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Why middle-class wealth is withering

If the middle class is truly the backbone of America, the country's spine may be close to breaking.

Middle America came out of the Great Recession in a precarious position, sinking into "dissavings" -- when spending is greater than income -- thanks to a nasty combination of stagnant wages and a hit to real estate and investment values, according to a new working paper from New York University economics professor Edward N. Wolff.

That's led to a grim outcome, with virtually no change in the country's median wealth between 2010 to 2013, even as asset prices, such as the stock market and housing values, rebounded in the years following the recession, Wolff wrote. The cause? "The high dissavings rate of the middle class," he noted.

The country's widening income and wealth gap results from a perfect storm of dismal trends slamming the middle class. As the recession hit, this group had already suffered from several years of relatively stagnant wage gains. From 2007 to 2010, median income slumped almost 7 percent, and median wealth plunged by 44 percent.

So, with the recession over and the economy getting back on track, wouldn't Americans have benefited across the board? Not quite, the study found. While home values and stock prices gained, the middle class failed to see much lift because they fell into a dissavings rate of 9.9 percent relative to median income, eating into their assets to make up for stagnant wages.

"It appears that the middle class was depleting its assets to maintain its previous level of consumption," Wolff wrote. "The evidence, moreover, suggests that middle class households, experiencing stagnating incomes, expanded their debt (at least until 2007) mainly in order to finance normal consumption expenditures rather than to increase their investment portfolio."

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American workers' stagnant pay has become a sore point, both among employees themselves and economists and policymakers. Real wages, or earnings after inflation is taken into account, have been falling or flat for decades, Pew Research noted earlier this year.

In fact, the average wage for American workers peaked way back in 1973, when the typical employee earned $4.03 an hour, or about $22.41 in today's dollars. The average hourly wage for nonmanagement, private-sector workers was only $20.67 in September, or about 7.8 percent below what workers earned more than 40 years ago.


The sickly average American wage, called "the great wage slowdown of the 21st century" by David Leonhardt of The New York Times, could have potentially dire outcomes. It means Americans may face increasingly lower living standards, while it also hampers economic growth and social mobility, among other problems.

And some groups are suffering more than others. The recession hurt black households much more than white households, Wolff wrote. The reason? Blacks had "a higher share of homes in their portfolio than did whites and much higher leverage than whites," the paper noted. Blacks were also more likely to have a higher ratio of mortgage debt to home value, so they were hit harder when home values fell in the recession.

Those trends have prompted a growing racial wealth divide, according to a study published by Pew Research on Friday. While the median wealth of white households was eight times the wealth of black households in 2010, that ratio had widened to 13 times by 2013, Pew said.

"The current gap between blacks and whites has reached its highest point since 1989, when whites had 17 times the wealth of black households," Pew noted. "The current white-to-Hispanic wealth ratio has reached a level not seen since 2001."

Blacks and other minorities have suffered more than whites on the income front. The median income for minorities fell 9 percent from 2010 to 2013, which means they may (like the middle class in general) be drawing on their savings to get by during the post-recession years, Pew noted.

Whites are also more likely than blacks to hold stocks, and so they've benefited more than blacks from the rising stock market. Pew added: "The racial and ethnic wealth gaps in 2013 are at or about their highest levels observed in the 30 years for which we have data."

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