The middle class is struggling

The share of the middle class in the societies of the most developed countries has decreased from 64 to 61 per cent in the last three decades.
The middle class is struggling


The middle class is still the foundation of the economic and social development of every country. It is made up of the most enterprising citizens capable of creating businesses, highly-skilled professionals, the organizers of services and social life, and the creators of culture. Middle class values motivate citizens to succeed and serve as the bedrock on which society is built. The aspiration to be a part of the middle class drives people to acquire a better education and skills, to take better care of their health, or to participate in culture. In turn, the ability to satisfy these expectations is one of the natural sources of the development of the middle class.

It has to be noted, that the term “middle class” can mean a lot of things. Being a part of the middle class isn’t only based on a given person’s wealth, but also on the sense of self-identification and on sharing the values that middle class usually represents. However, incomes are more easily measurable than people’s values or self-identification. As a result, this simplified but quantifiable income-based concept of the middle class is used in the OECD’s report published in April 2019. In order to avoid misunderstanding, the report does not use the term “middle class”, instead referrs to “middle-income households”.

According to the OECD definition, middle-income households are those earning between 75 and 200 per cent of the median national income. This definition of the middle class is so broad (or, perhaps, the variation in its income is so low) that it includes over 70 per cent of all residents in Iceland, the Czech Republic and Norway. Its share is only slightly lower in the overall populations of Slovakia, the Netherlands and Denmark.

In Poland, according to data for 2016, middle-income households account for 65.5 per cent of the population, which is higher than the average in the OECD countries (61.5 per cent). Meanwhile, the share of middle-income households in their respective societies is lower in countries such as Germany (63.9 per cent), Ireland (60.4 per cent), Canada (58.4 per cent) and the United Kingdom (58.3 per cent). In the United States, the share of middle-income households was only 51.2 per cent in 2016. Middle-income households do not even constitute the majority of the population in somewhat developed countries that are still classified as emerging economies, such as China (48.2 per cent), Chile (47.5 per cent), Mexico (44.9 per cent), Brazil (44.8 per cent), and India (40.2 per cent). The share of middle-income households is particularly low in South Africa, where it only reaches 33.5 per cent of the country’s total population.

In the context of the general discussion on the importance of the middle class, it is worth noting that the societies with the highest share of the middle class also tend to have the lowest share of poor people. For example, in the Netherlands poor people account for only 6.0 per cent of the population, while in Denmark and the Czech Republic their share is even lower and reaches only 5.7 per cent. For comparison, in Poland the share of poor people is 8.6 per cent. In South Africa almost one fourth of the population can be classified as poor.

Due to the high variation in income levels across the individual countries, people who are considered affluent in one country would not even qualify as “middle-income” in another, based on their earnings. In India, the threshold for affluence is an income of more than USD4,400 per year (calculation based on purchasing power parity, USD value from 2010). Meanwhile, in China that amount is not enough to be included in the middle class.

Comparisons between countries even in Europe is not easy. For example, in Hungary the threshold for affluence is an income of more than USD23,200 per year. This is less than the lower limit of middle-incomes in the United States (USD 23,400 per year). In Poland, the category of middle-incomes ranged from USD9,900 to USD26,500. Meanwhile, in Norway and in Luxembourg people earning such amounts would still be considered low-income.

However, members of the middle class in the individual countries are less concerned about international comparisons. What truly frustrates them are the changes concerning their own income, as well as the relations between the affluent, middle-income and poor people that they are observing on a daily basis. Although the shrinking of the middle class has been proceeding for many years, the recent global financial crisis has accelerated the rate of these changes.

The middle class may well be the group most negatively affected by these changes. The report prepared by the OECD indicates that between 2007 and 2016 the median of real incomes among middle-income households in the OECD countries increased at the rate of only 0.3 per cent annually. This is much slower than in the previous decade (starting from the mid-1990s), when real incomes increased at the rate of 1.9 per cent annually. The rate of income growth was also higher in the decade before that (starting from the mid-1980s). During that period it reached 1.0 per cent annually in real terms.

Meanwhile, the growth rate of the highest incomes, and in particular in the even narrower group of the top 1 per cent of the highest earners, was much higher during that time. This group always serves as a reference point for the middle class. For example, in the United States, the share of the top 1 per cent of the wealthiest people in the total income has grown from 11 to 20 per cent in the last three decades. In the OECD countries (this comparison concerns 17 countries), the real income of the top 10 per cent of the wealthiest people grew by over 60 per cent in the years 1985-2016. During that time, the median income in all these countries increased by around 40 per cent. Meanwhile, the income of the bottom 10 per cent of the poorest people only increased by about 20 per cent. This means that the gaps between poor people, middle-income people, and the rich have widened.

At the same time, there was a simultaneous increase in the cost of living, and — which is particularly important for the sense of well-being of the middle class — in the cost of the services that distinguish the middle-class from the poorer strata of society. This relates in particular to the cost of housing (and especially larger flats in better locations), the cost of better (private) education for the children, the cost of (private) health care, insurance, holidays, and even the cost of shopping at more elegant stores.

Assuming the price index of 1996 as 100, the core inflation in the OECD countries (the HICP indicator) reached 80.3 per cent by 2017. During the same time, health care costs increased by 94.3 per cent, the cost of education went up by 132.1 per cent, and housing prices rose by 137.6 per cent.

The increase in costs has become so severe that goods previously available to middle class households have become unattainable after the recent crisis, despite the stabilization or even slight increases in real incomes. This is especially true considering that job security has decreased, and gainful employment is the principal source of income of the middle class. These changes are overlapping with the generational transition. Children entering adulthood in recent years — who have, in general, graduated from better schools — are increasingly unable to reach the standard of living of their parents. In the retiring generation of the baby-boomers, 70 per cent belonged to the middle class of their respective societies, while in the generation of the millennials the share of households belonging to the middle class is only 60 per  cent.

At the same time, many studies indicate that the work performed by the representatives of the middle class — in technical and engineering professions, as well as popular services including trade and banking — will be the most susceptible to being replaced by machines and computers in the coming years. This will lead to further income polarization of societies — there will be a very small percentage of extremely rich people, and an increasingly numerous remaining part of the society. Whether that remaining group will consist of poor people or middle-income households depends on the effectiveness of the economic and social policies implemented in the individual countries.