Texas Border Business
Understanding how things are going for families of various earnings levels is an important undertaking, because trends in financial security across the income spectrum have notable implications for public policy and perceptions of the economy. A recent study offers a new perspective and food for thought about the middle class, essentially shifting from a “relative” definition (looking at how families at different income levels are doing compared to each other) to an “absolute” one (focusing on how purchasing power has changed over time).
Politicians on both sides of the proverbial aisle have lamented the shrinking or “hollowing out” of the middle class, generally blaming each other and coming up with very different potential solutions. However, new analysis offers a fresh perspective on the issue, which is essentially to try to determine whether families are financially better off than they were in the past.
To shed light on this question, data from the US Census Bureau from 1979 to the most recent available was fully adjusted for inflation and family size. A definition of middle class with constant minimum and maximum levels of purchasing power over the period was then derived. The authors found that while the middle class under their constant purchasing power definition has indeed been shrinking, it is primarily because families have tended to advance into a rapidly expanding “upper-middle” class. In fact, lower-income groups also shrank.
Even under a variety of potential tweaks in the methodology, the bottom line is clear – families are earning significantly more than in the past, and many have moved up the purchasing power ladder. While incomes are certainly rising faster among higher income families and the wealth gap is inexorably widening, they are nonetheless increasing across the spectrum (with the exception of the lowest 5% of the income range). Although transfer payments were not fully captured in the assessment, this area clearly needs more focus (and recent policies have often moved in the wrong direction).
One reason for increasing incomes is that there are now more two-earner families than there were in the 1970s. Nonetheless, the data indicate that the shift has been less about the number of women working and more about better opportunities for career advancement.
Clearly, there are many people who are struggling, and it can be helpful to examine other patterns in the data to uncover more meaningful ways to improve financial sustainability across a broad spectrum. For example, health insurance is a large and growing budget item that is becoming increasingly unaffordable for some. Housing cost escalation has also burdened many families and individuals. Earnings is only one measure of financial wellbeing, but there has been notable improvement in absolute, if not relative, terms. Stay safe!
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Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 3,000 clients over the past four decades.
