New Study Explains Why the Middle Class Is Suffering More Than We Thought

April 15, 2015 Updated: April 15, 2015    

Everybody knows that the “median” American household or the middle class isn’t faring too well. Unfortunately, a new study redefined the term middle class and it’s even worse than we thought.

“Purely income- or wealth-based definitions of the middle class are ambiguous and unstable. It tells us nothing about the characteristics of the median family or any other family at that moment or over time,” states a report by the Federal Reserve Bank of St. Louis.

Instead of taking the median household income (the exact middle of the spectrum, not a simple average), which has been declining since 1999, the study defines its middle class as a household headed by somebody who is 40 years or older, white or Asian, and has at least a high-school diploma. Blacks or Hispanics need at least a two-year college degree to make the bracket.

(Federal Reserve Bank of St. Louis)
(Federal Reserve Bank of St. Louis)

This sample represents 44 percent of families where head of household is 40 and older. Their income performance went down more than the median family.

Whereas median income only went down 1 percent from 1989 to 2013, the demographically defined middle-class income decreased 21 percent over the same period. Their net worth also decreased 27 percent.

Income in the top tier of society (white/Asian with college degree) went up 2 percent but their net worth went up 22 percent. This means that assets went up in price but wages never rose much, even for the better educated. Indeed, labor’s share of GDP declined from a high of 67 percent at the end of the 1950s to a low of 58 percent today.  

(Federal Reserve Bank of Cleveland)
(Federal Reserve Bank of Cleveland)

Small Businesses Create Jobs

Victor Sperandeo, a veteran in the financial industry puts the blame squarely at the feet of regulation and says the United States is not creating enough small businesses to hire enough people.

“Regulation is creating costs and preventing people from hiring,” he said indicating that he has to spend at least $500,000 on lawyers because of regulation for his financial business every year. He also said he reduced his headcount from 30 to 10 because of it. Other costs for small businesses include regulation for health care, safety, and accounting.

“What creates jobs and higher income is competition. If you have a lot of demand for workers because you are creating new businesses, then the competition for workers drives wages up and also creates employment,” he said.

A report published by the U.S. Census in 2012 looks in detail at new business creation. It finds that at the beginning of the 1980s each year there were 13 percent more firms than the year before. That number dropped to 7 percent in 2012 and is probably even lower now. They employed 20 percent of workers in 1980 and only 12 percent now.

(U.S. Census)
(U.S. Census)

Especially stricter banking regulations have cut off funding to smaller businesses and hindered their growth: “We don’t have loans because the authorities are forcing banks to have higher capital ratios and forcing them to be very careful the way they lend,” said Robert Brusca of FAO Economics.

So small companies are struggling with the costs of regulation, but what about the big corporations? They have been hiring, but mostly in other countries.

International Competition

On the face of it, the rationale for big multinationals to move abroad is simple: Look for the cheapest place to produce and then ship the products back to your home market, laying off people in the United States in the process.

We don’t create those jobs because of international competition. We have multinational firms located around the world. They see where costs are, what the costs of labor are. Anybody looking at the United States to build a factory or any kind of facility is looking at a lot of expense,” said Brusca.

But where did this all get started? Brusca said that it all started with Japanese companies reducing costs in the early 1990s because of a strong yen.

“Japan broke the ice on that,” he said. After other companies saw that it was safe to build factories in the Philippines, China, and Bangladesh, they soon followed suit, putting America under pressure to do the same.

“A lot of multinationals took their knowhow and went to China and moved everything there,” he said. Incidentally, the early ’90s is the period when the income decline of the middle class starts.

While big companies could shift their production, smaller companies often couldn’t compete with the cheaper prices from goods made abroad and had to close shop.

Part Time Nation

“People who before the financial crisis were working fulltime are working part-time, there has been an explosion in temporary employment,” said Peter Atwater of Financial Insyghts.

It’s hard to outsource lower income jobs in retail or dining, so they stay in the United States, but they don’t pay much.

As a result, we have 6.7 million people working part time for economic reasons—and often for minimum wages—substantially higher than before the financial crisis at 4.3 million.

Robert Brusca said increases in technology and automation do the rest to decimate the middle class.

“That’s very little left in between. We are having a technology and a trade revolution and we aren’t prepared to deal with it.”