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Why The Fed Thinks The Middle Class Is In Worse Shape Than You Think, In Four Charts

Whether it’s Japanese citizens on the verge of “slipping into poverty” under a policy the PM so humbly named after himself or UK school children short on socks and suffering “Victorian” conditions, there are signs aplenty that the monetary policies adopted by the world’s most influential central banks are widening the gap between the wealthiest members of society and everyone else by inflating the prices of the assets that are most likely to be concentrated in the hands of a relative few. A new study from the St. Louis Fed suggests that the Middle Class in America is “under more pressure than you think.” 

From the St. Louis Fed:

To avoid the ambiguity and temporal instability associated with an income- or wealth-based definition of the middle class, we focus on three persistent characteristics of every family head—his or her date of birth (hence, age at a given time), highest educational attainment, and race or ethnicity. We think of a middle-class family as one whose demographic characteristics suggest it is unlikely to be persistently rich or poor…

 

We define three groups of families headed by someone 40 or older as follows:

  • Thrivers (33 percent of families 40 or older in the 2013 SCF): Families likely to have income and wealth significantly above average in most years; these families are headed by someone at least 40 years old with a two- or four-year college degree who is non-Hispanic white or Asian;
  • Middle class (44 percent of families 40 or older in the 2013 SCF): Families likely to have income and wealth near average in most years; these families are headed by someone at least 40 years old who is white or Asian with exactly a high school diploma or black or Hispanic with a two- or four-year college degree; and
  • Stragglers (23 percent of families 40 or older in the 2013 SCF): Families likely to have income and wealth significantly below average in most years; these families are headed by someone at least 40 years old with no high school diploma of any race or ethnicity and black or Hispanic families with at most a high school diploma.

The results, while sad, certainly did not surprise us. 

The median incomes of thrivers and stragglers were slightly higher in 2013 than in 1989—about 2 and 8 percent, respectively. The median income of the demographically defined middle class, on the other hand, was 16 percent lower in 2013 than in 1989. The median wealth of thrivers was 22 percent higher in 2013 than in 1989, while the typical family in each of the two other groups experienced large declines, of 27 percent among the middle class and 54 percent among stragglers.

Figure 3 shows that the median middle-class family as we define it suffered a steady erosion of income relative to the family at the exact middle of the overall population of families in each year's ranking (termed P50, for the 50th percentile).

Figure 4 shows that the middle-class decline was slightly worse in terms of wealth. The cumulative growth shortfall for the median demographically defined middle-class family was about 24 percent compared to overall median wealth. The median demographically defined middle-class family had wealth at the 53rd percentile in the 1989 distribution (not shown in figure). By 2013, the median middle-class family ranked at the 47th percentile. The median straggler family also fell far behind its benchmark, which we take as the 25th percentile of the overall wealth distribution. The median straggler family ranked at the 30th percentile of wealth in 1989, falling to the 26th percentile in 2013.