Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Saturday, September 15, 2012

What is the Economic Middle Class?

My lovely wife shared this link with me on Facebook.  I got into a discussion in comments there with a right winger who suggested that $250,000 was a very reasonable estimate for median income in Boston.

As it turns out, median household income in Boston is $51,914, close to the national average, and way below the Mass. State average of $67,950.  But right wingers live in a data-free world, so this is no surprise.

Another contention in comments at that site is that the middle class is undefined and undefinable. Not so.  I define middle class household income as the middle quintile.  This range includes the median and a band around it wide enough to hold 20 percent of the population.  You might wish to concoct your own definition with a wider spread, but you'd better not be asymmetric around the median.  Feel free to use the middle three quintiles, if that is your preference.  But if your of concept of middle class gets very far beyond 50% of the population, you really ought to give more thought to what the word "middle" actually means.

Thinking about all this prompted a look at the various income quintiles.  The data, through 2009, is available at the Census Bureau web site, table 694.  This table provides historical data from 1967 through 2009 on the top income limit for the bottom 4 quintiles, and the bottom income limit for the top 5%, expressed in constant 2009 dollars.

Graph 1 presents this data.  The 3rd quintile - my definition of the middle class - is between the orange line and the yellow line.

In 1967, the threshold for the middle quintile was $32, 848.  By 2009, it had increased by 17% to $38,550.  This is a compounded annual growth rate of 0.38%

In 1967, the top limit for the middle (and threshold to the 4th) quintile was $46, 621.  By 2009, it had increased by 33% to $61,801. This is a compounded annual growth rate of 0.68%.

The threshold value for the fifth quintile increased from $66,481 in 1967 by 80% to exactly $100,000 in 2009.  This is a compounded annual growth rate of 0.98%.

To reach the top 5% required an income of 106,684 in 1967.  By 2009, this had increased by 69% to $180, 001.   This is a compounded annual growth rate of 1.25%.

So my comment sparring partner and the current presidential challenger he seems to support are a bit off base.  $250,000 in household income puts a family well above the 95th percentile.  In fact, that is just enough household income to crack the top 2%.

My ongoing hobby of debunking right wing nonsense aside, the point of this post is mainly to inform.
There are two main observations:
1) While the bottom two quintiles haven't changed much over the decades, entry to the third quintile has crept up a bit; and into higher categories it's moved up a lot.  We recognize this as stagnation in the bottom half and growing inequality in the top half, skewed powerfully to the top.
2) This data set stops in '09, so Obama is outside the discussion.  But we can see that all the way up to the 95th percentile, income growth was dead flat during the Bush administration.  No wonder the 95% percentile feels so poor.

But -- surely, some wealth was generated during those 8 years.  GDP growth was positive at least some of the time.  I wonder where it all went?


Jerry Critter said...

While people may debate whether $100,000 per year is a lot of money, clearly if you are making more that 95% of the people, you are not in the middle class.

Chaz said...

Great post. What could be more sensible than using the middle quintile. I just saw the following in Barron's and was reminded of your post. It seems Mr. Goolsbee takes a much wider section of the distribution-- the middle 90%.

from Barron's Nov 12, 2012 issue: By ROBIN GOLDWYN BLUMENTHAL
How do you define the middle class; what's key to addressing its problems?

Austan D. Goolsbee
Professor, University of Chicago, and former Obama economic advisor
"It depends a bit on what you are using the definition for (similar to how the definition of what constitutes a small business depends on a lot of things). The middle 90% of the income distribution is a pretty good definition. Broad-based growth is most important, long term. We need to induce innovation and encourage growth and make sure our workforce has the skill and education to keep us the richest country on earth."

White House Task Force, Middle Class
"Middle-class families are defined by their aspirations more than their income. The Commerce report assumes that middle-class families aspire to home ownership, a car, college education for their children, health and retirement security, and...family vacations."

Frank Lichtenberg
Courtney C. Brown Professor of Business, Columbia Business School
"There is no generally agreed-upon definition. Clearly, the middle class comprises households in the middle of the income distribution. But is it the middle 50%, 75%, or another percentage? The government benchmarks the poverty line (now about $23,000 for a family of four). But there is no generally accepted threshold between the middle class and the upper class."

Jazzbumpa said...

Chaz -

In my cross-post at Angry Bear, I took a lot of heat for my middle quintile idea.


To each his own, I guess.

But these broad definitions of the middle really do baffle me. What common ground is there between someone at the 90th percentile and someone at the 10th?

Sure the line between middle and upper is blurry. That's unavoidable. But using the middle quintile - or even the middle three - is easy to comprehend, and might even be useful.

Thanks for the visit.