In the second of three postings on wealth distribution, we look at the mixed fortunes of the world’s middle classes.
“I just had a cup of tea with soymilk,” tweets Dave Ellis. “It was one of the worst decisions I’ve ever made in my life.”
Dave’s tweet, and many, many more, can be found on Middle Class Problems, which makes fun of the daily challenges facing folks in the middle of our societies. In truth, their supposed pretensions and status anxieties have long made the middle classes objects of fun and even scorn. Even John Lennon, raised in fairly comfortable surroundings, turned his back on them and proclaimed himself a Working Class Hero.
Lennon was able to play with his identity, perhaps, because from a social perspective the term that might have described him best – “middle class” – is so vague. By definition, middle class is relative – somewhere between not well-off and very well-off, or rich, but where?
The economic definition is unclear, too (see Box 1): For example, some experts use a relative approach and define a household as middle class if it’s earning, say, between 75% and 125% of median income. (Median income is the point in the income range, after taxes are paid and state transfers received, that separates the top 50% of earners from the bottom 50%.) Other approaches are more global: Goldman Sachs has defined middle class households as having an income of between $6,000 and $30,000 a year. By contrast, experts working in development tend to use a much lower figure – between $10 and $100 a day. Another way to see it is that, after covering the essentials, middle-class households have some money to spare – in other words, they’ve risen above subsistence living and can start thinking about the future.
In any case, defining “middle class” in purely economic terms misses a lot. That’s because to be middle class is as much a question of values as of income or wealth. “Middle class values,” says development expert Homi Kharas, “emphasize education, hard work and thrift.” The goal of all this, adds columnist David Brooks, is improvement – of the individual, family and society: “They teach their children to lead different lives from their own, and as Karl Marx was among the first to observe, unleash a relentless spirit of improvement and openness that alters every ancient institution.”
It’s these values that make the middle classes so important – a reality underlined by recent protest in Brazil and elsewhere. As the OECD’s Horacio Levy wrote, the rallies showed that a “part of the population now feels empowered to demand access to quality services”.
Those calls are only likely to grow: According to Homi Kharas, there were 1.8 billion middle class people in the world (based on the $10 to $100-a-day definition) at the start of this decade. Europe and North America accounted for more than half the total, and the next biggest share was in the Asia-Pacific region, with 28% of the total. By 2030, Kharas estimates that the middle class will total 4.8 billion, and around two-thirds will live in the Asia-Pacific. These, he argues, they will increasingly take over from U.S. consumers as the main drivers of the world economy.
Naturally, any projections like this come with health warnings. It remains to be seen, for example, how the current slowdown in emerging economies will affect the emerging middle classes. Their position is often fragile – $10 a day doesn’t buy a lot of stability – and they are vulnerable to setbacks both in the economy and in their own households in the form of unemployment or illness. But, economic shocks aside, their long-term prospects probably look good.
By contrast, many fear the same can’t be said for developed economies. As Alan Krueger, then-chairman of President Obama’s Council of Economic Advisers, said in June, “economic forces have been chipping away at the middle class for decades”. As we’ve noted before on the blog, income inequality has tended to rise in OECD countries, fuelled by factors that include technological change, globalization and the emergence of winner-take-all economies. In many OECD countries, middle-class incomes have grown less quickly – or even stagnated – compared to those of high earners. Middle-class jobs, too, are under pressure, increasingly vulnerable to technological advances, even in areas like law and tax accounting that might once have seemed immune.
The result, argue some, is a “squeezed middle” – a middle class that grabs a shrinking share of national income and is losing confidence that its children will do better than it’s doing. In the world of middle-class problems, that’s a very big one indeed.
OECD work on income inequality
Divided We Stand: Why Inequality Keeps Rising (OECD, 2011)
An emerging middle class – Mario Pezzini in the OECD Observer
The hurting middle class – Arianna Huffington in the OECD Observer
A hollowing middle class – Peggy Hollinger in the OECD Observer