Fewer Americans identify as middle class, despite ongoing economic recovery

The economy, particularly in Northwest Arkansas, has seen steady growth in the past two years. But on a national level the number of Americans who consider themselves middle class wage earners continues to shrink, according to a recent report from Pew Research Center.

Economists warn that without middle-class engagement, a full economic recovery is unlikely.

Since 2011, the number of Americans who identify themselves as the middle class has dropped from 52% to 44%. Pew researchers said this is a fundamental shift in how American’s view their income levels.

According to the Census Bureau, the median household income in the U.S. decreased by 8% since the recession began in 2007. Median incomes fell from $55,627 in 2007 to $51,017 in 2012. The median income in 2012 was at the same level it was in 1995, a setback of 17 years, the report notes.

Income losses have been greater for households in the middle of the income distribution than for households at the top. For households in the third quintile of the income distribution, average income fell by 8% from 2007 to 2012. Meanwhile, for households in the highest quintile, average income fell by only 2%. The net result is growing inequality in the income distribution, the research notes.

A separate study Pew conducted in 2012 also found a reduction in the middle of the income distribution. The study used Census Bureau data to classify adults into lower, middle or upper income tiers depending on the income of their household relative to the overall median. The researchers found that the share of adults in the middle income tiers has fallen in each of the last five decades, from 61% in 1971 to 51% in 2011.

Economists have been reporting for years that the lack of job growth in the middle-skill, mid-income levels jobs is creating a gap in earning potential for the middle class. The New York Federal Reserve found that middle class jobs increased 46% between 1980 and 2009. At the same time, low-skill jobs rose 110%, while high-skill jobs increased 100%. The shift has been referred to “jobs polarization” and it continues today with the majority of new jobs announced being low-skill, lower income positions.

Wall Street analysts continue to advise investors to aim high or low but avoid the middle income demographic as it steadily erodes. John Maxwell, head of the global retail and consumer practice at PricewaterhouseCoopers, recently told The New York Times that retailers and restaurants are either chasing richer customers, or focusing on rock-bottom prices to attract budget-conscience shoppers.

“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Maxwell said. “You don’t want to be stuck in the middle.”

Restaurants such as Olive Garden and Red Lobster that cater to the middle income consumers have had their woes, while fine-dining chains like Capital Grille and Ruth’s Chris Steak House continue to expand. The local Ruth’s Chris Steak House in Rogers confirmed with The City Wire that it’s in the midst of expanding its patio section to add additional tables and seating to the restaurant.

“We know much of the economic recovery of the past few years is largely attributed to upper-income demographics. But this wealthy class can only consume so much,” said Kathy Deck, director for the Center for Economic Research at the University of Arkansas.

She said this shift away from the middle class is a challenge to continued economic growth and the longer term consequences could result in diminished innovation. Locally, Deck said roughly 26.3% of households earn less than $25,000 and just 26.8% of households earn more than $75,000. That leaves the vast majority in the middle, where incomes have largely stagnated.

“A shrinking middle class is not what people think of when picturing a vibrant economy. Without the middle engaged future recovery will be hindered in the national economy,” Deck said

She also said that while Northwest Arkansas is seeing much broader-based job growth than the nation as a whole, there are still more applicants than there are jobs, particularly in the lower-skill service industry.

“As long as there is a surplus of applicants, there is little chance wages will increase among these service/hospitality jobs. From December 2012 to December 2013, Northwest Arkansas jobs grew at 4.1% clip. This compared to 1.6% nationally,” Deck noted.

While the Northwest Arkansas economy is growing at faster pace than the nation, Deck said it is not immune to effects of the shift income distribution and growth.

A recent report from economists Steven Fazzari of Washington University and Barry Cynamon, of the Federal Reserve Bank of St. Louis, indicated that the top 5% of earners were responsible for 38% of domestic consumption in 2012. The researchers found this was a 10% jump from 1995.

Fazzari reports since the recession ended in 2009, inflation-adjusted spending by this top echelon has risen 17%, compared with just 1% among the bottom 95% of wage earners.

The effects of this phenomenon are now rippling through one sector after another in the American economy. While spending among the most affluent consumers has managed to propel the economy forward, the sharpening divide is worrying, Fazzari notes.

“It’s going to be hard to maintain strong economic growth with such a large proportion of the population falling behind,” he said. “We might be able to muddle along — but can we really recover?”