The squeezed middle is real, but our measures are designed to miss it
Everyone agrees the middle class is under pressure. Few agree on who the middle class actually is. And almost nobody talks about the fact that how we define and measure “the middle” is itself a political choice, one that shapes what governments see and what they choose to do about it.
The OECD defines “middle income” as households earning between 75 and 200 per cent of the national median. That sounds reasonable until you notice that someone at 200 per cent of the median in Ireland is a comfortable professional, while someone at 200 per cent in the US is struggling to cover basic costs. The same statistical label describes entirely different lives. A relative definition tells you where a household sits in its own country’s distribution. It tells you nothing about whether that household can pay its rent.
And rent is the point. The squeeze on the middle is real, but it is not primarily an income story. It is a cost story. Across the OECD, housing has risen from a quarter to over a third of middle-income budgets since the mid-1990s, with prices growing at twice the rate of inflation – and even higher in some countries. Education, childcare and healthcare have followed. Income can rise while living standards fall, if costs rise faster than earnings.
In the United States, most middle-income households went from spending 90 per cent of their income in 2004 to 100 per cent today. They stopped saving entirely. No standard inequality measure captures any of this. If you are not measuring the cost of middle-class life, you are not measuring the squeeze.
Ireland shows what happens when you pull back the curtain on a country that looks equal. Market income inequality stands at a Gini of 47. After taxes and transfers it falls to 27, one of the largest reductions in the OECD. Half of all workers earn less than 40k a year. The bottom quintile earn almost no market income. They are not participating in the economy so much as being compensated for their exclusion from it. Ireland does not have a well-functioning labour market corrected by a generous welfare state. It has a transfer economy wrapped around a low-wage economy. And most economists, looking at the disposable income figures, see no problem at all.
This is not just an Irish story. The standard account is that Europe is less unequal than the United States because European welfare states redistribute more. That is not wrong, but it misses the larger point. Once you correct for gaps in the data, the US actually transfers a larger share of national income to its bottom half than any European country. It just starts from a much deeper hole. The real reason Europe is less unequal is that stronger unions, coordinated bargaining and public education compress the wage structure before the state steps in. If you want to understand why the middle is squeezed, start with who earns what, not with what governments hand out afterwards.
Underneath it all, a structural shift has been running for four decades. Labour’s share of national income has fallen from 61 per cent in 1980 to 53 per cent today. Eight percentage points of what economies produce has moved from wages to profits. The middle is not just being squeezed by rising costs. It is getting a shrinking share of a growing pie, and most of our indicators are not designed to show it.
Return to Ireland and the wealth data make the point. Ireland’s wealth Gini stood at 0.78 in 2013. Central Bank data show it fell to 0.68 by 2022. Progress? Not quite. The bottom half improved their position by paying down crisis-era mortgage debt, not by building wealth. They shed liabilities. Meanwhile the top ten per cent captured nearly half of all wealth growth and the number of millionaire households more than doubled. The headline improved. The underlying concentration got worse. Which number should shape the policy debate?
How we define the middle, and how we measure its fortunes, shapes what democracies can see. And what they cannot see, they will not fix.
Leave a Reply