The Money in the Middle: Step right up to the roaring 2000s

American Demographics, April, 2000 by Alison Stein Wellner

The economy is cruising along. Consumers are plunking down cash and credit on sales counters from coast to coast.

And during the past six years, 4.4 percent of American households have transitioned up and out of middle-class status and into the top stratas of income in the United States, according to Gregory Acs, a senior research associate at the Urban Institute in Washington, D.C.

Today, more than 20 percent of households earn more than $75,000, versus 16 percent in 1992. Who's been taking their place?

Thirty years ago, more than half of all middle-class households were headed by non-Hispanic whites. But as the population as a whole has become more diverse, so, too, has the middle class. Today, the percentage of middle-income households headed by non-Hispanic whites has dropped to 49 percent. And the middle-class diversity trend only accelerated during the 1990s. In 1992, 38 percent of black households had middle-class incomes. Six years later, that number had grown to 41 percent. Hispanic households saw a similar increase during that same time period: from 44 percent to 46 percent. At the same time, the percentage of non-Hispanic white households in the middle decreased by 1 percentage point, and the percentage of Asian households remained flat.

Certainly, the rising tide of the economy has played an important role in the changing make-up of the middle - especially for Americans born in the United States. But immigration has been a key factor as well. Over the past 30 years, there's been an important shift in the demographics of immigrants: They're getting younger. Forty-four percent were aged 25 to 44 in 1997 - up from just 19 percent in 1960, when one-third of immigrants were over the age of 65, compared to just 11 percent in 1997. This has been central to the diversification of the middle class, since younger immigrants have a better chance of improving their financial situation over time. And they are bringing a different mentality and a different set of expectations to the middle-class marketplace.

Of course, identifying what we mean by middle class is a tricky endeavor - not even the U.S. Census Bureau has an official definition. Part of the problem is that the true "middle" is a shifting target. Between 1997 and 1998, for example, the real median income of households in the United States grew by 3.5 percent.

Nevertheless, to some it's simply a matter of income quintiles, and the middle three - or 60 percent of U.S. household income distribution - create the boundaries of the middle. In 1998, the middle three quintiles accounted for an estimated 165 million households. But by that definition, households with incomes as low as $16,117 and as high as $75,000 would each be considered middle class. And the poverty threshold for a family of four in 1998, according to the U.S. Office of Management and Budget, was $16,660.

Acs suggests that the income range of the middle 40 percent of the population is a better way to define middle class. "Middle class is a feeling," he says, as much as it is a numerical paradigm. Using Acs' range, a middle-class income today is roughly between $30,000 to $75,000 - a level that spans the third and fourth quintiles. The absolute lowest limit to be considered middle class may actually be a bit lower, cautions Acs, around $25,000; it depends on the number of people in the household. It also depends on where in the country the household is located, since there are geographic variations in the cost of living.

Coming to America

What does it take for a low-income household to cross that $25,000 threshold into middle class? It helps to have two earners in the household, says Acs. And that is a fundamental difference between middle-class hopefuls today and those of years past, points out Toni Horst, an economist with Dismal Scientist and RFA, an economic data analysis company based in West Chester, Pennsylvania. Between 1987 and 1997, households with two earners saw their income increase by 5 percent, according to American Incomes: Demographics of Who Has Money (New Strategist). At the same time, households with one earner saw their income decrease by 2.3 percent. Today, having two earners is a requirement to keep up, says Horst.

Which is one reason why much of the growth in the middle class today has been fueled by immigration. At 3.32 people per foreign-born household, immigrant families are considerably larger than the 2.56-person average size of native-born households. And these larger households have more earners: 1.6 versus 1.39.

But large household size doesn't tell the whole story. Mexican-born households, the worst off financially of all immigrant groups, also have the largest household size (over four people per household). At the same time, they have low levels of educational attainment. "Education is the biggest ticket to the middle class," says Horst. "Not much happens without it."

There's a sharp difference in income between people who are educated and people who aren't, agrees Frank Stafford, a professor at the University of Michigan and the principal investigator of the Panel Study of Income Dynamics. For example, between 1976 and 1996, the earnings of men with advanced degrees increased by more than a third for non-Hispanic whites and blacks, and by 20 percent for Hispanics. In contrast, earnings for men who did not finish high school fell by 12 percent for blacks and by 20 percent for whites and Hispanics.