W(h)ither the Middle Class? A Dynamic View

A constant theme throughout the history of the U.S. has been the growth of the middle class and the promise of its growth for the elimination of poverty. By the late 1980s, social analysts sensed a decline in the size of the American middle class which later was verified through cross-section analysis of wage and salary and income distribution data. Using time series from the Panel Study of Income Dynamics for prime-age males, this study moves beyond verification of the shrinking of the middle class. The analysis examines changes in both income and wealth and finds that wealth increases reinforced income changes at the upper end of the distribution while for low-income households, real earnings have stagnated. The analysis also finds that demographics and cyclical factors account for little of the shrinkage of the middle class, although, cyclical factors in the late 1980s reduced the upward mobility of lower-income households and increased the downward mobility of many in the lower range of the middle of the income distribution. This coupled with the gains to upper income households generated by the 1986 Federal Tax Reform enlarged the number of households at both ends of the income distribution at the expense of the middle class. Moreover, the authors find that prime-age adults who began the 1980s in the middle-income category had a greater probability of falling to the lower class than of rising to the upper class