The U.S. middle class is smaller, but richer. Still, income inequality is rising faster in Europe.
American pundits and politicians love to contemplate the state of the American middle class, but we rarely get a sense of how it compares to the middle classes in other countries. A new report from the Pew Research Center sheds some light on this, revealing an American middle class that is notably smaller—but richer—than its equivalents across Western Europe.
Using data from Luxembourg’s Cross-National Data Center, the report paints a surprisingly complex picture of the progress of U.S. and EU middle-income earners from 1991 to 2010.
Yes, this swath of the American population has shrunk while lower and higher income tiers have grown. By contrast, Western Europe performance is decidedly mixed. The middle class is shrinking in Germany, Italy, and Spain—but growing in Ireland, the U.K., and the Netherlands.
First some qualifiers. The report has some necessary limitations: The only data available across all countries is on disposable income after tax and social security contributions. This means that housing costs, which can vary greatly, are not factored into final figures. Specifically, the report looks at people who fall in the middle income bracket, with disposable income between 66 percent and 200 percent of the country’s median income. This provides valuable information about income distribution, but while this group overlaps with the middle class, it isn’t necessarily synonymous with it. (Depending on the region, middle-class characteristics can also be defined by education, cultural values, and aspirations, in addition to income level.)
Finally, the report’s survey period ends in 2010, providing an overview of recent trends without revealing their contemporary effects. The 2008 financial crisis succeeded in gutting many southern European countries’ economies, creating continent-wide national recessions followed frequently by years of stagnant growth. The report may show some of the effects of this general downturn, but probably not all of them in their entirety.
America’s middle income tier is smaller
As the table below details, Income is distributed more unevenly in the United States than any European country included in the report. Compared to Western Europe, America’s lower and upper income tiers have more people in them.
In total, 26 percent of Americans fall into the lower income group, compared to 13 percent in the Netherlands, which sports the smallest lower income group in the report. Among Western European nations, Spain has the largest share of citizens in the lower income bracket, but at 24 percent of all citizens, there is still a clear space between Spanish and U.S. scores. It’s in the upper income bracket where the U.S. breaks ahead of the crowd. Fifteen percent of Americans fall into the highest bracket, compared to just 6 percent of Norwegians.
The United States’ smaller middle income group still earns more than almost all its Western European counterparts. The average disposable income among middle income Americans in 2010 was $60,884, placing it comfortably ahead of Norway, which averaged $56,960. The one exception to Western Europe’s income trends was Luxembourg. The 575,000-citizen state boasted a considerably higher average middle income of $71,799, far ahead of any other state surveyed.
America and Germany shrink, while Ireland booms
Not only is the American middle income bracket smaller, it is also shrinking. Between 1991 and 2010, the proportions of Americans in this income group shrank to 59 percent from 62 percent—a modest fall that nonetheless affected millions. In this case, however, the contrast provided by Western Europe is complex. In some countries, the share of middle income residents actually rose; in others it sank more sharply.
By far the greatest rise was in Ireland, where the middle income tier grew by eight points from 61 to 69 percent. France and the Netherlands also saw modest middle income growth, both retaining a far larger middle income class than Britain or Ireland. This middle income tier shrank in many countries, however; most dramatically in Finland and Germany, where it shrank by 7 percent. Still, this left each country’s middle income tier considerably larger than in the U.S., Britain, or Ireland.
The shrinkage of America’s middle income tier came with an overall rise in median incomes, suggesting that salary gains between 1991 and 2010 were disproportionately distributed in the wealthiest tier. During the study period, America’s median income actually rose by $4,598 per year. This rise stands in contrast to the fate of Germany, Finland, and Spain, where median incomes fell slightly, and Italy, where they fell sharply. Elsewhere in Europe, however, they rose dramatically. Ireland experienced the largest growth in income overall, signalling the arrival of the so-called Celtic Tiger period when the previously impoverished country’s economy boomed from the early ‘90s to the mid-2000s. In fact, Ireland is the only one in the study where the middle income tier grew in proportion to the overall rise in median incomes.
Germany’s middle class shrinks faster
In a United States where large sections of the public are painfully aware of increasing income inequality and the hollowing out of the middle class, it might be tempting to use this picture of Western Europe for some good old-fashioned self loathing. But it’s not all good news in Europe. Germany and Finland may be regularly cited as examples of strong economic performance and good governance, but the report shows that these countries’ middle income tiers have shrunk at a far greater rate than it has in the U.S., with the lower income tier also growing far more sharply. In terms of their wealth spread, Spain, Italy, and Luxembourg have all fared poorly, while even Norway and Denmark have seen fractional inequality growth.
Occasionally North Americans may wonder why Europeans fret about growing social inequality while they still apparently boast a healthier level of wealth distribution than America. The strength of these swings—far sharper than anything in America during this period—go a long way toward explaining Europe’s fears.