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Wednesday, November 28, 2012

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 2011, 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. Relatively few households can be found in the upper end of the income distribution. Of the 121,084,000 households with income in 2011, only 2.3% 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. In 2011, the top 5% of U.S. households with income accounted for 22.3% of total income, and the top 20% of households (which includes the top 5%) had 51.5% of all money income.

The second major point is that there is no official government definition of who belongs to the middle class, and 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.

Thirdly, absolute income appears to partly determine who belongs to the middle class. By combining money income data from the latest Annual Social and Economic Supplement to the Current Population Survey with results from surveys that asked people to identify their social class, the middle class may refer to households with income levels in 2011 that ranged from $38,521 (the bottom of the middle quintile, 20%, of households) and extended into the top quintile (households with income of $101,583 or more)—perhaps including households with incomes somewhat over $200,000.

Lastly, relative income may also be a defining characteristic of the middle class. In other words, the middle class appears to identify itself relative to the income of a reference group (e.g., their neighbors or coworkers). According to studies of self-reported well-being, 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 in part explain the 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 13, 2012
Number of Pages: 10
Order Number: RS20811
Price: $29.95

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