The chasm of inequality: Why is the middle class shrinking?

AdamIn PewResearchCenter’s report (2015:1) they argue that lower and upper-income U.S households now outnumber the middle for the first time in decades. Despite financial gains the middle class has lost their majority income share to the upper classes and “the share of American adults living in middle-income households have fallen 61% in 1971 to 50% in 2015” (PewResearchCenter, 2015:1). However, this is not one isolated case as recent evidence suggests that Britain’s middle class is “being swiftly eroded by a new and disturbing economic reality”(McLaren,2013) with nearly 60% of Brits “defining themselves as working class” (McLaren,2013). @ucdpolitics student, Adam Costello argues that this is a disturbing trend, and that the decline of the middle class raises one very important question, why is it happening?

There is a growing body of evidence that the incomes of the middle class are experiencing a dramatic reversal of fortune. Frank (2016: 8-10) shows that the U.S middle 20 percent have witnessed a significant drop in the increase of their incomes. Economists will claim that Americans today are “better off” than they were thirty years ago but unequal distribution has resulted in the majority of this increase going straight to the upper strata. This correlates with the research of Ortis and Cummins (2011:15) of 141 countries where middle class incomes had either declined or remained unchanged over two decades.

This can be correlated with a decline in the overall value of labour within the economic sphere. Piketty (2014:221-222) utilises his concept of a capital/income ratio to reveal that the share of national income from labour has dropped steadily in most advanced countries. In the U.S manufacturing, which has traditionally been the employer of those with low to medium level skills, is contracting as its employment share has decreased as well as the wages of those remaining (PewResearchCenter,2015:3).Seery and Arendar (2014:75) claim “the prevalence of ‘low road’ jobs in profitable supply chains” is responsible for this contraction here and elsewhere as multinational companies move their manufacturing wherever labour is cheapest.

To delve deeper into the role of companies, Seery and Arendar (2014:73) firmly blame the collapse of labour value on their refusal to pay a “living wage”. The problem of inadequate wages may be perceived as being a third-world issue but in reality “poverty wages” are prevalent in middle and rich-income countries such as Vietnam and the U.S (Seery and Arendar, 2014:75-76). Apart from relocating abroad to reduce wages they also employ workers on non-fixed hour contracts meaning workers have no entitlement to benefits including sick leave and can be quickly dismissed. Corporations justify these inequalities on grounds such as that increasing the minimum wage would result in higher prices for consumers however this is hypocritical since the incomes of senior executives have increased noticeably.

A key variable in the relationship of unequal income distribution is the decline of unions. In Jaumotte and Buitron’s report (2015:27) they conclude that de-unionization has “contributed to the rise of top earners’ income shares and less distribution, and eroding minimum wages increased overall inequality considerably”. Collective bargaining has been proven to increase prosperity by increasing wages and by protecting its member’s benefits. Pyke (2013) makes the contrast clear by using an analysis of U.S census date that found a 0.6% difference in the share of total income for the middle class in the least and most-unionized state which amounts to “over $2 billion, or almost $700 per middle class household”.

Governments have played a role in this by refusing or stripping unions of legitimacy in the eyes of the law. Culpepper and Regan (2014:724) note that in Ireland and Italy the collapse of union influence has been due to their inability to persuade countries to back them because they “have neither the carrots needed with which to attract the governments to incorporate them into policymaking nor the sticks with which to attract them”. Furthermore, many wealthy companies use their influence to lobby politicians to prevent the establishment of labour laws. Without states backing unions by intervening on their behalf or implementing favourable policies then they lack the coercive power or clout needed to convince workers to join.

The wealth of the middle class has witnessed a simultaneous stagnation in overall value. Between 1983 and 2013 American middle class wealth was “essentially unchanged, rising only 2% to $98,057” (PewResearchCenter, 2015:6) even though median wealth had “increased by 43%” from 1992 to 2001” (PewResearchCenter, 2015:6). The Great Recession is primarily responsible due to the subsequent contraction that erased any gains made by middle-income households over the past thirty years.  However, since wealth itself is merely total assets minus total debts each of these must be studied independently to properly understand this decline.

Over investment in housing has been the primary source of their net asset value dropping. In the U.S, middle class possessing a home between 2007 and 2013 “accounted for 40% to 50% of the total mean value of assets” (PewResearchCenter, 2015:6). Landy(2013) raises how detrimental this was when the bubble burst in 2006 and collapsing housing prices “erased over $6 trillion in accumulated household wealth”. The middle’s reliance also meant a failure to diversify their financial assets into products including bonds, stocks and equities which accounted for less than a fifth of total assets (PewResearchCenter,2015:6). The consequences of this became apparent when the American stock market rebounded and those who had invested in these assets, such as upper-income households, were quickly able to rebuild their wealth (Landy, 2013).

At the same time, the middle has witnessed a staggering increase in their debts over the years. Landy (2013) claims that pre-recession middle-income earners were lulled into accumulating debt by increasing house values and cheap credit. This resulted in a situation where their debt level had risen 170% between 1983 and 2007 whereas the value of their assets only increased by 80% (PewResearchCenter, 2015:6). After the Great Recession, middle-income families have reduced their burdens by as much as 20% however they are still heavily indebted and cannot offset falling asset values (PewResearch,2015:6).

In conclusion, the middle class faces a bleak future of attrition due to economic polarization. Pressman(2007:724) states how serious this is by reiterating a wide range of writers from Aristotle to Barro who all claim that a superior middle class in terms of size and economic influence is central to democracy and social stability. As the middle class fades, an unbridgeable divide is opening up between the rich and the poor of society. Wealth inequalities are already at unsustainable levels with the top decile possessing “nearly 3,000 times the mean wealth of the bottom decile” (Ortiz and Cummings,2011:15). If that wasn’t grim enough, Piketty (2014:263-264) predicts that top decile will claim 60% of all income by 2030 in the U.S while the bottom half will possess less than 20% which is a level of inequality unwitnessed since 18th century France on the eve of the French Revolution. If the middle class is not saved now, then these unjustifiable inequalities will continue to grow and as they do a violent backlash from the bottom 99 per cent of the world’s population will become inevitable.

Adam Costello is a Second Year student studying Politics and International Relations in UCD.  He has a special interest in globalisation and its impacts on Western societies.

 

Bibliography

PewResearchCenter (2015) The American Middle class is losing ground. Available at http://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/ [Accessed 26 October 2016]

McLaren, J. (2013) Britain’s disappearing middle class. Available at http://www.macleans.ca/news/world/stuck-in-the-middle-with-no-one/ [Accessed 27 October 2016]

Frank, H.R. (2013) Falling behind: How Rising Inequality Harms the Middle Class, with a New Preface.Berkley, California, Los Angeles. University of California Press.

Ortiz, I., Cummins, M. (2011) Global inequality: Beyond the Bottom Billion-A Rapid Review of Income Distribution in 141 Countries. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1805046 [Accessed 26 October 2016]

Piketty, T. (2014) Capital in the Twenty-First Century. London, Harvard University Press.

Seery, E. and Arendar, A.C. (2014) Even it up: Time to end extreme inequality.[Online]. Oxfam. Available at https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/cr-even-it-up-extreme-inequality-291014-en.pdf [Accessed 27 October 2016]

Jaumotte, F., Buitron, C.O. (2015) Inequality and Labor Market Institutions. [Online]. IMF. Available at http://www.imf.org/external/pubs/ft/sdn/2015/sdn1514.pdf [Accessed 25 October 2016]

Pyke, A. (2013) The Middle Class Does Better In States With Lots of Union Members. Available at https://thinkprogress.org/the-middle-class-does-better-in-states-with-lots-of-union-members-37b3b06788b1#.boyqogc9j [Accessed 28 October 2016]

Culpepper, P.D. and Regan, A. (2014) ‘Why don’t governments need trade unions anymore? The death of social pacts in Ireland and Italy’. Socio-Economic Review 12 (4). [Online]. Available at http://ser.oxfordjournals.org/content/12/4/723.full.pdf+html [Accessed 26 October 2016]

Landy, B. (2013) A Tale of Two Recoveries: Wealth Inequality After the Great Recession. Available at https://tcf.org/content/commentary/a-tale-of-two-recoveries-wealth-inequality-after-the-great-recession/ [Accessed 28 October 2016]

Pressman, S. (2007) ‘The Decline of the Middle Class’. Journal of Economic Issues 41 (1). [Online]. Available at http://www.tandfonline.com/doi/pdf/10.1080/00213624.2007.11507000?needAccess=true&instName=University+College+Dublin [Accessed 27 October 2016]

 

 

 

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