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Declining Middle Class

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August 08, 2010 – Comments (4)

There's another article on the declining income of the middle class, via Big Picture.

the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. 

 I am going to bet that if you broke that down further you'd find the bottom 20-30% have declined significantly.  Probably somewhere in the 70-90% have actually maintained lifestyle.

This business of percent wage increases benefits high wage earners far above low wage earners.  5% on a 20k income is only going to give you about $83/month, whereas on $120k it gives $500/month. Increases in rent, utilities, transportation, etc. can easily outstrip that kind of increase on a low income earner.  The high income earner covers it and has some left over to spend or save as they please.

It is interesting to me that they go back to 1973, as I find it hard to believe the decline has been happening that long.  There is no question in my mind that in Vancouver it has been happening since the early 80s.  In the 80s Vancouver completely saw union power and wages decline, but wages remained better across the rest of Canada and I was constantly shocked at the wages American friends were discussing relative to what I saw in Vancouver.

My perception is that the rest of Canada started to see a decline of wages in the 90s, and perhaps the US was also seeing a decline, but I think the decline was steeper in Canada.

I wrote about the declining wages back in 2007.  Something in the above linked article is that the American couple that has income a full 1/3rd above the median income is that they say they can't seem to save, and what I was pointing out was that people aren't saving anymore because they simply have far less disposable income.  Also, in Canada the tax burden on the young and poor is grossly excessive.  In my post I link to an article which show the basic tax burden before paying employment and pension benefits is a full 1/3rd more for a young person compared to a senior.  Additionally, that young person has all kinds of work related expenses, like transportation to get there.  A 25-year-old making 30k compared to a senior with 30k of income is trying to live on about 20% less after the extra taxes and work related costs.  They haven't had a chance to accumulate wealth of any kind to buffer them to live on a lower income and they likely still have student loans, or are trying to save for basics like cars and furniture.  They simply do not have the capacity to support the aging population and unless there are massive structural changes, they are going to be an exceptionally destitute senior population.

I am far more for structural changes that enable people to look after themselves and for giving people more responsibility for their retirement rather then being expected to pay for others retirement through taxes.  I do believe in some kind of pension, but something that is a buffer rather then any kind of expectation that it should be a living income.  My thoughts are in the range of covering food and utilities.

I don't believe at all that lifestyle has been declining since 1973.  I suspect there are quite a few years in there where it was gaining anymore before it started to decline.  Certainly my memory of how you could live as a minimum wage earner in my youth was that you could live on it and have money left over and that simply hasn't been possible for quite a few years now.

4 Comments – Post Your Own

#1) On August 08, 2010 at 11:50 AM, AvianFlu (36.26) wrote:

Shadowstats had a great multi-decade chart that showed the inexorably widening gap between the rich and the poor. This is despite 75 years of increasing government control over every aspect of the economy.

This is the bottom line, which can be easily determined by studying the case histories of countries around the world: In countries with large amounts of state control the standard of living is lower. Most people are poorer, but there are a few rich at the top. In countries with less state control there is a larger percentage of the population in the "middle class". And in fact, it is easy to see that pattern in the United States. I wish I could have put my finger on that chart at shadowstats.

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#2) On August 08, 2010 at 12:37 PM, tomlongrpv (76.28) wrote:

Interesting comments and I think pretty accurate from what most people see.  And incomes thought of as ample simply aren't anymore and it's not just overall inflation that is eroding those incomes but inflation particular to things like housing.

What is the ramification of your conclusions for investing?  Perhaps we should focus on companies making necessities and not luxuries.  While I have had some success with such companies, however, my best successes so far have been with luxury good manufacturers.  So what am I to conclude?

I think #1 is off on his analysis though because most of Northern and Western Europe has markedly more state control than the US or Canada but higher standards of living for most people by most measures.  Most third world developing countries with little or no state control have small middle classes.  The welfare state social net is what keeps many people in Europe out of the abject poverty people with their lower incomes would suffer elsewhere.

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#3) On August 08, 2010 at 3:24 PM, bigcat1969 (92.66) wrote:

The US seems to be moving to the worst of both.  The middle class seems to be shrinking as money moves upwards to the very rich in what once was free Capitalism and government is increasing control and spending into what should buy Socialism, yet we have no real safety net for a huge amount of Americans that Socialism should provide and no jobs that Capitalism should provide.  That is why unemployment is at almost 100 weeks for many, since there is no other safety net, yet 1/3rd of the unemployed don't qualify for unemployment money and people are running out of those almost 2 years of payments.  For both classes of people there is virtually no safety net.

Either let Capitalism work, let companies like GM and BoA die when the deserve it and let new companies rise that can make it or tax everything, let the government run companies and provide a 100% safety net for the citizens.  This half and half is only good for increasing the wealth and power of a select few and that should not be the goal of any government.

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#4) On August 08, 2010 at 4:47 PM, amassafortune (29.47) wrote:

After the 1991-92 recession, the company I worked for hired a large number of temporary workers to hedge against the risk that the recovery at that time would not hold. Laid-off workers that had made about $16/hr and had a standard array of good benefits were not called back. The temps made about $8-$9/hr and could get health insurance through the temp agency, but they had to pay a large portion of the premium themselves.

Here it is 2010 and companies are still using temp agencies heavily as a way to manage their risk. The BLS non-farm payroll report last Friday showed hourly wages increased by two cents last month but these temp agencies are still only paying a $9/hr as they were in 1991 for general labor. The BLS must be using the wage rate paid to the agency, not the worker. Existing workers aren't getting increases at a level that offsets workers being re-added at lower rates. Maybe the estimated new workers added through the birth/death model are making good estimated wages. Whatever the reason, monthly wages tend to increase each month in government reports, but actual wages over time do not. 

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