Shrinking middle class threatening social stability, warns OECD

By David Donaldson

April 23, 2019

The middle class across the developed world is shrinking as incomes fail to keep up with housing and other costs of living.

In most developed countries, including Australia, the size of the middle class and its economic influence have fallen in recent decades.

In a report released earlier this month, Under Pressure: The Squeezed Middle Class, the think tank says the middle class –defined as those earning between 75% and 200% of the median national income — has shrunk in most member states.

On average across OECD countries, the proportion of people in middle income households fell from 64% to 61% between the mid-1980s and mid-2010s.

Australia’s middle class is a bit smaller than the average, at 58%. The proportion of Australians counted as high, low and poor earners are all slightly higher than average, reflecting higher inequality.

The economic influence of the middle class has also dropped sharply. In all but a handful of the OECD group of mostly rich countries, middle incomes are barely higher today than they were ten years ago. Middle incomes across that time increased by just 0.3% per year, much slower than previous decades — and lower than those on top incomes.

This gradual shrinkage is concerning because a successful middle class underpins democracy, argues the OECD. Societies with a strong middle class enjoy lower crime rates, and higher levels of trust, satisfaction, stability and good governance.

“Indeed, over the past 30 years, middle-income households have experienced dismal income growth or even stagnation in some countries,” says the report.

“This has fuelled perceptions that the current socio-economic system is unfair and that the middle class has not benefited from economic growth in proportion to its contribution.”

OECD Secretary-General Angel Gurría is concerned by these developments.

“Today the middle class looks increasingly like a boat in rocky waters,” said Gurría.

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

The amount Australians spend on housing has grown, as it has across many developed countries. Between 2005 and 2015, the percentage of income dedicated to paying for an Australian home has risen from 19% to 23% — though this is still lower than the OECD average of 27% up to 32%.

It’s not all bad news: while the number of medium-skilled and low-skilled jobs in Australia has decreased since the mid-1990s, the number of high-skilled jobs has grown significantly.

To help the middle class, a comprehensive action plan is needed, argues the OECD.

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. Targeted grants, financial support for loans and tax relief for home buyers would help lower middle-income households, says the OECD. And in countries with acute levels of housing-related debt, mortgage relief would help overburdened households get back on track.

As temporary or unstable jobs — often offering lower wages and job security — replace some traditional middle-class jobs, more investment is needed in vocational education and training systems. Social insurance and collective bargaining coverage for non-standard workers, such as part-time or temporary employees or self-employed, should be extended.

Finally, to foster fairness of the socio-economic system, policies need to consider shifting the tax burden from labour income to income from capital and capital gains, property and inheritance, as well as making income taxes more progressive and fair.

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