America’s Dwindling Middle Class

After rising steadily since World War II, the nation’s living standard stumbled in the 1970s and 1980s. Between 1973 and 1985, average real income per household fell 2%, and wage and salary income dropped nearly 10%.

Even more important, this decline was accompanied by income redistribution away from the middle class. The share of households with incomes over $50,000 or under $20,000--the rich and the poor--rose 9% and 8%, respectively, and that of households in the middle dropped 9%.

Contrary to a common view, this wasn’t due to changes in household structure. True, female-headed and non-family households grew sharply between 1973 and 1985, but their incomes also rose. In fact, their income distribution--that is, the percentage of such households in the high-, middle- and low-income categories--came to nearly mirror the national norm.

Nor did the rise of the two-earner family push many middle-income households up the income scale. In 1985, the biggest group of two-earner families made from $35,000 to $40,000 a year--precisely the income range where the largest declines occurred. Apparently, families needed a second income just to preserve their economic status, not to improve it.

The cause of the dwindling of the middle class--and the key to income distribution patterns in the future--is the changing labor market. Since 1973, jobs in high-paying occupations such as management, professional specialties and sales have constituted a rising share of private non-farm employment, at the expense of moderate-paying occupations.

And since 1979, high-paying occupations have fared better against inflation than have moderate- and low-paying jobs, which have been victimized by foreign competition, deregulation and cost control.

At the same time, the share of jobs in middle-income employment categories, such as construction, manufacturing and transportation and public utilities, declined. Mining, where the energy crisis provided jobs, was the only exception among the middle-income industries.

Collectively, these categories went from accounting for 43.5% of all employment in 1973 to 39.2% in 1979 and to 33.2% by 1985. Meanwhile, the share of jobs grew in lower-paying categories such as wholesale and retail trade, finance, insurance and real estate and services.

The middle-income groups also were hit by the rise in the jobless rate from 4.0% in 1973 to 7.2% in 1985. In both years, about 15% of households experienced unemployment. But in 1985, the period of unemployment lasted longer, reducing incomes by 40%, compared to about 30% in 1973.

Another important development was the rise in part-time employees, especially involuntary ones (workers who would rather have full-time jobs), whose ranks swelled 127%. Part-time employment allows managers to lower labor costs and use workers more efficiently, but has a disastrous effect on incomes. Involuntary part-timers often are primary breadwinners, and the rapid growth of this group helps explain the increase in low-income households.

The 1973-1985 period began with low productivity and inflation, but ended with disinflation, global competition and, most importantly, cost control. These three features are likely to dominate the next decade as well, suggesting that belt-tightening has only begun.

Cost control is certain to spread from manufacturing to all sectors of the economy, and second- and third-generation organizational and staffing improvements will build upon the initial gains. While household incomes, spurred by higher productivity, probably will rise by around 1% a year during the next decade--modestly by historical standards, but better than the average annual decline of 0.2% in the 1973-85 period--income polarization is likely to intensify.

Management, professional and sales jobs probably will continue to grow more than other occupations, even if their own growth rate slows as managers themselves become targets of restructuring. The share of moderate-paying occupations will continue to dwindle, but also at a slower rate: As the U.S. trade deficit stabilizes, jobs will no longer flow abroad, but will be hurt by automation as U.S. business strives to regain its competitiveness.

Another factor enhancing U.S. competitiveness is pay moderation--a trend dating back from the early 1980s, when management successfully challenged organized labor, capping wage settlements and reducing union power.

In the next decade, pay moderation should not only endure but spill over to non-union jobs.

In contrast, the pay gains of the higher-paying jobs are likely to widen; firms will be willing to pay more for quality managers, who are indispensable in a highly competitive environment.

Upper-income households also should benefit disproportionately from gains in ownership income (business, investment or interest income), which in coming years is expected to rise much faster than wages and salaries.

The overall effect of these trends likely will be a substantial increase in the number of households with annual incomes between $5,000 and $20,000 in 1985 dollars, as well as those with incomes of $60,000 or more. The number of middle-income households will decline commensurately; most will be forced into the lower income range, although a few will move up.

Unlike the past decade, the percentage of households in the $50,000-$60,000 range also will fall significantly, mainly because many middle-management jobs will be eliminated. At the same time, the gains in households with incomes over $60,000, aided by rising ownership income, will be dramatic.

The 1973-85 period saw the transition from shortages to surpluses and from high inflation to disinflation. In the next decade, disinflation, which has the strongest impact on income polarization, should be felt in full.

The projections portend significant changes in the living standards of many American households. The scale of these changes will have major implications for national spending and savings patterns and will affect a wide range of social, political and economic issues. For example, many Americans who find themselves irrevocably sliding down from the ranks of the middle class may vent their frustration on imports, lending support for severe protectionist measures now brewing in Congress.