Wealth distribution: OECD says middle class is getting squeezed

It is a common parental promise and expectation that the next generation will be able to lead a better, richer and easier life. And while this has been true for decades since World War II, the past 20 to 30 years have been different. Millions in industrialised countries have come to realise that their wealth is stagnating.

Those born after 1983 are much less likely to be part of the middle class than previous generations, mainly because the middle class has shrunk in most OECD countries, research by the Organisation for Economic Cooperation and Development has found.

While almost 70% of baby boomers were part of middle-income households in their twenties, the OECD found only 60% of millennials are considered to be part of that demographic today. The report defines middle class as the group earning between 75% and 200% of the median national income.

The group’s study, which notes a squeezed middle class that is under pressure, is the latest piece of research that finds an increasingly unequal wealth distribution with the top 10% in the income distribution holding almost half of the total wealth, while the bottom 40% accounts for only 3%.

The effect of this is a higher economic vulnerability and lower social mobility for a larger group of people.

With few exceptions, middle class incomes in OECD countries are barely higher today than they were 10 years ago, increasing by just 0.3% per year. (This is a third less than the average income growth of the richest 10%.)

The dismal income growth, and stagnation in some countries, has been widely blamed for the perception that the current economic system is inherently unfair and that the middle class has not sufficiently benefited from economic growth relative to its contribution.

Because living costs are rising faster than incomes, indebtedness is a growing problem.

House prices have been growing three times faster than household median income over the last two decades. And housing generally takes up one third of the disposable income compared to only a quarter in the 1990s.

As a result, more than a fifth of middle-income households spend more than they earn.

“Today the middle class looks increasingly like a boat in rocky waters,” said OECD Secretary-General Angel Gurría, who launched the report last month in New York together with Luis Felipe Lopéz-Calva, assistant secretary general of the United Nations Development Programme.

“Governments must listen to people’s concerns and protect and promote middle class living standards. This will help drive economic inclusive and sustainable growth and create a more cohesive and stable social fabric,” Gurria said.

A comprehensive action plan is needed to support the middle class, the OECD said, recommending governments should improve access to high-quality public services and ensure better social protection coverage.

To tackle cost of living issues, policies should encourage the supply of affordable housing.

In addition, targeted grants, financial support for loans and tax relief for home buyers would help lower middle-income households.

In countries where the levels of housing-related debt are acute, mortgage relief would help overburdened households get back on track.

Gabriela Ramos, the OECD Chief of Staff who oversees the organisation’s work on inclusive growth, said the analysis delivers a bleak picture and a call for action. “The middle class is at the core of a cohesive, thriving society. We need to address their concerns regarding living costs, fairness and uncertainty.”

Amid the stagnation in wealth, labour market prospects have become increasingly uncertain: one in six middle-income workers are in jobs that are at high risk of automation, compared to one in five low-income and one in 10 high-income workers.

To counter the threat of temporary and unstable jobs with lower wages replacing traditional middle-class jobs, the OECD said, more investments are needed in vocational education and training.

Social insurance and collective bargaining coverage for non-standard workers, such as part-time or temporary employees or self-employed, should be extended, the report stated.

In creating a fairer socio-economic system, the necessary changes will have to extend to tax policy, the OECD noted.

The organisation advised policy-makers to consider shifting the tax burden from labour income to income from capital and capital gains, property and inheritance.