The Shrinking Middle Class: Government Data Reveals Five Decades of Economic Squeeze

Last updated 1 week ago. Our resources are updated regularly but please keep in mind that links, programs, policies, and contact information do change.

The American middle class represents a promise of economic opportunity and comfortable life in exchange for hard work. For decades, this group formed the clear majority of the U.S. population.

That middle class is now shrinking. Its share of the economic pie is dwindling, and the financial pressures on middle-income families are intensifying. These changes have reshaped America’s economic landscape and threaten the American Dream.

A hollowed-out middle class affects everything from consumer demand to political stability, from social mobility to democratic governance.

Defining the Middle Class

No Official Government Definition

The U.S. government has no official definition for “middle class.” The U.S. Census Bureau, the nation’s primary source for income and poverty statistics, explicitly states that it doesn’t formally classify households as “middle class.”

Instead, it provides raw data on income distribution, often broken down into quintiles (fifths of the population) or measured with statistical tools like the World Bank’s Gini index, which gauges overall inequality.

This absence of an official benchmark significantly shapes public and political conversation. It creates a vacuum that allows politicians, analysts, and individuals to apply their own definitions, leading to widespread confusion. A family earning $35,000 and another earning $200,000 might both self-identify as middle class, making it difficult to have coherent, data-grounded debates about who needs help and what policies are most effective.

The lack of definition also reflects deeper questions about what “middle class” actually means. Is it purely about income? Does it include wealth and assets? Should it factor in debt levels, job security, or access to benefits? These questions aren’t just academic—they shape how policies are designed and who they’re intended to help.

The Pew Research Standard

In the absence of a federal standard, the most widely used definition comes from Pew Research Center, a non-partisan research organization. This report adopts Pew’s income-based definition, which classifies “middle-income” or “middle-class” households as those with annual income that is two-thirds to double the national median household income.

This benchmark isn’t a simple, one-size-fits-all number. It’s carefully adjusted for two critical factors:

Household Size: Income thresholds are scaled to account for the number of people in a household, recognizing that a single person requires less income to maintain the same standard of living as a family of four. The adjustment uses an equivalence scale that accounts for economies of scale in household consumption—it costs less per person to house and feed a family of four than four separate individuals.

Local Cost of Living: Using data from the American Community Survey, incomes are adjusted for vast differences in the cost of living across the country. This ensures that a household in an expensive coastal city is measured on a comparable basis to one in a more affordable rural area. The adjustment considers housing costs, which typically represent the largest budget item for most families.

Based on this methodology, for a three-person household in 2022, the middle-income range was approximately $61,000 to $183,000 annually in 2023 dollars. Households earning less fall into the “lower-income” tier, while those earning more are in the “upper-income” tier.

Alternative Approaches to Definition

While Pew’s income-based approach is widely accepted, other organizations use different methods that can yield different results.

Asset-Based Definitions: Some economists argue that wealth—not just income—should be central to middle-class definition. A family might have middle-class income but no savings, making them financially vulnerable in ways that income alone doesn’t capture. Conversely, a retiree might have modest income but substantial assets built over a lifetime of work.

Lifestyle-Based Definitions: Others focus on consumption patterns and lifestyle markers. This approach looks at whether families can afford what are considered middle-class staples: homeownership, reliable transportation, healthcare coverage, occasional vacations, and the ability to save for children’s education and retirement.

Occupational Definitions: Historically, certain occupations were considered inherently middle-class—teachers, nurses, police officers, skilled trades workers. But many of these jobs now pay wages that might not qualify as middle-class by income standards, especially in high-cost areas.

Subjective Definitions: Polling data shows that Americans’ self-identification as middle class often differs from objective measures. Some surveys find that people across a wide income range identify as middle class, suggesting the term carries cultural and psychological meaning beyond pure economics.

Beyond Income: Security and Aspiration

While income provides a crucial benchmark, the concept of being “middle class” resonates with Americans for reasons that go beyond a paycheck. It often implies a specific lifestyle and sense of economic security.

This includes owning a home, having stable employment, being able to save for retirement and a child’s college education, and having a financial cushion to weather unexpected hardships. It’s this combination of tangible assets and intangible security that forms the core of middle-class identity and the American Dream.

The security aspect is particularly important. Middle-class status has traditionally meant not just having enough money to meet current needs, but having enough stability and resources to plan for the future. It means being able to take calculated risks—like starting a business or changing careers—without risking destitution.

This security dimension helps explain why many families with middle-class incomes don’t feel middle-class. Despite earning what should be adequate wages, they live paycheck to paycheck, unable to build savings or weather financial shocks. The subjective experience of economic stress can overshadow objective income measures.

Geographic Reality Check

The importance of adjusting for local cost of living cannot be overstated. A single national income figure is largely meaningless for determining middle-class status. Government data analysis makes this starkly clear.

To cross the national middle-class threshold in 2022, a household in the high-cost San Francisco metro area needed an income of about $66,700. In contrast, a household in the low-cost Jackson, Mississippi, area needed only about $37,150 to achieve the same relative standard of living.

This disparity is visible across states and cities. In 2023, the income range for the middle class in Maryland was roughly $65,779 to $197,356. In Detroit, Michigan, that same range was just $25,384 to $76,160.

But these geographic variations create their own complications. A teacher or firefighter might be solidly middle-class in Mississippi but struggle financially in California, despite doing the same job. This geographic arbitrage affects everything from recruitment of public workers to internal migration patterns as Americans move in search of affordable middle-class lifestyles.

The variations also create policy challenges. Federal programs that use national income thresholds might provide inadequate help in high-cost areas while being overly generous in low-cost areas. Similarly, companies setting national salary scales must grapple with vastly different purchasing power across locations.

Some metropolitan areas have become so expensive that traditional middle-class professions—teachers, police officers, nurses—can’t afford to live where they work, leading to long commutes, staffing shortages, and community disruption. This geographic squeeze is reshaping American settlement patterns and challenging traditional notions of career paths and community stability.

Five Decades of Decline

Analysis of government data over the past five decades reveals two clear and powerful trends: the middle class now represents a smaller share of the U.S. population, and more dramatically, it controls a much smaller share of the nation’s total income.

A Shrinking Share of the Population

The most direct measure of the shrinking middle is its size relative to the total population. In 1971, a decisive 61% of American adults lived in middle-income households. It was, by definition, the clear economic majority.

By 2023, that share had fallen to 51%—barely a majority at all.

This 10-percentage-point decline didn’t happen in a vacuum. The population has polarized, moving toward economic extremes. The share of adults in the upper-income tier grew substantially, from 11% in 1971 to 19% in 2023. At the same time, the share in the lower-income tier also rose, from 27% to 30%.

The story is not one of simple decline, but of a financial landscape pulling apart, with fewer people clustered around the median.

This polarization represents a fundamental shift in American society. For most of the post-World War II era, the income distribution resembled a diamond shape, with a large middle and smaller groups at the top and bottom. Today, it’s becoming more of an hourglass, with growth at both ends and a narrowing middle.

The demographic changes within each income tier tell additional stories. The upper-income tier has grown partly due to educational attainment—more Americans have college and advanced degrees, which typically lead to higher-paying jobs. But it’s also grown due to the outsized returns to certain skills and positions in the modern economy.

The lower-income tier’s growth reflects several factors: the decline of manufacturing jobs that once provided middle-class wages without college degrees, the rise of service sector jobs that often pay less, and the increasing number of part-time and gig workers who may prefer flexibility but often sacrifice economic security.

Source: Pew Research Center analysis of government data

A Smaller Slice of the Economic Pie

While the decline in population share is significant, the erosion of the middle class’s economic power is even more stark. The share of the nation’s aggregate household income held by the middle class has fallen far more steeply than its population share.

In 1970, middle-income households were the undisputed engine of the U.S. economy, earning 62% of the nation’s total income. By 2022, that share had plummeted to 43%.

This represents a massive transfer of economic power. In absolute terms, the middle class lost nearly a fifth of its share of national income over five decades. This wasn’t just about the rich getting richer—it was about the middle class getting relatively poorer compared to the overall economy.

The primary beneficiary of this massive shift has been the upper-income tier. Their share of aggregate income surged from 29% in 1970 to 48% in 2022. This means that the top 19% of the population now commands a larger share of the nation’s income than the 51% in the middle.

This concentration is even more extreme when looking at the very top of the income distribution. The top 1% of households now earn more than 20% of all income, while the top 0.1% earn about 10% of all income. This level of concentration hasn’t been seen since the 1920s, just before the Great Depression.

Meanwhile, the economic standing of the lower-income tier has also weakened. Even as the share of adults in this tier grew from 27% to 30%, their slice of the national income pie actually shrank slightly, from 10% in 1970 to 8% in 2022.

This suggests that the economic floor for those at the bottom has become less stable relative to the overall economy. Not only are more people in the lower-income category, but those in this category have access to a smaller share of national resources than before.

Source: Pew Research Center analysis of government data

The juxtaposition of these trends reveals a fundamental decoupling in the American economy. In 1970, the middle class’s share of the population (61%) was almost identical to its share of national income (62%). This 1-to-1 relationship has been broken.

The middle class is not only smaller than it was five decades ago, but its households also have significantly less economic clout relative to their numbers—a clear mathematical demonstration of rising income inequality.

Regional and Demographic Variations

The national trends mask important variations across different regions and demographic groups. The middle class hasn’t declined uniformly across the country or among all populations.

Geographic Patterns

Some metropolitan areas have seen their middle classes grow, while others have experienced steep declines. Generally, areas with strong high-tech industries, major universities, or diverse economies have maintained larger middle classes. Meanwhile, regions dependent on manufacturing, mining, or agriculture have often seen middle-class shrinkage.

The Rust Belt cities like Detroit, Cleveland, and Buffalo have experienced particularly steep middle-class declines as manufacturing jobs disappeared. In contrast, cities like Austin, Texas, and Raleigh, North Carolina, have seen middle-class growth fueled by technology and research industries.

Racial and Ethnic Differences

The trends also vary significantly by race and ethnicity. White and Asian households are more likely to be in the upper-income tier, while Black and Hispanic households are disproportionately represented in the lower-income tier.

However, all groups have experienced some middle-class erosion. Even among demographics where middle-class membership has remained relatively stable, the economic power of that middle class has diminished as their share of aggregate income has fallen.

Educational Divides

Perhaps no factor correlates more strongly with middle-class membership than educational attainment. College graduates are increasingly likely to be in the upper-income tier, while those with high school diplomas or less are increasingly likely to be in the lower-income tier.

This creates a particular challenge: many jobs that once provided middle-class lifestyles with high school diplomas now require post-secondary education. But the cost of higher education has risen faster than middle-class incomes, creating barriers to upward mobility.

The Great Financial Squeeze

For millions of American families, the story of the past few decades is one of relentless financial pressure. On one side, wage growth has failed to keep pace with the broader economy. On the other, the costs of foundational pillars of middle-class life—healthcare, childcare, and housing—have soared.

The Paycheck Problem

While households in all income tiers have seen their inflation-adjusted incomes grow since 1970, these gains have been profoundly unequal. The median income of upper-income households jumped by 78% between 1970 and 2022.

For middle-income households, that growth was a more modest 60%, while lower-income households saw the smallest increase at 55%.

But even these figures mask important complexities. Much of the income growth for middle-class families has come from women entering the workforce and families working more hours, not from higher wages per hour worked. The typical middle-class household today has more workers and works more total hours than a similar household in 1970.

This trend is often described as the “productivity-pay gap.” Since the 1970s, the output per hour of the American worker—their productivity—has continued to climb steadily. For the first few decades after World War II, compensation for the typical worker rose in lockstep with productivity.

But since the 1970s, the two lines have diverged sharply, with productivity growth far outpacing pay growth.

From 1979 to 2020, productivity grew 59.7% while typical worker compensation grew only 17.5%. This means that workers today produce far more value per hour than workers in previous generations, but they’re receiving a much smaller share of that additional value as compensation.

The Measurement Debate

There’s technical debate among economists about the best way to measure inflation when calculating real wage growth. Some argue that the commonly used Consumer Price Index overstates inflation and that the Personal Consumption Expenditures price index is more accurate.

Using the PCE index does show more real wage growth since 1980 than the CPI (a 42% increase versus 18%). However, even with this more optimistic measure, a significant gap between productivity and pay remains, confirming that economic gains from increased efficiency haven’t been broadly shared with workers generating them.

The measurement debate reflects deeper questions about how to account for quality improvements in goods and services, changes in consumption patterns, and differences between the goods that workers buy and the output they produce. But regardless of which measure is used, the basic story remains the same: productivity has grown faster than typical worker pay.

Benefits and Total Compensation

Some economists argue that focusing only on wages misses the picture because benefits—particularly health insurance—have become a larger share of total compensation. When benefits are included, the productivity-pay gap narrows somewhat.

However, this argument has limitations. First, much of the growth in benefit costs reflects rising healthcare prices rather than improved benefits for workers. Second, many middle-class workers today actually have less comprehensive health coverage than their counterparts decades ago, with higher deductibles and co-pays.

Third, benefits are not distributed equally across the workforce. Higher-paid workers are more likely to receive comprehensive benefits, while lower-paid workers often receive minimal benefits or none at all.

The Rising Price of the American Dream

The other side of the squeeze comes from rapidly rising costs for non-negotiable family expenses. The “lived inflation” for a typical middle-class family is often much higher than the national average because their budgets are dominated by specific services whose prices have exploded.

Healthcare Costs

Healthcare represents perhaps the most dramatic example of cost inflation outpacing income growth. According to a Department of Health and Human Services report, the average premium for family health coverage reached $25,572 in 2024, a 20% increase since 2020.

But premiums tell only part of the story. Deductibles—the amount families must pay out of pocket before insurance kicks in—have grown even faster. The average deductible for employer-sponsored health plans has more than doubled since 2009, shifting more costs directly to families.

Healthcare costs now consume an average of 8% of a household’s budget, and these expenses are high enough to push an estimated 5.1 million people into poverty each year. Medical debt has become a leading cause of personal bankruptcy, even among families with health insurance.

The healthcare cost crisis particularly affects the middle class because they typically earn too much to qualify for government assistance like Medicaid but not enough to easily absorb major medical expenses. A serious illness or injury can quickly push a middle-class family into financial distress.

Childcare Crisis

The cost of childcare has become prohibitive for many families. The national average price was $13,128 in 2024. For a family with two children, the cost of center-based care now exceeds the median annual rent payment in 49 states and the District of Columbia.

Data from the Department of Labor shows that a year of care for a single child can consume between 8.9% and 16.0% of a median family’s income.

Critically, childcare prices have risen faster than overall inflation, increasing by 29% between 2020 and 2024, compared to a 22% rise in the general price level.

The childcare cost crisis creates a particular bind for middle-class families. They typically earn too much to qualify for childcare subsidies but not enough to easily afford quality care. This forces many families into difficult choices: one parent (usually the mother) leaving the workforce, accepting lower-quality care, or going into debt to maintain employment.

The problem is compounded by what economists call the “Baumol effect”—the tendency for services that require human labor to become more expensive over time relative to manufactured goods. Childcare is inherently labor-intensive, making it resistant to productivity improvements that might lower costs.

Housing Affordability

Housing costs have similarly outpaced income growth, particularly in metropolitan areas where most middle-class jobs are located. Home prices have risen much faster than middle-class incomes, making homeownership increasingly difficult for younger families.

The National Association of Realtors reports that the median existing home price has increased by over 400% since 1990, while median household income has grown by only about 150% over the same period.

Even for families who manage to buy homes, the financial burden has increased. The typical first-time homebuyer now puts down a smaller percentage and takes on larger mortgage payments relative to income than previous generations.

For those who can’t afford to buy, rental costs have also soared. In many metropolitan areas, middle-class families spend 30% or more of their income on rent, leaving less money for other needs and making it difficult to save for a down payment on a home.

Higher Education Costs

The cost of higher education, long seen as the pathway to middle-class status, has grown exponentially. Tuition and fees at four-year public colleges have increased by over 300% since 1990, after adjusting for inflation.

This creates a particular squeeze for middle-class families, who often earn too much to qualify for need-based financial aid but not enough to easily afford college costs. Many middle-class students graduate with substantial debt, which can delay other middle-class milestones like homeownership and family formation.

The rising cost of education also affects parents, many of whom sacrifice their own retirement savings to help pay for their children’s education. This intergenerational transfer of financial stress compounds the middle-class squeeze.

Sources: Pew Research Center, HHS, Child Care Aware of America, Bureau of Labor Statistics, National Association of Realtors, College Board. Time periods vary slightly based on data availability.

Growing Dependence on Government Support

A crucial and often overlooked trend revealed by USAFacts analysis is the changing composition of middle-class income. Between 2000 and 2019, the average wage income for middle-class households actually fell by about 7% in real terms.

Yet their total average household income rose from $67,044 to $72,868. This seemingly contradictory outcome was driven entirely by a dramatic increase in government transfer payments.

The share of middle-class income coming from programs like Social Security, Medicare, Medicaid, and SNAP grew from 18% in 2000 to 28% in 2019. This indicates that the private sector market, through wages and salaries alone, is no longer delivering a rising standard of living for the middle 20% of households.

This trend reflects several factors. An aging population means more middle-class households include retirees receiving Social Security and Medicare benefits. Economic volatility has increased reliance on safety net programs during periods of unemployment or underemployment. Rising healthcare costs have driven more middle-class families to rely on government programs like expanded Medicaid or premium subsidies under the Affordable Care Act.

The economic stability of the American middle class has become increasingly dependent on the public sector and the social safety net to fill the gap left by stagnant wages.

This dependence creates both opportunities and vulnerabilities. Government programs can provide crucial support during economic transitions and help families weather financial shocks. But it also means that middle-class economic security is increasingly tied to political decisions about program funding and eligibility.

The Debt Solution

Faced with stagnant wages and rising costs, many middle-class families have turned to debt to maintain their standard of living. Household debt as a percentage of income has increased substantially since the 1980s.

Much of this debt is secured by assets—primarily mortgages and student loans—which can be viewed as investments in future economic security. But families have also increasingly relied on unsecured debt, including credit cards and personal loans, to cover current expenses.

The growth in debt has allowed middle-class families to sustain consumption levels despite income stagnation, but it has also increased financial vulnerability. Higher debt levels mean families have less flexibility to handle economic shocks and may be more vulnerable to economic downturns.

Four Forces Reshaping the Economy

The squeeze on the American middle class isn’t the result of a single cause but rather the confluence of powerful, interconnected forces that have been reshaping the global and domestic economy for half a century.

The Automation Revolution

One of the most significant drivers has been technological change, particularly automation. This has led to a phenomenon known as “job polarization.”

For decades, the backbone of middle-class employment consisted of “routine” jobs—tasks that are procedural and repetitive. This includes both manual jobs, like those on an assembly line, and cognitive jobs, like clerical or administrative work.

Computers and industrial robots are exceptionally good at performing these routine tasks. As technology has advanced, these middle-skill, middle-wage jobs have been automated away. This has “hollowed out” the middle of the labor market, leading to job growth at two extremes:

• High-skill, high-wage jobs: These require non-routine cognitive skills like creativity, complex problem-solving, and managing people—tasks that are difficult to automate
• Low-skill, low-wage jobs: These often involve non-routine manual tasks like food service, cleaning, or personal care, which require in-person interaction and adaptability in unpredictable environments

The impact is measurable. One study found that for every new industrial robot introduced per 1,000 workers, local wages decline by 0.42%, and the employment-to-population ratio falls, contributing to the loss of an estimated 400,000 jobs nationwide to date.

The AI Revolution

The automation story is far from over. Artificial intelligence and machine learning are beginning to affect even high-skill, cognitive jobs that were previously thought to be automation-proof. Tasks involving pattern recognition, data analysis, and even some forms of creative work are increasingly being augmented or replaced by AI systems.

Recent advances in large language models and AI systems suggest that the next wave of automation could affect professionals like lawyers, doctors, accountants, and journalists—occupations that have traditionally been solidly middle-class.

This creates uncertainty about which jobs will remain secure in the future and what skills workers will need to maintain middle-class status. The rapid pace of technological change makes it difficult for education and training systems to keep up.

Geographic Concentration

The benefits of technological change haven’t been evenly distributed geographically. High-tech industries tend to cluster in specific metropolitan areas, creating pockets of prosperity while leaving other regions behind.

Cities like San Francisco, Seattle, Boston, and Austin have become centers of innovation and high-paying tech jobs. Meanwhile, smaller cities and rural areas that depended on routine manufacturing or clerical work have seen good jobs disappear without adequate replacement.

This geographic concentration has contributed to regional inequality and has made it difficult for workers in declining areas to access the opportunities created by technological change.

Globalization’s Double-Edged Impact

The integration of the U.S. economy with the rest of the world has brought enormous benefits, including lower consumer prices and new markets for American goods. It has also lifted hundreds of millions of people out of poverty globally.

However, for the American middle class, the effects have been mixed. The entry of China and other low-wage countries into the global market created a massive new supply of labor, putting direct downward pressure on wages of American workers in manufacturing and other industries exposed to international competition.

The well-known “elephant curve” of global income growth from 1988 to 2008 starkly illustrates this dynamic. The biggest winners from globalization were the global top 1% and the emerging middle classes in Asia. The group that saw the least income growth was the middle class of the developed world, including the United States.

Trade and Manufacturing

The impact of trade on manufacturing employment has been particularly significant. From 2000 to 2010, the U.S. lost approximately 5.7 million manufacturing jobs, many of which had provided middle-class wages to workers without college degrees.

While some of this job loss was due to automation and productivity improvements, trade played a significant role. The “China shock”—the rapid increase in Chinese imports following China’s entry into the World Trade Organization—directly affected millions of American workers and entire communities built around manufacturing.

Services and White-Collar Work

Globalization’s effects aren’t limited to manufacturing. Advances in communications technology have made it possible to offshore many service jobs, from customer service to software development to financial analysis.

This has created competitive pressure on white-collar workers who previously felt insulated from global competition. Professionals in fields like accounting, legal services, and information technology now compete with workers in countries with much lower labor costs.

The Benefits and Costs

It’s important to note that globalization has also brought significant benefits to American consumers, including lower prices for goods and services, greater variety of products, and access to new markets for American businesses.

However, these benefits haven’t been evenly distributed. Higher-income households, which spend a smaller share of their income on goods and more on services, have benefited less from lower goods prices. Meanwhile, the costs of globalization—job displacement and wage pressure—have fallen disproportionately on middle- and lower-income workers.

The Decline of Worker Power

A third critical factor has been the steady erosion of workers’ collective bargaining power. There’s a strong historical correlation between the decline in private-sector union membership and the rise in income inequality.

At their peak in the 1950s, labor unions represented over a third of the U.S. workforce. By 2022, that figure had fallen to just 10.1%, with private-sector union membership at just 6%.

This decline has significant economic consequences. A U.S. Treasury Department report found that unions raise wages for their members by an average of 10-15% and also improve benefits like retirement plans and health insurance.

Furthermore, unions create a “spillover effect,” compelling non-union employers in the same industry to raise wages and improve conditions to compete for workers. The weakening of this institution has diminished the ability of typical workers to negotiate for a larger share of the economic gains created by rising productivity and technological change.

Causes of Union Decline

Several factors have contributed to the decline of unions:

Structural Economic Changes: The shift from manufacturing to services has hurt unions, as manufacturing industries were more heavily unionized. Many service jobs are harder to organize due to their dispersed nature.

Political and Legal Changes: Changes in labor law and enforcement have made it more difficult for workers to organize. “Right-to-work” laws, which allow workers to benefit from union representation without paying union dues, have weakened union finances in many states.

Employer Opposition: Many employers have become more sophisticated and aggressive in opposing unionization efforts, using legal and consulting services to prevent union formation.

Globalization: The threat of moving operations to lower-wage countries has given employers more leverage in negotiations with unions.

Cultural Changes: Changing attitudes toward institutions generally, including unions, have reduced support for collective action.

The Compensation Gap

The decline in union power has coincided with a growing gap between worker productivity and compensation. During the era of strong unions (1945-1975), productivity and compensation grew together. As union membership declined, this relationship broke down.

Research suggests that the decline in unions explains about one-third of the rise in wage inequality since the 1970s. This includes not just the direct effect on union members, but also the spillover effects on non-union workers.

The Rise of Extreme Inequality

These forces—automation, globalization, and de-unionization—have combined to produce a dramatic increase in income inequality. The economic gains of the past several decades have flowed disproportionately to the very top of the income ladder.

According to analysis of government data, between 1979 and 2021, the average income of the richest 0.01% of U.S. households grew nearly 27 times faster than the income of the bottom 20% of earners.

By 2021, the richest 1% of households earned, on average, 139 times as much as households in the bottom 20%. This extreme concentration of income at the top is the mathematical mirror image of the middle’s shrinking share of the national economic pie.

The Superstar Economy

Economists have identified several mechanisms that have contributed to rising inequality:

Superstar Effects: In many industries, small differences in talent or performance can lead to enormous differences in compensation. This is partly due to technology that allows the most talented performers to reach much larger audiences.

Winner-Take-All Markets: Many markets have become winner-take-all, where small numbers of companies or individuals capture most of the economic returns.

Skill-Biased Technological Change: Technology has increased the returns to certain skills while reducing the returns to others, widening wage gaps between different types of workers.

Capital vs. Labor: Returns to capital (investments, ownership stakes) have grown faster than returns to labor (wages), benefiting those who own assets more than those who depend primarily on wages.

Network Effects: Many modern industries exhibit network effects, where the value of a product or service increases as more people use it, leading to market concentration and outsized returns for winners.

The Feedback Loop

These trends didn’t happen in isolation; they form a self-reinforcing cycle. Automation and globalization created pressures on middle-class jobs, the decline of unions removed a key countervailing force, and the resulting inequality concentrated wealth and political influence, which in turn could be used to enact policies that further weakened labor protections.

As wealth became more concentrated, the wealthy gained more political influence through campaign contributions, lobbying, and other forms of political participation. This influence could then be used to shape policies in ways that further benefited high earners—through tax policy, regulatory changes, and other measures.

Why This Matters for Everyone

The hollowing out of the American middle class is more than just an economic statistic; it has profound consequences for the nation’s economic vitality, social cohesion, and political stability. A strong and prosperous middle class isn’t just a beneficiary of economic growth—it’s a prerequisite for it.

Economic Consequences

A core tenet of modern economics is that a strong middle class provides the stable consumer base that drives productive investment and economic growth. Consumer spending accounts for roughly two-thirds of the U.S. economy.

Unlike the wealthy, who tend to save or invest a larger portion of their income, middle-class families spend a larger share of what they earn on goods and services, fueling demand.

When middle-class incomes stagnate and inequality rises, this engine can sputter. There’s simply not enough demand in the economy to encourage businesses to make new investments in plants, equipment, and jobs. This can lead to a vicious cycle of slow growth.

The Demand Problem

Economic growth depends on a virtuous cycle: businesses invest and hire when they expect demand for their products and services. That demand comes primarily from consumers with disposable income. When the middle class shrinks and its purchasing power declines, businesses have less incentive to invest and expand.

This creates what economists call a “demand deficiency”—there isn’t enough spending in the economy to fully utilize productive capacity. Even when businesses have access to capital and technology, they won’t invest if they don’t see sufficient market demand.

The Debt-Fueled Bubble

To maintain their standard of living in the face of stagnant wages, many middle-class families have taken on more debt, particularly for housing and education. This debt-fueled consumption is unsustainable and can increase the fragility of the financial system, as seen in the lead-up to the 2008 financial crisis.

When families are highly leveraged, they become more vulnerable to economic shocks. A job loss, medical emergency, or other financial setback can quickly lead to default, creating ripple effects throughout the financial system.

The 2008 financial crisis illustrated this dynamic. Rising inequality contributed to unsustainable borrowing by middle-class families trying to maintain their living standards. When housing prices collapsed, the resulting wave of defaults and foreclosures triggered a broader economic crisis.

Innovation and Entrepreneurship

A strong middle class also supports innovation and entrepreneurship. Middle-class families are more likely to have the resources and security needed to start new businesses or pursue higher education. They also provide much of the demand for new products and services.

When the middle class is under financial stress, families are less likely to take the risks associated with starting businesses or investing in education and training. This can reduce the economy’s dynamism and long-term growth potential.

Social and Political Fallout

Beyond the economic impact, a shrinking middle class poses a significant threat to social and political stability. Historically, nations with a large and stable middle class tend to have more stable democracies.

Conversely, societies where the middle class collapses have been more vulnerable to political extremism, social unrest, and authoritarian movements.

Social Cohesion

High levels of economic inequality can corrode the social fabric. It can lead to a decline in social trust—the belief that others will act fairly and that the system isn’t “rigged”—which is essential for a functioning democracy and economy.

When large segments of the population feel that their hard work is no longer rewarded and that their children’s prospects are dimming, faith in core institutions, including government, can erode.

Social trust affects everything from economic transactions to political cooperation. In high-trust societies, people are more willing to engage in economic activities with strangers, more likely to comply with laws and regulations, and more supportive of public investments that benefit society broadly.

Political Participation

Economic stress can affect political participation in several ways. Financially stressed families may have less time and energy to devote to civic activities. They may also become more cynical about the political process if they feel that their concerns aren’t being addressed.

This can lead to a dangerous political cycle. A financially stressed and disaffected populace may withdraw from civic engagement, depressing political participation among the non-wealthy. This creates a vacuum that allows well-funded special interests and the wealthy to exert disproportionate influence on policy, leading to outcomes that may further exacerbate inequality.

The Populist Response

The economic pressures on the middle class have contributed to the rise of populist political movements across the political spectrum. Both left-wing and right-wing populism often appeal to middle-class fears about economic security and social mobility.

These movements can channel legitimate economic grievances but may also promote solutions that are counterproductive or divisive. The challenge for democratic societies is to address the underlying economic problems while maintaining institutional stability and social cohesion.

Intergenerational Mobility

A strong middle class has historically been associated with high levels of social mobility—the ability of people to move up or down the economic ladder based on their efforts and talents. When the middle class shrinks, the ladder itself becomes less stable.

Research shows that intergenerational mobility has declined in the United States over recent decades. Children are less likely to earn more than their parents than they were in previous generations. This undermines the American Dream and can reduce support for institutions and policies that depend on the belief that hard work leads to economic advancement.

Geographic and Social Segregation

Rising inequality and middle-class decline have contributed to increased geographic and social segregation. Wealthy families increasingly live in separate communities from middle-class and poor families, attending different schools and having little interaction across class lines.

This segregation can reinforce inequality by limiting social networks and reducing empathy across class lines. It can also make it harder to build political coalitions for policies that address inequality.

International Competitiveness

The decline of the American middle class also has implications for international competitiveness. A strong middle class provides the skilled workforce, consumer demand, and social stability that support economic competitiveness in the global economy.

Human Capital

Middle-class families typically invest heavily in education and skill development for their children. When the middle class shrinks, fewer families may be able to make these investments, potentially reducing the overall skill level of the workforce.

This is particularly important as the economy becomes more knowledge-intensive and as technological change accelerates the need for continuous learning and skill updating.

Social Infrastructure

A strong middle class supports the social infrastructure—schools, libraries, parks, civic organizations—that contributes to quality of life and economic productivity. When middle-class communities are under financial stress, these institutions may suffer.

Innovation Ecosystem

Innovation often depends on a broad base of educated consumers who can adopt new technologies and provide feedback to innovators. A shrinking middle class may reduce this innovative capacity and make it harder for new technologies to find markets.

Potential Policy Solutions

Addressing the decades-long trend of a shrinking middle class is one of the central challenges facing U.S. policymakers. There’s no single solution, and proposals often reflect different diagnoses of the core problem.

The current debate can be broadly organized into four categories of action: strengthening paychecks, rebalancing the tax code, tackling high costs, and investing in the workforce of the future.

Strengthening Paychecks

This approach focuses on directly boosting worker income and restoring bargaining power that has eroded over time. Proponents argue that market outcomes aren’t fixed and that policy can ensure workers receive a fairer share of economic growth.

Raising the Minimum Wage

Regularly increasing the federal minimum wage and indexing it to inflation to ensure its value doesn’t erode over time.

The federal minimum wage has been stuck at $7.25 per hour since 2009, and its purchasing power has declined significantly due to inflation. Many economists argue that raising the minimum wage would not only help low-wage workers but also create upward pressure on wages throughout the economy.

Critics worry that higher minimum wages could reduce employment, particularly for low-skilled workers. However, recent research has found little evidence of significant job losses from moderate minimum wage increases, and some studies suggest that higher wages can increase productivity and reduce turnover.

Updating Overtime Rules

Expanding eligibility for overtime pay to millions of salaried workers by raising the salary threshold under which it’s automatically granted.

Currently, many salaried workers earn relatively modest wages but are classified as “exempt” from overtime requirements, meaning they can be required to work long hours without additional compensation. Updating these rules would either increase pay for workers who work overtime or encourage employers to hire additional workers to avoid paying overtime premiums.

Strengthening Collective Bargaining

Passing legislation, such as the Protecting the Right to Organize (PRO) Act, to make it easier for workers to form unions and bargain collectively, and to penalize companies that violate labor laws. The Treasury Department has documented how unions benefit not just their members but the broader middle class through spillover effects.

The PRO Act would override state right-to-work laws, allow unions to collect dues from all workers they represent, and make it easier for workers to form unions by allowing them to organize without employer interference.

Alternative Forms of Worker Organization

Some proposals go beyond traditional unions to explore new forms of worker organization adapted to the modern economy. These might include:

• Sectoral bargaining: Negotiating wages and working conditions across entire industries rather than company by company
• Worker cooperatives: Employee-owned businesses that give workers a direct stake in company success
• Professional associations: Organizations that set standards and negotiate on behalf of freelancers and gig workers
• Works councils: Employee representation on corporate boards, common in European countries

Profit-Sharing and Employee Ownership

Some proposals encourage companies to share profits with workers through tax incentives for profit-sharing plans or employee stock ownership programs. These policies aim to ensure workers benefit more directly from the companies’ success.

Research suggests that profit-sharing can increase worker motivation and productivity while also providing additional income. However, it can also make worker incomes more volatile and doesn’t address the fundamental issue of wage levels.

Rebalancing the Tax Code

Tax policy is a powerful tool for shaping economic outcomes, and there are competing visions for how it should be used to help the middle class.

Relief and Redistribution Approach

This philosophy uses the tax code to provide direct financial relief to low- and middle-income families. Proposals include:

• Expanding refundable tax credits like the Child Tax Credit and the Earned Income Tax Credit
• Creating new credits for workers without children or for families with newborns
• Making permanent the enhanced premium tax credits that lower healthcare costs under the Affordable Care Act

The Child Tax Credit expansion in 2021 temporarily provided monthly payments to families and was credited with significantly reducing child poverty. Making such expansions permanent could provide ongoing support to middle-class families.

These measures are often paired with proposals to increase taxes on corporations and the wealthiest households to ensure progressivity and fund investments. This might include:

• Higher income tax rates on high earners
• Wealth taxes on very wealthy households
• Capital gains tax reform to ensure investment income is taxed similarly to wage income
• Corporate tax increases to ensure profitable companies pay their fair share

Growth and Investment Approach

This approach argues that broad-based tax cuts, particularly for businesses, are the best way to stimulate economic growth that will ultimately benefit all Americans. Proposals include:

• Making the individual and corporate tax cuts from the 2017 Tax Cuts and Jobs Act permanent
• Further reducing corporate tax rates to encourage business investment and job creation
• Simplifying the tax code to reduce compliance costs for businesses and individuals

Proponents argue that lower taxes encourage business investment, job creation, and economic growth that benefits everyone. They contend that trying to redistribute income through the tax code discourages economic activity and reduces the overall size of the economic pie.

More aggressive versions, such as those outlined in Project 2025, suggest consolidating the tax code into just two brackets (15% and 30%) and further cutting the corporate tax rate to 18%. However, analysis suggests this specific plan would result in a tax increase for the median family of four while delivering large tax cuts to the wealthiest households.

Hybrid Approaches

Some proposals attempt to combine elements of both approaches:

• Targeted business tax cuts focused on activities that benefit middle-class workers, such as research and development or domestic manufacturing
• Tax reforms that simplify the code while maintaining progressivity
• Credits for businesses that provide good jobs, benefits, and profit-sharing to workers

Tackling High Costs

This set of policies aims to directly lower the prices of essential goods and services that are straining family budgets. Instead of focusing only on the income side, these proposals address the expenditure side.

Housing

Housing costs represent the largest budget item for most middle-class families, making housing policy crucial for middle-class economic security.

Supply-Side Solutions:

• Tax incentives for building “starter” homes to increase affordable housing supply
• Zoning reform to allow more diverse housing types in residential areas
• Streamlined permitting processes to reduce the time and cost of housing construction
• Land value capture mechanisms to help fund affordable housing development

Demand-Side Solutions:

• First-time homebuyer tax credits or expanded down payment assistance programs
• Shared equity programs where government helps with down payments in exchange for a share of future appreciation
• Rent stabilization policies to limit rapid rent increases in hot housing markets

Public Investment:

• Public housing modernization to create more mixed-income communities
• Community land trusts to preserve affordable housing in gentrifying areas
• Transit-oriented development to create affordable housing near job centers

Healthcare

Healthcare costs represent one of the fastest-growing budget items for middle-class families, making health policy central to middle-class economic security.

Price Controls and Negotiation:

• Expanding the government’s ability to negotiate prescription drug prices
• Promoting greater price transparency in the pharmaceutical industry
• International reference pricing for prescription drugs
• Generic drug competition policies to reduce pharmaceutical costs

System Reform:

• Public option health insurance plans to increase competition and lower premiums
• Medicare for All or other single-payer proposals to eliminate private insurance costs
• All-payer rate setting to control healthcare price increases

Direct Relief:

• Programs to cancel medical debt for eligible Americans
• Expanded premium subsidies for health insurance purchases
• Out-of-pocket cost limits to protect families from catastrophic medical expenses

Childcare and Education

Childcare and education costs have become major barriers to middle-class economic security, making these areas key targets for policy intervention.

Universal Childcare:

• Universal pre-K programs to reduce childcare costs while improving educational outcomes
• Subsidized childcare for middle-class families, not just low-income families
• Employer-sponsored childcare incentives and support

Higher Education:

• Universal, government-seeded Children’s Savings Accounts to help all families save for college
• Free community college programs to provide affordable post-secondary education
• Student loan forgiveness programs to relieve existing debt burdens
• Income-driven repayment programs to make student loans more manageable

Tax Credits:

• Expanding tax credits like the Child and Dependent Care Tax Credit to make childcare more affordable
• Education tax credits that better target middle-class families
• Employer incentives to provide educational benefits to workers

Investing in the Future Workforce

This long-term strategy focuses on equipping American workers with the skills needed to compete and thrive in an economy constantly being reshaped by automation and globalization. The goal is to build a more resilient and adaptable workforce.

Education and Job Training

Increasing access to affordable, high-quality higher education, community college, and vocational training programs. This includes consolidating and better targeting existing education tax subsidies to ensure they effectively help students and workers.

Community College Investment:

• Free community college programs to provide accessible post-secondary education
• Industry partnerships to ensure training programs meet real workforce needs
• Stackable credentials that allow workers to build skills over time

Apprenticeship Programs:

• Expanding registered apprenticeships beyond traditional trades to new industries
• Tax incentives for employers who provide apprenticeship opportunities
• Industry-education partnerships to create clear pathways from training to employment

Lifelong Learning Accounts

Creating individual accounts that workers can use throughout their careers to pay for skills training, certifications, or education to adapt to changing job markets.

These accounts could be funded through various mechanisms:

• Employer contributions as part of benefits packages
• Government matching funds for worker contributions
• Unemployment insurance reform that includes training accounts
• Portable benefits that move with workers between jobs

Industrial Strategy

Making public investments in strategic sectors to create high-skill, high-wage domestic jobs. This can include funding for manufacturing innovation institutes, strengthening domestic supply chains, and promoting research and development in clean energy and other future-oriented industries.

Advanced Manufacturing:

• Manufacturing innovation institutes that bring together businesses, universities, and government
• Domestic supply chain development to reduce dependence on imports
• Automation partnerships that help manufacturers adopt new technologies while retraining workers

Green Economy Investment:

• Clean energy manufacturing incentives and support
• Infrastructure modernization that creates good-paying jobs
• Research and development investments in emerging technologies

Technology and Innovation Hubs

Investing in regional innovation centers that bring together universities, businesses, and government to develop new technologies and create high-paying jobs in communities across the country, not just major metropolitan areas.

Regional Development:

• Technology hubs in smaller metropolitan areas and rural regions
• University-industry partnerships to commercialize research
• Entrepreneurship support including access to capital and mentorship
• Innovation districts that co-locate research institutions, businesses, and housing

Addressing Geographic Inequality

Many proposals specifically target the geographic disparities that have left some communities behind while others prosper.

Place-Based Investments

Targeted investments in infrastructure, broadband, and economic development in distressed communities to create opportunities where people already live rather than expecting them to move to high-cost metropolitan areas.

Infrastructure Investment:

• Broadband expansion to connect rural and underserved communities
• Transportation improvements to connect workers to job opportunities
• Water and sewer system upgrades to support economic development
• Energy infrastructure including clean energy projects

Economic Development:

• Tax incentives for businesses that locate in distressed areas
• Small business support including access to capital and technical assistance
• Tourism development to leverage natural and cultural assets
• Agricultural innovation to support rural economies

Remote Work Support

Policies that encourage and support remote work arrangements, allowing workers to access high-paying jobs while living in lower-cost areas, potentially revitalizing smaller communities.

Technology Infrastructure:

• High-speed internet access in rural and small-town areas
• Digital literacy programs to help workers adapt to remote work
• Co-working spaces in smaller communities

Policy Changes:

• Tax incentives for remote work arrangements
• Regulatory changes to facilitate cross-state remote work
• Government remote work policies that allow federal employees to live anywhere

Institutional Reforms

Some proposals focus on changing institutions and rules to create more favorable conditions for middle-class prosperity.

Financial System Reform

• Banking regulations that ensure access to affordable financial services
• Consumer protection against predatory lending and financial scams
• Retirement security reforms to help workers save for retirement
• Financial literacy education to help families make better financial decisions

Corporate Governance Reform

• Executive compensation limits tied to worker pay
• Shareholder primacy reforms to consider other stakeholders
• Worker representation on corporate boards
• Antitrust enforcement to prevent excessive corporate concentration

Political Reform

• Campaign finance reform to reduce the influence of wealthy interests
• Lobbying restrictions to level the political playing field
• Voting access improvements to ensure broad political participation
• Ethics enforcement to maintain public trust in institutions

Implementation Challenges and Trade-offs

While there are many proposals for addressing middle-class decline, implementing them faces significant challenges and involves difficult trade-offs.

Political Feasibility

Many of the most ambitious proposals face significant political obstacles. The American political system, with its multiple veto points and diverse constituencies, makes major policy changes difficult.

Different proposals appeal to different political coalitions, making it challenging to build broad support. Proposals that help middle-class families might face opposition from business interests or taxpayers who would fund them. Geographic differences in economic conditions and political preferences add another layer of complexity.

Fiscal Constraints

Many proposals to help the middle class require significant government spending or reduce tax revenues. With large budget deficits and mounting national debt, fiscal constraints limit the scope of possible interventions.

This creates difficult choices about priorities and funding mechanisms. Should new programs be funded through higher taxes, spending cuts elsewhere, or additional borrowing? Different approaches have different economic and political implications.

Economic Trade-offs

Policy interventions can have unintended consequences that offset their intended benefits. For example:

• Minimum wage increases might help some workers but could reduce employment for others
• Rent control might help current tenants but could reduce housing supply
• Trade protection might save some jobs but could increase consumer prices
• Tax increases might fund helpful programs but could discourage economic activity

Implementation Complexity

Many proposals are easier to design than to implement effectively. Government programs can be bureaucratic, inefficient, or subject to political interference. Market-based solutions can be undermined by special interests or unequal access to information and resources.

Successful implementation often requires careful design, adequate funding, skilled administration, and ongoing monitoring and adjustment.

Timing and Sequencing

The order and timing of policy changes can affect their success. Some reforms might need to be implemented gradually to avoid disruption. Others might be more effective if implemented together as a package.

The political cycle can also affect timing. Major reforms are often easier to implement early in an administration when political capital is highest.

The Path Forward

The different approaches to addressing middle-class decline highlight a central tension in the policy debate. Some solutions focus on alleviating the immediate financial symptoms of the middle-class squeeze, while others aim to address the long-term, structural causes.

The forces that have reshaped the American economy over the last 50 years are deeply embedded, suggesting that a sustained, multi-faceted approach may be necessary to rebuild and strengthen the nation’s economic core.

Building Consensus

Success will likely require building broader consensus around the importance of middle-class prosperity for economic growth, social stability, and democratic governance. This means finding common ground across different political perspectives and economic interests.

Areas of potential agreement might include:

• Infrastructure investment that creates jobs while improving economic competitiveness
• Education and training programs that help workers adapt to economic change
• Innovation policies that maintain American technological leadership
• Regulatory reforms that promote competition and prevent abuse
• Fiscal responsibility that ensures sustainable government finances

Learning from Experience

Policy development should be informed by evidence about what works and what doesn’t. This includes learning from:

• State and local experiments with different approaches
• International experience with similar challenges
• Research and evaluation of existing programs
• Stakeholder input from businesses, workers, and communities

Adapting to Change

The economy will continue to evolve, driven by technological change, globalization, demographic shifts, and other forces. Policy responses need to be flexible and adaptive, able to respond to new challenges and opportunities.

This suggests the importance of:

• Continuous monitoring of economic trends and policy effectiveness
• Regular program evaluation and adjustment
• Investment in research to understand emerging challenges
• Institutional capacity to respond to change

Success will likely require combining immediate relief for struggling families with longer-term investments in education, infrastructure, and institutions that can help ensure the benefits of economic growth are more broadly shared.

The shrinking middle class represents one of the defining challenges of our time. How policymakers respond will determine whether the American Dream remains attainable for future generations or becomes the privilege of an ever-smaller elite.

The data is clear: the middle class that built America’s prosperity is under unprecedented strain. The question now is whether the political will exists to implement the bold, sustained action needed to reverse five decades of decline and rebuild the economic foundation of American democracy.

Our articles make government information more accessible. Please consult a qualified professional for financial, legal, or health advice specific to your circumstances.