In most developed countries around the world the middle class is shrinking. Some would argue that the "middle class" is the most important part of a successful democracy.


The secrets of Canada's world-leading middle-class success

DOUG SAUNDERS


August 4, 2007 at 12:00 AM EDT

LONDON — This long weekend, as Canadian highways fill with lakeside-bound cars and airports with resort-bound families, it is hard to believe that we are anything but a middle-class nation.

After years of full employment and impressive economic growth, you'd think the entire country had been elevated into the secure world of home ownership, retirement savings and weekends on the dock. There's some truth to this vision – but it's a lot stranger than you'd think.

The middle class, around the world, is in trouble. As my articles from India in the past two weeks have shown, poor countries are seeing stunning growth without producing the sort of big, sustainable middle class that leads to peace and long-term stability. There are too many barriers to prevent people from leaving poverty.

But what about countries such as ours, which have had big middle classes for decades? Here, we see a surprising version of the same effect – with notable exceptions. A comprehensive look at the workings of the world's middle class has just been published by Steven Pressman, an economist at Monmouth University in New Jersey. In his The Decline of the Middle Class: An International Perspective, Canada plays a fascinating role.
This long weekend, as many Canadian families hit the Muskoka Lakes (above) and other resorts , it is hard to believe that we are anything but a middle-class nation. There's some truth to this vision – but it's a lot stranger than you'd think.

This long weekend, as many Canadian families hit the Muskoka Lakes (above) and other resorts , it is hard to believe that we are anything but a middle-class nation. There's some truth to this vision – but it's a lot stranger than you'd think.

From 1980 to 2000, a period of explosive economic growth and expanding wealth, most major Western nations actually saw their middle classes shrink in size. The middle-income ranks (earning 75 to 125 per cent of the median income) in Britain shrank by 4.5 percentage points; in Sweden by 7.1 points; and in the U.S. by 2.4 points. These numbers represent tens of millions of people.

Were all these people disappearing from the middle class because they got rich? Or had they failed to find a place on the economic escalator and slipped to the ground floor?

“There was both upward and downward mobility,” Mr. Pressman told me, “but downward mobility exceeded upward mobility by around two to one.”

But there are exceptions to this trend. Switzerland's and Germany's middle classes stayed roughly the same size. And two countries – Norway and Canada – saw their middle classes grow substantially. In Canada, it grew to 37 per cent of the population from 33 per cent, the equivalent of a whole mid-sized province joining the station-wagon brigade, moving Canada into the league of Scandinavian nations in the size of its middle class.

Some of this came from wealthier Canadians being humbled: During the same 20 years, the upper class shrank by 1.9 percentage points, to 33.3 per cent of the population. But more came from poor families moving up. Canada is a middle-class success story, especially compared with the slouching United States. But the story doesn't end there.

Mr. Pressman set out to learn what is making the middle class collapse in many countries but expand in others. Some have attributed these changes to an aging population, the number of working women or divorce rates. He used statistical methods to remove age and gender from the picture, but the patterns remained the same.

Then he looked at unemployment: Were countries with rising employment rates experiencing a growing middle class? Nope. Britain has far lower unemployment than Canada, but a shrinking middle class: “While jobs were being added, households were not moving into the middle class.” In the Netherlands, unemployment fell dramatically, but the middle class declined.

Then Mr. Pressman took his data and subtracted everything except salary and wage earnings. That is, he looked at what would be happening if people lived off only the money paid by their employers.

Suddenly, everything changed. Canada's great middle-class boom turned into an enormous decline: If people were forced to live off their earnings alone, our middle class would have shrunk by a staggering six percentage points. The same was true in Germany. In Britain, the middle class would have contracted even more dramatically.

What had Mr. Pressman subtracted? In short, government: All the handouts, tax benefits, subsidies and rebates that transfer money into middle-class pockets (not including pensions). Without government help, Canada's middle class would be endangered.

In a modern economy, Mr. Pressman told me, “I am not sure that the middle class can be self-sustaining. It seems to require active government policies. The market tends to produce great inequalities in income; these inequalities seem greater in a global economy.” Contrary to earlier economic belief, the countries that are most competitive in a globalized economy are those with the most robust tax-and-spend programs. But they have to be aimed at the right places.

Many Canadian families wouldn't be middle-class if it weren't for government handouts. One key example is the thousands of dollars that Ottawa reimburses parents for child-care expenses each year: Without it, many women wouldn't be able to work, so their families would be deprived of one income and may slide into the lower-class bracket. Tax-funded aid for education savings, first-time home buying, retirement savings plans and medical coverage add up: If you gave up all these breaks, would you still be in the middle class?

I compared these findings to information on the money governments actually spend on different classes and got a surprising result: The countries doing well are the ones that don't just help out the middle class, but do so at the expense of the poor.

Canada hands a comparatively paltry 22 per cent of its spending to the poorest three-10ths of the population and a generous 64 per cent to the middle four-10ths, according to the Organization for Economic Co-operation and Development. Germany, one of the few other countries with a non-shrinking middle, gives only 22.3 per cent to the poor.

Compare that with Britain, whose Labour government spent the 1990s changing social programs so that the money went to the poor rather than the middle class; in Britain today, 34.7 per cent of social spending goes to the lowest-income third – and yet the British middle class has shrunk. In Sweden, where almost 30 per cent of spending goes to the poor, the middle class was clobbered.

(An exception is Norway, which spends a record-breaking 43.8 per cent on its poorest third and saw middle-class gains even bigger than Canada's. But Norway's economy consists largely of oil revenues, allowing taxes and spending levels that, in other countries, would probably destroy the very economy that makes the welfare state possible.)

However, countries that saw middle-class gains also tend to be ones that don't tax the poor heavily. Sweden, surprisingly, does. Canada doesn't. Arguably, governments gain more by making middle-class life easier than by simply aiding the poor. The poorest third are doing a lot better now than they did 20 years ago; unlike the middle class, they saw formidable income gains. But not enough to shift many of them into the secure middle.



It may be that traditional welfare-state programs do more to keep people in poverty than to guide them out – a criticism that has been levelled from both the left and the right. Or perhaps there's a new sub-class of “precarious” casual workers, who never are quite poor enough to qualify for welfare or prosperous enough to earn the state benefits of the comfortable middle. Such workers, key to our new national wealth, could be in serious trouble.

Herein lies the paradox of the modern middle class: Its existence is reliant on a thriving and open market economy, but its size and sustainability are equally dependent on the tax-and-spend mechanisms of the modern welfare state – which, it turns out, are even more important in globalized, high-competition economies.

The countries that are doing best are those that spend serious money on cultivating and maintaining a middle class. Many poor countries, despite having developed booming economies during the past 15 years, fail to join the middle-class club because they can't afford to erect government-supported stepladders to success. And countries such as Canada, which can and do spend that money, have done the best at surviving the social turmoil of our age.

Well, the NYSE down turn this week is actually a good sign.

Predatory lending will go down tremendously. People signing retarded interest only loans (a good way to go from middle class to poverty) will go down tremendously.

Housing will get cheaper and people who are mildly intelligent can find a good deal on a house because sellers will be more motivated. This will help the lot of us who live well within our means, but if you're over extended... watch out!!

Why did you bold points that are irrelevant to the conclusion of the article?

Here's the key:

"I compared these findings to information on the money governments actually spend on different classes and got a surprising result: The countries doing well are the ones that don't just help out the middle class, but do so at the expense of the poor."


There are lots of ways to interpret this result, but the way that first pops into my evil, conservative brain is that the poor are poor for reasons beyond just income inequality. Perhaps socialized behavior patterns are more indicative of economic mobility than most people are willing to admit.

IMNSHO, another key point is this:

"Or perhaps there's a new sub-class of “precarious” casual workers, who never are quite poor enough to qualify for welfare or prosperous enough to earn the state benefits of the comfortable middle. Such workers, key to our new national wealth, could be in serious trouble."

This is important to think about when contemplating progressive taxation schemes. A point I've tried to make before is that cut-off levels for taxes or benefits hurt those on the cusp. For example, tax rates that are 10% for people making <$34,999 and 15% for people making >$35,000 are just stupid. What difference does that one dollar make? If social programs are designed to help “precarious” casual workers, then they should be done on a logarithmic scale to approach some predetermined level of appropriateness.

I think this absolutely right. It's kind of like the difference between doing calculations based on Calculus or not.

In the past, I think it would have been impossibly unwieldy to have a progressive tax structure that utilized a smoothly sloping curve rather than the linear graduated rates we currently use. But now, with nearly half of people filing electronicly, it is actually a reality to have a computer calculate your tax, rather than the stupid tables in the back of teh 1040 instructions. With a smooth curve, you would eliminate the problem of people on the cusp, because there would be no cusps, and if formulated smartly, the government would net more revenue without most people feeling any difference in the taxes that they pay.

Do you think this is a workable solution?

i dunno i dont really remember posting the article. I was pretty drunk. but i do remember reading it in the paper over the weeekend.

If one must insist on progressive taxation, then this would be a good way to go.

If nothing else, it'd be amusing to hear politicians try to explain their tax plans by what adjustment they'd make to a non-linear equation.

Heh. Politicians and math. I don't think the American public would accept anything based on a logarithmic scale. Talk radio would label it a leftist mathematician conspiracy.

Idiocracy at its finest.

Oh, and here's my hypothesis to pose as a counter-argument. I'd look at the increasing amount of job opportunities sent overseas to developing countries in the past 25 years or so. While people over there are willing to work for less than what the developed worked is accustomed to, it's a lot more than what they are accustomed to. Thus, their salaries increase at the expense of the salaries of who used to occupy the jobs--and they must be mostly in the middle class, as most of the higher paying jobs require skill or location still mainly found in the developed world.

Now, I would neither advocate income redistribution that the left would want, nor advocate nationalist protectionist policies (I'm looking at you, Pat Buchanan). If anything, it should be a sober awakening of how good we've had it relative to the rest of the world, and start to consider ways to enjoy life with less, or make a good bargaining argument to get more.

I understand your point there, but perhaps a better question would be what other factor would contribute to the changes in the percentages of the population in each class? The first thing that jumps to my evil-conservative mind is immigration. Canada has an immigration policy that favors middle-upper-middle-class immigrants, like doctors and engineers, to come to their country. The USo'A on the other hand has an immigration policy that makes no such distinctions and allows in far more people who are in the lower income brackets in their countries of origin. These immigrants can replace the current low income workforce keeping them from achieving any upward social mobility. I guess what I'm saying is that maybe the reason the percentage of Canada's population that is middle class is growing is because that's where there population growth is, as opposed to the US where most of the population growth is at the lowest end of the income spectrum.

I was wondering why my post didn't get much attention--I thought it was somewhat controversial. Thanks from coming through again, b_i.

I think it's just a matter of demand for labor when it comes to immigration. There are more jobs needed for unskilled labor (which could be vacated by the natives possibly "moving up" to skilled labor/service jobs), and companies don't need to have the higher-end immigrants to fill those jobs. While this may be taking down the US overall in the inequality department, it is surely an increase for those whose economic situations were worse in their country of origin.

Do you think the raw numbers of immigrants, in either country, are enough to affect the changes you suggest? My first blush at this idea is that while Canadian immigration policy may "favor" middle class immigrants more than American policy (something I do not in any way dispute), it would take nearly unanimously middle class (or lower class in the case of the US) immigration to affect the level of change you suggest.

It may be a factor, but I tend to think that it is a lesser factor than some other factors suggested.

The middle class really struggle here in Brazil, since it pays a lot of taxes and gets nothing from the gov.

I didn't mean suggest that it's purely the number immigrants; it's also their fertility rates versus native born citizens. Let me try to explain my view a little bit better. First, I'm making the assumption that the so called demographic-economic paradox; education and economic achievement are inversely correlated with birthrates, is true. Secondly, I recognize that in the US, immigrants and their first generation children have higher birthrates than they would in their countries of origin. Finally, I recognize that a majority of the population current growth in the US is from immigration. (Google any of that for recent study/research details). Combine those three and you get a growing percentage of the US population starting out in the lower income bracket, independent of immigrations effect on reducing job opportunities for the existing low income workers already participating in the US economy, which is what the original post was describing.

Admittedly that idea is full of assumptions about potentially biased statistics, but I think it's a point like GH's that should be considered when reflecting on the future of the middle class in North America.

Couldn't that be said throughout the history of the United States? This is a nation built on immigrants, and more often than not, they came here to escape from worse conditions in their country of origin.

i was thinking this same thing.

Wow... another horrible illogical piece...

No, tell us what you REALLY think.

There was thinking behind that post? Who knew?

Each of those three ideas in my previous post was an independent fact (assumption based on statistical evidence), so I think you are right in saying that historically a lot of population growth has come from immigration, but something else has changed over time. The birth rates of the middle class have been declining since around 1970. As women have gained in economic opportunity, they have been putting off or even having fewer children because they are now able to choose their own fates in life instead of being raised to be a mother. Combine that with the enormous cost, both financially and otherwise, of raising a child in the middle class and it's not hard to see why less middle class people are having kids. The lower income class, where most of the US population growth is occurring, has it's children subsidized through social programs. Add to the reduced cost burden; typically lower education levels and in the case of most immigrants a language barrier, you will inevitable get growth at the lower end of the income spectrum.

I suspect, as the author of the original post does, that If social programs were targeted at the middle class their fertility rates would increase the number of people in the middle class would increase as well. As an interesting side note, college educated black women have a lower fertility rate (1.5) than college educated white women (1.6). That doesn't bode well for the establishment of a black middle class.