestyle Measure
The most popular measure of the middle class is the lifestyle measure – another holdover from the working class. In one sense, these landmarks have changed very little, in another they have changed drastically. These still include a house, a car (or two), a collection of appliances, an education for the kids and so on. The difference is the cost. Over the last 30 years, the amount of disposable income being eaten up by each of these categories has shifted.

You can blame China for stealing jobs all you want, but it is also true that China helped the middle class swell as measured by lifestyle. Thanks to China and other low-cost producing nations, we pay less for many basic goods. According to studies done by Elizabeth Warren – currently the special advisor for the Consumer Financial Protection Bureau – we now pay less for appliances, clothing, and food. Unfortunately, the areas where costs have increased from 1972-2004 are big-ticket items like mortgages (76%), healthcare (74%), cars (52%), childcare (100%) and taxes (25%). As a result, the middle class is using more of their income and debt than ever before to reach middle-class lifestyle benchmarks. (For tips on how to stretch your paycheck further, read Increase Your Disposable Income.)

The Middle Class Destroyer
So what is causing the middle class, as measured by lifestyle, to vanish? If you're thinking it has something to do with housing, you'd be right. With so many people seeking to join the middle class, demand for housing increased, causing the price of houses to shoot up in value – especially with the help of banks, subprime lending and government initiatives of housing for all. This, in part, is how the real estate bubble formed. This spike in one of the basic components of middle class lifestyle meant more debt, more home-related spending and less saving than any time before. (For more insight, see What is a subprime mortgage?)

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Bottom Line
This precarious balancing act couldn't continue forever. Since 2007, middle class people have been losing their jobs, houses and cars in record numbers. Even those who are staying afloat are doing so by eliminating many of the perks of middle class – paying for a child's education, a second car, a larger house and so on. In this sense, the middle class as we knew it in 2005 is indeed disappearing. The new definition of what is middle class is being worked out right now as people leave their McMansions and re-evaluate what they can and can't live without.

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