Road Block

Based on research by Wagner Kamakura 

• “Middle class” is a vague phrase that needs precise definition.
• The middle class has advanced in income and wealth over three decades, but not nearly as much as the rich.
• While the consumption gap between the upper class and all others has widened, the poor are virtually left behind.

Is the middle class coming to an end? The eulogies come from virtually every political quarter. According to Senator Elizabeth Warren, a middle class American lifestyle is “increasingly out of reach for middle class families.” In the words of Senator Marco Rubio, American workers might “have what was a great job 10 years ago, but now...literally live one unexpected expense away from disaster.”

The reality, research shows, is a bit more nuanced. In a recent working paper, Wagner A. Kamakura, a professor of marketing at Rice Business, shows that there are indeed yawning and growing gaps between America’s socio-economic classes. But while these gaps are real, overall quality of life among the middle class has actually increased, when measured in terms of consumption. Only one group, in fact, has definitively gotten worse off: the poor.

Just who is in the middle class? There’s a remarkable lack of consensus about this, not just among scholars, but also among other Americans. In one survey, for instance, nearly a third of respondents earning more than $150,000 per year identified as middle class. So did 40 percent of respondents earning $20,000 or less. Standard U.S. government definitions, which define middle class in terms of current yearly income, are hardly more illuminating.

The confusion, in part, comes because American class hierarchy can’t really be understood only by income. In the course of one lifetime, an individual’s experiences and expectations can often include chapters of both wealth and adversity. This aggregate lifetime profile – what scholars call “permanent income” – is one way to define economic class.

But it’s not as if lifetime earnings show up on a tax return. So in order to study permanent income, Kamakura looked at a sample of 101,671 U.S. households from a spectrum of incomes between 1982 and 2010.

To estimate their permanent incomes, he included factors such as profession, education and tax payments along with financial and physical assets.

More objective than self-reporting, this method let Kamakura divide America into four economic strata: upper, two middle quartiles, and lower. He defined wealth as financial assets plus the value of an owned home.

The formula revealed stark divides in American fortunes. Over three decades, upper class wealth leaped an average of 3.5 percent per year in real terms. Middle class wealth rose 1.7 percent per year over the same period. But lower class wealth grew a mere 0.3 percent per year.

The annual growth in wealth among the upper quartile, in other words, was more than double that of the middle class. The lower quartile of Americans saw virtually no growth whatsoever.

Kamakura also uncovered generational, gender, and racial chasms. Households headed by men in their 30s to 50s did better than both younger households and households headed by men 61 and older. Households headed by men were more likely to be upper class than households led by women. White households were more likely to be middle class than those headed by African-Americans, which were more likely to be poor.

But to truly understand the middle class, Kamakura argues, you also have to know how people consume.

Even when their incomes go up, for example, many Americans struggle to make the mortgage or pay for health care – not to mention affording a nice vacation, a new car, or jewelry that seems commensurate with their standard of housing. Despite apparently healthy incomes, in other words, many theoretically middle class Americans are dogged with anxiety about their expenses.

To tackle this aspect of class, Kamakura turned to the Bureau of Labor Statistics.

Studying raw data from the bureau’s quarterly Consumer Expenditure Survey, Kamakura found that the United States lurched into a disturbing new state of inequality over three decades. Most strikingly, consumption of medical goods and services grew among the wealthy but declined everywhere else, after adjusting for price changes. The middle and lower class quartiles consumed fewer medical goods and services between 2005 and 2010 than they did between 1982 and 1985.

The gap persisted in recreation, education, family vacations, and charitable donations. Rich people consumed 37 percent more in 2005-10 than they did in 1982-85. Middle class people consumed 28 percent more. And poor people consumed only 20 percent more.

What accounts for the difference? Prices, for one thing. During the time Kamakura studied, inflation lowered the purchasing ability of both the middle class and the poor. Education costs mushroomed 500 percent. Hospital costs increased nearly 600 percent. Even protecting existing assets cost more: both motor vehicle insurance and health insurance ballooned 400 percent during the survey period.

Perhaps the most dramatic shift, though, took place between lower class Americans and everyone else. In contrast to the other groups, lower class Americans’ wealth stagnated. Disposable income for the wealthy quartile was 5.5 times that of the poorest quartile between 2006 and 2010.

That stagnation was reflected in spending. Between 2005 and 2010, the poorest Americans spent 32 percent less annually on medical goods and services than they had between 1982 and 1985. Overall, in fact, they consumed less in real terms than they had three decades earlier.

The figures are stunning, considering that per capita gross domestic product increased by 48 percent during these decades.

Most Americans say they expect to live middle class lives. Kamakura’s findings, however, show that since 1982 it has become harder and harder to stay in the middle lane. It’s cold comfort indeed that the economic class right behind hasn’t moved down the highway at all.

Wagner Kamakura is the Jesse H. Jones Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Kamakura, Wagner A. (2014). What Happened to the American “Middle” Class? Class and Consumption in America. Class and Consumption in America, Social Science Research Network.