Why the Middle Class is Shrinking in Rich Countries?

by Arundhathi Jegadeesh,

(Image source:ABS-CBN News)

In most of the OECD (Organisation for Economic Co-operation and Development) countries there has been little or no growth of the middle class between the mid-1980s and the mid-1990s, while it rose in the next decade that is from mid-1990s to mid-2000s. In the following decade, from 2006 to 2017, this growth has fallen. Only a few of the OECD members such as Israel and Turkey can boast about having a higher median income than previous decades. While in Greece, Italy, Japan, Mexico, Slovenia and Spain, the median income has become lower in the mid 2010s than it had been in 2008. Therefore, we can say that the median income has fallen in most of the OECD countries.

The ones who belong to the middle-income class would include all those who have 75 per cent to 200 per cent of the median national income (OECD). Middle class varies across the world. The middle- income class in Mexico would consist of those who earn an income of US$ 3800 to 10,000 while in Luxembourg this section would earn between US$ 26,500 and 70,500. But across the OCED countries, on an average, being part of the middle-income class in one country would mean belonging to the middle- income class of most of the other countries.

One of the reasons that can be attributed as to why the middle-income class has seen a decrease in its growth is job polarisation. Job polarisation means that there is a decrease in the medium skilled jobs in comparison to the lower skilled jobs and the higher skilled jobs. The gap between the median income and the high income has increased over the years and it seems to be increasing. On the other hand, the gap between the median income and the lower income has not changed much or has remained stagnant. Thus, the pay has now become more unequal at the bottom strata, with these incomes not changing much; while the pay at the top strata is increasing rapidly. But, job polarisation changes in different occupations and as a result of the increase in the high skilled jobs, the overall effect of job polarisation is dampened.

One of the major reasons for the fall in the middle-income class jobs is the birth of new technologies. It is a fact that technology has created new job titles during the industrialisation era or the digitalisation era. Increase in the technological innovation is also known to increase the productivity of the workers, which means higher incomes. Higher incomes mean higher demand for goods and services, which would increase the production and supply and finally decrease the prices of the goods and services. Thus, technological innovation inadvertently leads to higher incomes and lower prices. But it can also create inequalities. While technological innovation does create new job titles, it can also eradicate older ones. These new job titles are scarce in nature. The demand for abundant skills falls with the technological innovation while the demand for scarcer ones increases, leading to a mismatch in the demand and supply of the skills. As a result, the medium-skilled jobs and middle-income jobs tend to be on the losing side since these are the ones which are abundant.

The middle class spend bulk of its expenditure on core goods consisting of housing, food and clothing, education, etc. — all that make up a comfortable living. In fact, half of the budget goes into core good spending, where expenditure on housing is the major one. In 1995, it had been only one fourth of the budget but by 2015, it rose to one third of the budget. This is also due to the house prices growing twice as fast as inflation. On an average, 20 per cent of the disposable income is spent on mortgages but this can range between 10 to 30 per cent in the OECD countries. Food and clothing account slightly less than one quarter of the budget. In most OECD countries, healthcare and education are provided, therefore spending on these tend to be limited; but in the US and Mexico, health accounts for 9 per cent of the budget and education accounts for 8 per cent of the budget. The increasing cost of college fees and other educational institutes are pushing more and more people into debt.

The middle class in the richer countries of the world is definitely shrinking and this is because of a decrease in the share in the number of people in the middle class as well as a fall in the median incomes. Much of the reason can be attributed to the rising cost of the standard of living of the middle class, which is in fact higher than the growth of incomes. Moreover, job polarisation and the rapid advancement in technological innovation are also major factors, with the latter causing a fear of high- level unemployment. Thus, major policies and work need to be developed in order to curb this shrinking, as it could lead to an adverse situation of extreme inequality.

(Arundhathi Jegadeesh is a Research Intern at Centre for Public Policy Research. Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research)