The disappearing act of the Middle Class.
While almost all politicians claim to represent “working-class values” or the middle class, for almost four decades this subset of Americans has rightfully held the position of the economic majority. Yet, recently they have lost that title, disappearing into the Upper and Lower classes. Statistics can help us visualize this shift: the middle class accounted for 60% of the income spectrum in 1971, but in 2015 now only accounts for 49%.
Investigating the economics behind this doesn’t make the picture any brighter:
Technically speaking, household income can be broken into two parts.
- Labor Income: Wages, salaries, work-related compensation
- Capital Income: Dividends, interests, investment compensation
The share of labor income as a percentage of total income (across all classes) was previously steady over its long run trend since the economic stagnation of 1975. Surprisingly, this trend now seems to be aimed gradually downward meaning that income from work-related compensation accounts for less and less of a households income.
For the well off, this is no problem because they receive substantial amounts of income from invested capital. For the middle class and lower classes, which inherently would depend on more labor income, this is a huge problem.
Economists are describing this as “Labor Market Polarization”. With a decline in labor income share: total income rises, yet labor income grows as a lower respective rate.
As a silver lining, the far edges of the income spectrum have seen the most growth. The upper class in 1971 received 29% of US output while the middle class received a substantial 62%. In 2015 the roles have reversed, with the upper class holding 49% of income and the middle class holds only 43%. Yet this also means that the amount of Americans in the Lower class has been increasing.
To be able to address this problem could be an even scarier thought. As we advance further with innovative technologies such as autonomous driving and machine learning, the range of income distribution would inevitably widen.
If there is one thing that could describe all of the anger that politicians are leveraging on, Labor Market Polarization could be it.
