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How the U.S. Middle Class Became 10% Poorer

What does the OECD’s redefinition of the middle class reveal about the U.S. economy?

August 1, 2007

What does the OECD's redefinition of the middle class reveal about the U.S. economy?

The OECD in Paris has monumental news for middle class America. The OECD, of course, is the most trusted source for internationally comparative data on economic issues in the developed world.

Its statistical department, in cooperation with member states’ national statistical agencies, is engaged in an exercise to turn often diverse national statistical surveys of very different “middle classes” into cross-country datasets that enable true comparisons across countries.

So what’s the bombshell buried in the statistical pile? As it turns out, the OECD statisticians have just — in one fell swoop — lowered the estimated income for the average American worker by more than 10%, and at the same time raised incomes for the middle classes of other major countries by up to more than 30%.

Sadly, it will likely be lost on CNN’s Lou Dobbs (and his viewers) that the culprit here is not globalization or wicked foreign workers competing on an uneven playing field — but a matter of mere statistical validity.

Evidently, all statistical work is caught between statistical accuracy (which researchers like) — and the need to keep costs and the burden of respondents down (which is preferred by taxpayers and those who are measured).

Subsequently, what the OECD has used until recently as a proxy for the “middle class” was the set of data that was most widely available across member states. It is the concept of the “average production worker” (APW).

This group includes adult full-time workers who are directly engaged in a production activity in the manufacturing sector, including manual (non-supervisory) workers and minor shop-floor supervisory workers. Excluded were non-manual (supervisory) workers, part-timers and all workers outside the manufacturing sector.

Those statistics represented the industrial economy quite well but also ensured that a relatively small (and declining) subset of workers outside booming sectors like technology or finance came to represent the “middle class” statistically.

Another distorting factor was that, in the case of the United States, the manufacturing sector is typically far more unionized than the rest of the economy. And that means their wages are higher than in non-unionized fields of the economy.

However, as a result of better statistical data-gathering across other sectors of the economy in more countries, the OECD recently updated its definition of “the middle class.” It now focuses on “the average worker” — rather than “the average production worker.”

This new proxy for the middle class captures a far larger group than the old one — and includes essentially the entire private-sector economy. It ranges from mining and quarrying, utilities, construction, wholesale/retail/repair, hotel/restaurants and transportation to financial services and real estate — and includes both manual and non-manual workers.

Included in middle class income are all wages, cash supplements, bonuses, overtime pay, holiday pay, Christmas bonuses etc.

Interestingly enough, this one change in statistical methodology has very different effects on the middle classes in different OECD countries.

While the United States saw a decrease in average income of 10% — the biggest decline of all 30 member states — the income of the British middle class rose by 32%. Similarly, France’s, Germany’s and Japan’s average income increased by 28%, 20% and 17%, respectively.

A small consolation for U.S. middle class workers would be that the incomes of its nearby Canadian brethren also declined by 5%.

In the United States (and Canada), the manufacturing sector is highly unionized, especially in comparison to other sectors of the economy. Detroit’s auto workers, in particular, have traditionally enjoyed a status of “princes of labor,” earning far higher wages than most other U.S. private-sector workers, especially in many services sectors like construction, hotels and restaurants.

Now that these services sectors are included in calculating “the middle class” pay level, the average income of the U.S. middle class has evidently gone down quite substantially.

Mind you, lest CNN’s Lou Dobbs and other prognosticators of doom get too excited, it is important to remember that this decline in income is a statistical correction. U.S. income levels in the past had appeared higher than they were in reality.

Moreover, it is quite revealing that even the inclusion of the very high earning levels in the financial services sectors in the middle class — especially as supervisory workers (management) are now also counted — did not in the aggregate in the case of the United States act as a sufficient counterweight to the inclusion of more low-income workers.

Contrast that with the situation in the UK, where evidently the inclusion of the financial sector of the city of London boosted “average middle class incomes” by about a third. Either London’s bankers earn far more than Wall Street’s, or there are far more low wage middle class people in the United States than in the UK.

The result of all this is that today, the richest middle class in the OECD is found in Britain. In 2006, an average single British middle class worker earning the average wage, net of taxes and in PPP terms, had an income nearly 50% higher than his U.S. counterpart — $35,000 compared to $25,000.

As a matter of fact, U.S. middle class workers found themselves outside the top ten in the OECD.

And it doesn’t even help to marry. A British middle class family with two children and two incomes of 100% and 67% of average wages still earns over 40% more (in PPP terms, net of taxes) than their U.S. counterparts ($65,000 compared to $45,500). In fact, U.S. families in this category rank only 15th in the OECD.

It may well be outside the realm of sanity to an American visiting London that a small lunch salad at Wimbledon is £8 — or more than $16. But the truth is that it is probably not outside the purchasing power of the middle classes — or at least not the British one.