What Happened to the American 'Middle Class'? Class and Consumption in America

Abstract

The plight of the “middle class” has been a constant theme in political discourse and business press during the turn of the 20th century. Some argue that the “middle class” has been shrinking, while others contend that it is sinking or losing its ability to maintain its lifestyle. Those in the first camp see the “middle class” as a malleable cohort that can expand/contract in size over time, while those in the second group seem to define the “middle class” as a constant cohort whose income, wealth and consumption patterns vary over time. This lack of a consistent, objective and implementable definition of the “middle class” adds ambiguity to the controversy around this important segment of our society. In this study, we propose a metric for socioeconomic stratification, based on the theoretical concept of Permanent Income, which we use to classify households into the upper, middle and lower socioeconomic classes, using data from the Survey of Consumer Expenditures (CEX), gathered by the Bureau of Labor Statistics between 1982 and 2010. Our analysis of the three major socioeconomic strata in America over the past three decades produces interesting and valuable insights into how the different strata in our society fared in the last three decades. First, we find that, despite the current debate on the plight of the “middle class” in America, households in the two middle quartiles of our society have seen some improvement in income, wealth and consumption, albeit not in the same extent as the upper quartile. Our empirical results show that the one stratum clearly left behind in the past three decades is the lower quartile, which did not see any significant improvements in income or wealth, and in fact saw a decline in their consumption budgets.We find that the most visible shifts in the past three decades were observed on consumption, particularly on the consumption of positional (conspicuously consumed non-essential) goods and services, where the gap between the upper, middle and lower quartiles of Permanent Income have grown more dramatically. We see these discrepancies as a major source of discontent by the “middle class,” for two main reasons. First discrepancies in consumption are more visible than discrepancies in income or wealth. Second, discrepancies in the consumption of positional goods are exacerbated by their signaling value, which results into welfare gaps not only on the direct utility of consumption but also in terms of positional losses.