According to a 2014 report “The Middle-Class Squeeze,” the more workers in good jobs — who have access to good education; affordable child care, health care, and housing; and the ability to retire with dignity — the better it will be for the sustainable growth of the economy.
Defining the middle class
There is no clear definition for the middle class. The Center for American Progress defines the middle class as the middle three quintile of American households by income – those making between the 20th and 80th percentiles of the income distribution. However, the report further defines middle class as obtaining economic security. “Most of us don’t expect to be rich of famous, but we do expect a living wage and good American benefits for a hard day’s work,” said Sen. Tom Harkin (D-IA) in the report.
At the Center for American Progress, our work has focused on the importance of both strengthening and growing America’s middle class. So while the middle three quintiles will always be just that, it is our goal to ensure that as many Americans as possible have the cornerstones of the American Dream, including access to education, health care, housing, and the ability to retire.
Squeeze Part I: Stagnant Incomes
The golden age of the American middle class began following World War II. The economic statistics from that period tell a story of growing wealth and security for America’s middle class. It was around 1973 when growth in compensation began to slow.
With the 1990s tech boom the economy heated up and real wages and benefits jumped about 16% between 1995 and 2001. Real compensation growth has slowed further since the start of the 21st century. What’s worse, health insurance premiums over this period ate into end modest compensation gains. Therefore, many Americans saw stagnant or declining take-home pay even as productivity continued to rise.
In other words, American workers have been squeezed for decades when it comes to take-home pay, even before 2007 and the Great Recession. The financial crisis and the Great Recession itself then took a catastrophic toll on millions of Americans, as unemployment skyrocketed and trillions of dollars in household wealth vanished.
The median family saw its income fall by 8% between 2000 and 2012. Even for married couples with two children — a type of family that tends to have higher incomes — median income was virtually frozen between 2000 and 2012.
And while the economy has picked up since bottoming out in 2009, and private-sector job growth began to bounce back in 2010, the gains from this post-crash period have been strikingly unequal. Ninety-five percent of all income gains since the start of the recovery have accrued to the top 1 percent of U.S households.
The Importance of the Middle Class to Economic Growth
Rising inequality is not simply a question of distribution; it also poses real questions fro how our economy operates. Increasing resources available to the wealthiest Americans creates demand for luxury items such as private jets, the declining purchasing power of the middle-class American means that there is less demand for goods and services more broadly in the economy.
A recent analysis showed that giving $1 to a low-income household produces three times as much consumption as giving $1 to a high-income household.
Squeeze Part II: Rising Costs
While real incomes have been stagnant or declining in recent years, the other side of the story is the increase in the cost of various items that define a middle-class standard of living. Not only have families’ costs for things from higher education to health care increased rapidly relative to overall consumer inflation, but these costs are also consuming a growing share of family budgets, leaving less and less room for discretionary spending and saving.
As we pointed out earlier, between 2000 and 2012 the median family saw its income fall by 8%. At the same time, the typical family has seen the costs key elements of security rise dramatically, including child care costs — which grew by 37% — and health care costs — both employee premiums and out-of-pocket costs — which grew by 85%.
In fact, according to the CAP, investing in the basic pillars of middle-class security — child care, housing, and health care, as well as setting aside modest saving for retirement and college — cost an alarming $10,600 or 30% more in 2012 that it did in 2000.
As the cost of basic elements of middle-class security rose, the money available for everything else — from groceries to clothing to emergency savings — fell by $5,500. And while for the purposes of this example CAP assumes households will keep their retirement savings constant, data about worryingly low saving confirm that for millions of families, their retirement funds are bearing much of the pain of the squeeze.
The data paints a clear picture: The middle class is being squeezed. So it should come as no surprise that in a 2014 Pew Research Center survey, 57% of Americans responded that they think their incomes are falling behind the growing cost of living, up from 47% in 2006. In fact, the percentage of Americans who identify themselves as middle class has fallen to 44% down from 53% in 2008.
Policies to Alleviate the Squeeze
Understanding that middle-class families are clearly squeezed – with adverse effects on our entire economy 0 the call is for elected officials to craft policies to alleviate that squeeze. This requires two things: growing incomes and containing costs. Here are a few recommendations for increasing middle class income.
•Increasing the minimum wage
•Extending federal unemployment insurance
•Strengthening the Earned Income Tax Credit by expanding it for workers without children and lowering the eligibility age from 25 to 21
•Developing a federal paid family and medical leave program to ensure working families have access to wage replacement when they need it most via the Family and Medical Insurance Leave Act.
•Establishing a nation paid sick days standard
•Protect and strengthen unions
•Expand and incentivize apprenticeship programs especially for high-growth sectors
•Expand high-quality pre-school including Head Start and Early Head Start