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Wednesday, November 16, 2011

The Distribution of Household Income and the Middle Class

Linda Levine
Specialist in Labor Economics

Although not itself a subject of legislation, the shape of the income distribution enters Congress’s decision-making process concerning such policy issues as taxes, means-tested benefits, and social insurance programs. Congress also considers legislation specifically in the name of those in the middle class, which is variously defined as some income level or income range within the distribution of U.S. households with income. After briefly analyzing the distribution of household money income in 2010, the report attempts to put the term “middle class” into some perspective.

The first key point of the report is that, although there are a variety of ways to describe the income distribution, all show that income is concentrated among high-income households. For example, few households can be found in the upper end of the income distribution. Of the 118,682,000 households with income in 2010, only 2.1% had incomes of at least $250,000. (The Census Bureau does not disaggregate income within the $250,000-or-more income class.) In addition, a disproportionately large share of total money income accrues to those at the upper end of the distribution. That is to say, in an equal distribution, 5% of households would have an equivalent share of aggregate income. In 2010, the top 5% of households accounted for 21.3% of total income, and the top 20% of households (which includes the top 5%) had 50.2% of all money income.

The second major point is that there is no official government definition of who belongs to the middle class, perhaps because the term means different things to different people. The middle class may refer to a group with a common point of view or to those having similar incomes, for example. This report focuses on income (as defined by the Census Bureau).

Thirdly, it appears that both absolute and relative income may determine who belongs to the middle class. Based on combining money income data for 2010 with results from surveys that asked people to identify their social class, the middle class may refer to households with incomes in 2010 that ranged upward from $38,044 (the bottom of the middle quintile, 20%, of households) and extended into the top quintile (households with income of $100,066 or more)—perhaps up to households with income of about $250,000.

The last key point of the report is that the middle class appears to identify itself relative to a reference group (e.g., the incomes of others in their neighborhood or in their companies). According to studies of self-reported well-being conducted by economists in recent years, those who constitute the middle class seemingly are of like minds with regard to their economic situation. Specifically, having incomes far above those at the lower end of the income distribution appears to be a source of satisfaction to the middle class, but when those at the upper end of the distribution fare much better than they do, it can be a source of consternation to the middle class. As authors of one study put it, staying ahead of the Smiths and keeping up with the Joneses is important to the middle class. This outlook may partly explain the current antipathy expressed in some quarters toward the compensation of senior executives, among others, at some of the nation’s largest corporations generally and firms in the financial services industry specifically.

Date of Report: November
9, 2011
Number of Pages:
Order Number: RS2
Price: $29.95

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