The real "middle class" is even worse off

When we talk about the problems that middle-class households face, for example, how much financial stress they face or the "hollowing out" of the middle class, the precise definition of "middle class" is important.

The usual way of defining the middle class is the middle 50 percent of the income or wealth distribution. However, this measure can lead to ambiguities because the middle 50 percent of the income distribution is not the same as the middle 50 percent of the wealth distribution. It can also lead to instabilities due to changes in the demographic composition of the population over time.

Recent research from the St. Louis Fed's Center for Household Financial Stability attempts to overcome these problems by adopting a demographic definition of the middle class. And it makes a difference. As the authors, William Emmons and Bryan Noeth noted, changing the definition reveals that "the middle class may be under more financial pressure than has been otherwise reported."

What is a demographic definition of the middle class? The authors divide households headed by someone at least 40 years old into three groups, Thrivers, Middle Class and Stragglers. They define these groups like this (from a summary of the research):

• Thrivers are families likely to have income and wealth significantly above average in most years and are headed by someone with a two- or four-year college degree who is non-Hispanic white or Asian
• Middle Class are families likely to have income and wealth near average in most years and are headed by someone who is white or Asian with exactly a high school diploma, or black or Hispanic with a two- or four-year college degree
• Stragglers are families likely to have income and wealth significantly below average in most years and are headed by someone with no high school diploma of any race or ethnicity, and black or Hispanic families with at most a high school diploma

Comparing income in 2013 with income in 1989 for each of these three groups, the researchers found little change in the median income of Thrivers and Stragglers. For Thrivers, median income rose 2 percent over this time period, while for Stragglers it rose 8 percent. However, for the Middle Class, median income fell by 16 percent between 1989 and 2013.

The authors also examine changes in wealth for the three groups, and in this case only the Thrivers exhibit gains. In particular, they experienced a 22 percent increase in wealth, while Middle Class wealth fell 27 percent and Stragglers' wealth declined 54 percent.

The bottom line according to Emmons and Noeth is that "the demographically defined middle class reveals that families that are neither rich nor poor may be under more downward economic and financial pressure than common but simplistic rank-based measures of income or wealth would suggest. ... In effect, the bar has been rising to remain near the middle of the income and wealth distributions."