5 Reasons the Middle Class Is Feeling Poor

The U.S. economy is slowly on the mend. Shaking off slowing growth in China and Europe's seemingly endless sovereign debt crisis, U.S. unemployment rates are at a 44-month low, homebuilding sentiment is at a six-year high, and U.S. GDP growth advanced at a modest 1.3% in the second quarter.

Yet, there's a good chance that if you ask middle-class Americans how they're personally doing, chances are you'll get an earful of negativity. Of the 1,287 middle-class individuals recently polled by Pew Research, an overwhelming 85% of them claimed that it was more difficult to maintain their standard of living now than it was 10 years ago.

Why the discrepancy? I feel it can be best explained in five key points.

Point one: Real wage growth is nonexistent.

As U.S. businesses have become more efficient and productive over the past few decades, the amount of corporate profits streaming to the middle-class worker has been steadily on the decline. According to the 2012 Organisation for Economic Co-operation and Development Employment Outlook, the U.S. labor share (defined as corporate profits going to pay wages, salaries, and benefits) fell an adjusted 450 basis points in just the past 20 years with top income earners excluded.

The reasoning here is simple: Middle-class America isn't being paid enough for what it's bringing to the table. Nominal wages have risen 201.5% since Jan. 1980, but inflation-adjusted wages since then are up a measly 1.39%. 


Source: data360.org, Federal Reserve.

With the middle-class worker barely able to keep up with inflation, it's no wonder he or she feels poor.

Point two: The middle-class savings rate is pitiful.

This is almost cause-and-effect with point one, but poor real wage growth hasn't allowed the middle class to put away nearly enough of its hard-earned money.


Source: St. Louis Federal Reserve.

As you can see from the chart above, personal saving rates really began their decline in 1980, which perfectly coincides with the OECD's argument that labor's share of corporate profits is rapidly declining. My Foolish colleague Morgan Housel also closely examined middle-class saving rates in June and, pulling data from the Federal Reserve, pointed out just how little families have been able to save. In 2001, 61.3% of all middle-class families were able to put money aside the year prior; by 2010, that figure had fallen to just 49.8%. Although these savings rates do tend to pop during recessionary times as fear rises and spending tapers off, those pops are almost always temporary and lead to little meaningful long-term saving.

Point three: Labor participation rates are at a 31-year low.

Perception is reality; and the reality of the matter is that unemployment rates have remained so precipitously high for such an extended period of time that Americans are literally dropping out of the labor force in accelerating numbers.


Source: Bureau of Labor Statistics.

Some of these labor force dropouts are benign (e.g., people retiring or going back to college), but it still points to the grim reality that the middle-class worker is finding it tougher to remain positive and find a job that will effectively utilize his or her skill set.

Furthermore, the average duration of unemployment has ballooned within the past four years from 18.7 weeks to a near record-high 39.8 weeks. Personally, I'm discouraged just thinking about that fact.

Point four: Middle-class homeowners were crushed by the housing bubble.

Another key point of the aforementioned Pew Research study is that median net worth for the middle class fell by a whopping 28% over the past decade, to $93,000 from $129,000. One of the primary reasons for completely wiping out two decades of wealth accumulation: the downturn in the housing market.

Perhaps no class was more overzealous when it came to investing in and levering their wealth against their home more than the middle class. As of July, 22.4% of homeowners were underwater on their mortgage, with an even more disturbing 48% under the age of 40 currently owing more than their home is worth. With little to no equity in their homes to fall back on, many middle-class homeowners are just crossing their fingers and hoping their homes will eventually go up in value. That's not exactly a plan for success and is yet another reason why the middle class feels poor.

Point five: The income gap between the rich and the middle class continues to grow.

Perhaps nothing will make the middle class feel poorer than watching the rich get richer. While median net worth for the middle-class dropped by 28% following a decade filled with two nasty recessions, the median net worth of the upper-tier actually rose by 1% based on Pew Research's study.

According to a report in The New York Times from March, 93% of the income generated in 2010 ($288 billion) went to the top 1% of earners, producing an 11.6% rise in their 2010 income over the previous year. As for the remaining 99% -- middle-class included -- income for the average worker increased by just $80 over the previous year.

With basically no wage growth, no avenues to meaningful saving, discouraging employment opportunities, a black hole in the housing sector, and the rich getting richer, it's very easy to see why middle-income America is feeling so poor these days.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (15) | Recommend This Article (24)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2012, at 12:33 PM, mdk0611 wrote:

    With respect to wage growth, does that Federal Reserve graph consist of wages or wages plus benefits? A majority of workers are still covered by employer sponsored health insurance. If the graph covers only wages, to what extent have potential wage gains been diverted to cover health insurance costs that have been rising even faster than inflation?

  • Report this Comment On October 25, 2012, at 1:11 PM, atkinskd wrote:

    mdk

    To that point employee sponsored benefits have been on the decline as well. Vacation time, medical dental, vision etc deductibles and premiums are way up.

    My personal investigation has lead to the wealthy utilizing financial vehicles meant for those less fortunate, thereby insulating their wealth and reducing the 'back on your feet' funds (unemployment, welfare, etc.)

    Then tack on the conundrum of efficiency vs. required labor and the camels' back is done. Simply a matter of the wealthy overharvesting.

  • Report this Comment On October 25, 2012, at 1:57 PM, mdk0611 wrote:

    Whoa. Time out. Somebody gets laid off and either they or their employer (depending on the state) has been paying for unemployment insurance for years that suddenly they are not entitled to that benefit because they saved their money?

    In addition, please provide evidence of the wealthy getting welfare. I'd love to review the sources and data.

    Now, no doubt deductibles and co-pays have gone up with respect to health insurance. However, that's NOT the issue. The issue is whether the employer paid premiums have increased by more (perhaps significantly more) than the overall rate of inflation and, as a result, the increase in total employee compensation has been skewed towards health insurance at the expense of take home wages.

  • Report this Comment On October 25, 2012, at 2:33 PM, NickD wrote:

    Middle class is a joke maybe if you didn't have a kid at 20 and worked you and your partner until 30 saving one of the salary's for 10 years maybe just maybe you would be in the high income bracket.

    About 90% of the middle class is poor because of this you you really want to be a grandparent before 60?

  • Report this Comment On October 25, 2012, at 3:08 PM, Darwood11 wrote:

    I'd suggest a "Point 6" which is the value of their retirement plans.

    I'm not sure about Point 5. I'm in the middle class, and I don't know if I feel worse knowing how much Bill Gates, or Bill Clinton's net worth has increased in the last year. That number as compared to mine. The flip side is I don't feel better knowing that the bottom half of the middle class has less money than I do, and has lost ground in the last 5 years.

    There is another statistic to consider, and it goes against the premise of this article. It does explain why some of my middle classmates don't feel very bad, and some do.

    24 million households own their home outright. No mortgage. This according to Nicholas Colas of BNY in a Bloomberg article. I've read similar statistics elsewhere. For a comparison, about 11 million homes are currently underwater.

    About half of these fully paid for homes are retirees who bought homes about 30 years ago. This "stealth liquidity" is valued at up to $2 trillion and will roll over to heirs as the "greatest generation" and the following one pass away. The great unknown is if these properties will be cashed out to pay for geriatric health care.

    For the middle class that feels so poorly, I do have to ask. Do these people know their "net worth?" Do they know their probable future net worth in 5 year increments to retirement? I sometimes wonder, given the terrible lack of financial acumen in the U.S. that many people might feel better if they did, in fact, know their net worth, made a projection to retirement about their savings rate plus the contributions to any 401(k), 403(b) or any Roth-IRA contributions.

    But apparently most people can't do this, or won't. There are two sides to the unknown. One is that one's current emotional state may make them feel better, or worse. Want a temporary high? Go buy an iPhone and wave it around. Want a temporary low? Open that credit card statement with that new iPhone on the list.

    The following is based solely on my conversations with my "fellow middle classmates." Many feel low because they have no plan for the future, have no clue how it will turn out, and are in a downward financial spiral which is a combination of life style, current financial situation and an awareness that this cannot continue indefinitely. Yet they persist in their behaviors. They know there is a future price to pay, that this day is coming closer, and they don't have a clue how to deal with it when it arrives.

    I'll use my spouse as an example. She's a chronic worrier, burdened by the financial complaints of relatives, friends and workmates. Using Quicken, I print a financial statement of her personal "net worth" once a year. I also print one of our combined net worth. She feels much better after we discuss the meaning and impact this will have on her future retirement. She is happy to continue her monthly contribution to her retirement fund. She doesn't live as visually well as some of her friends. She has no regrets.

  • Report this Comment On October 25, 2012, at 4:48 PM, TomBooker wrote:

    <According to a report in The New York Times from March, 93% of the income generated in 2010 ($288 billion) went to the top 1% of earners, producing an 11.6% rise in their 2010 income over the previous year. As for the remaining 99% -- middle-class included -- income for the average worker increased by just $80 over the previous year. >

    I do it all of the time. All you have to do is miss one word or dislexy something and your whole point craps the bed. ;)

    If $288B = 93% of total income and it goes to the 1%, then that leaves about $20B for the other 142MM of us.

    I definitely think we are headed to Somalia, but I think we need to fall through the Banana Republic period first.

    sorry, couldn't resist. ;)

  • Report this Comment On October 25, 2012, at 5:03 PM, Darwood11 wrote:

    @TomBooker

    Good point! The numbers I have seen indicate that the top 1% gets about 20% of the income. Still a problem because that top group got about 8% way, way, way back in 1970.

    That's the wonders of the "service economy!"

  • Report this Comment On October 25, 2012, at 9:02 PM, xEbola wrote:

    NPR talked with the author of Who Stole the American Dream this week. It was a very good discussion and talked about how the middle class' income has only gone up the 1% cited in this article. Meanwhile, CEO pay has gone up 400%. I'm definitely going to read this book.

  • Report this Comment On October 26, 2012, at 2:57 AM, TomBooker wrote:

    @Darwood11

    Our august journalist meant the $288B is the "additional" income above 2009, not all of the income for 2010.

    If we other 99% got the remaining 7% of the total income as stated, our average annual income would be $140.85. So $80 would be one heck of a high % increase. ;)

  • Report this Comment On October 26, 2012, at 8:00 AM, Zebra365 wrote:

    For those of us who have not inherited money, wealth is deferred consumption. Many have not only NOT deferred consumption but taken out loans to increase current consumption.

    When you take out a loan, you are not borrowing from the bank, you are borrowing from your future production.

    If you eat next week's supper today, you will be hungry next week.

    If you have almost no net worth then you don't just feel poor, you are poor.

  • Report this Comment On October 26, 2012, at 9:12 AM, Darwood11 wrote:

    @Zebra365

    When I started my first bona-fide business, my accountant and I had periodic discussions about "good and bad practices." He used the term "mortgaging your future" to describe the act of borrowing with the anticipation of projected future income.

    That was back in 1978, a time when there was no easy money for a small business and getting bank loans was nearly impossible, even for receivables. So that conversation was hypothetical, but I was looking ahead. At that time I used an American Express business credit card to make purchases and pay for business travel, but that card was not a "credit" card in the present sense and it had to be paid off with each and every bill. It was the only "credit card" I could get.

    In principle I agree that "zero net worth" = "you are poor." But I've discovered that many of my middle class associates think they are poor because they don't know their current financial position. They can make guesstimates about the current value of their home if they have one, and can talk for hours about the real estate fiasco. But they can't answer a simple "Do you have a positive or negative net worth?" If they stumble with that one, then I ask "Has your retirement nest egg increased or decreased in the last three years?" Frequently, the answer is "I think so." Some who are retirees will also say "I live on fixed income" which then leads me into a conversation about the COLA increases for SS and that "underemployment" means falling income.

    Perception is so much of reality!

    Technically, I'm "underemployed" because I'm in phased retirement. Partly by choice and partly the consequence of this economy. I'm fine with that and don't feel that I'm underemployed.

    Looking back, I am very fortunate in so many ways. I had parents who were frugal and had a very strong work ethic, and made good financial decisions. I also retained good business professionals early on to see that I was fully informed about the consequences of my business decisions and practices. I learned a lot from all of them.

  • Report this Comment On October 26, 2012, at 11:00 AM, OldVMer wrote:

    How do you define middle-class, by income level? If so, then wouldn't you expect inflation adjusted wages to remain relatively static for an economic class as a whole? I expect the answer to this question is based on productivity gains. If a worker produces more then he (or she) should earn more. This is where the shifting of reward from the "workers" to the C-level executives and owners argument enters. That's why I'm a Fool trying to invest wisely so that I'm a member of the ownership team.

    I wonder what happens if you look at charts for points 1 and 2 by generation. I suspect you would see a much higher growth rate in wages (real or otherwise) if you followed the wages over time of people born in a given decade for instance. I've been in the same job, same company for decades and my wage since 1980 has gone up 700%, not 200%.

  • Report this Comment On October 26, 2012, at 4:45 PM, not4in wrote:

    Why am I feeling poor? To start with I received a niggardly 2% wage increase this year. A month after that my health insurance premiums increased more per pay period than my wage increase. My insurance also has higher copays and a deductible increase from $1,500.00 to $3,000.00 Next you have to take into account higher prices for everything else. Not the cooked inflation rate from the lamestream media but the true inflation rate. Next add a 1/2 percent increase in the county tax rate where I live.

    The CEO of the company I work for received a $1.5 million pay raise this year along with a larger bonus.

    I live frugally and have no debt. I am trying to save and invest but there is just not much left for investing after living expenses.

  • Report this Comment On October 27, 2012, at 3:59 PM, 48ozhalfgallons wrote:

    You feel poor when you want something you can't afford. You become poor when you borrow for it.

  • Report this Comment On October 31, 2012, at 9:12 PM, alf720 wrote:

    most people are unwilling to save because they do not want to change life style. many people do not understand savings because you can not touch it or feel it. savings is not a material item. pay your self first would be one way to start a savings plan just a few dollars a week will add up. But too many people want instant gradification.

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