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A Divided Middle

The importance of social protection to compensate the middle class

Ursula Dallinger | April 28, 2015

The middle class is not a homogeneous group. The segments within it respond differently to economic globalization, with the lower middle class heading towards the poorest. Although social protection schemes can go a long way to compensate for their income losses, there is an increasing divide within the middle class.

The erosion of the middle class has been a hot topic in the social sciences, public debates and the media in Europe in recent years. The focus has shifted from the precarious classes, the unqualified workers, the unemployed, single mothers and so on to the endangered middle class. The debate on the shrinking middle class as such is part of the inequality debate, but with the difference that it is not only the growing distance between the top and the bottom of the income hierarchy that is of concern, but the expanding number of members in both the lowest and highest income groups.

In research there is a lot attention to what is seen as the main cause of this polarization: the loss of skilled, well-paid jobs in industry, due to de-industrialization and globalization, skill-biased technological change or the weakness of unions (see also the articles by Evert-jan Quak and Jo Michell in this dossier). However, less attention is given to the role of welfare state redistribution in the alleged decline of the middle class and what impact social policies can have on the position of middle-income groups.

Research now shows that the decline of the middle class in most advanced economies is far more marked when you look at the total income generated from the market before taxation (market incomes) and less so when you look at income available for spending and saving after tax (disposable income). This suggests that the influence of social spending and the role of welfare states and taxation is significant for the stability of the middle class. 1

If the middle class is divided into a lower, middle and upper middle class, in many advanced economies it is the upper middle quintile that sees their income share rising. The lower middle and middle-middle, by contrast, have to accept a net decline in their positions. Their shrinking market income share is, however, almost completely compensated for by social security measures. This means that, although the lower middle class in particular shares the destiny of the lowest income groups, it benefits much more from social security measures. 2

A puzzling situation

What is known as the ‘middle-class crisis’ is receiving considerable attention because the destabilization it is causing seems more meaningful for the future of society than the state of low-income groups. The underlying assumption is that a well-off middle class is the storehouse of political stability and the goal of all those who hope to climb up the social ladder. Yet the flexibilization of labour markets, job losses due to globalization, and the financial and debt crisis of European countries now seem to be affecting even the middle class. Problems of income security and unequal distribution have penetrated to the core of society.

Figure 1a: Share of total income of lowest quintile (1st), lower middle (2ndh) and middle quintile (3rdh), in %.

Figure 1a: Share of total income of lowest quintile (1st), lower middle (2ndh) and middle quintile (3rdh), in %.

Figure 1b: Share of total income of upper middle (4th) and topmost (5th) quintile, in %.

Figure 1b: Share of total income of upper middle (4th) and topmost (5th) quintile, in %.

But are we really facing a middle-class crisis in Europe? Empirical data do not as yet unequivocally confirm this downward trend. The results are rather ambivalent, vary across countries and depend on the methods and measures used: while several studies produce evidence of a shrinking middle class, others show its income position to be stable. 3 This puzzling situation can be partly explained by the different definitions and corresponding measures that are used to delimit the middle segment of society. 4 Studies that measure the relative income position in a society by the share of total income received by different social groups report that the middle class is stable. By contrast, studies that see the middle class as those in the income bracket between 75% and 150% of median income claim that it is shrinking (see article 'Who are the 'middle'?' by Josefine Ulbrich). 5

Notwithstanding these different outcomes, one fact seems undisputable: the lower middle class – together with the lowest income group – is negatively affected by a polarized income structure that allows the income shares of the topmost 10% or 1% of the population to rise extremely high, while those at the bottom get smaller. In figure 1 this can be seen as the shrinking income shares of the bottom quintile and the lower middle quintile and a rising line for the income share of the 5th quintile.

The dualization process in Europe

Another reason for the differing explanations for the middle class crisis is the lack of attention to differences between countries. In liberal market economies, income inequality began to rise as early as the 1970s, and at a particularly fast pace in the United States. European countries resisted liberalization for a while, before giving way to entrenched labour market protection and social security when the problem of high and persistent unemployment could no longer be ignored or compensated by social transfer payments. 6 However, European countries protected their middle classes much better. Employment protection legislation, collective wage bargaining and coordinated industrial relations have helped the employed to maintain their status. But it would be naive to assume that these regulations would be able to fully prevent the European middle class suffering the same fate as workers with a weaker labour market status.

A dualization process can however be observed in Europe, which is counteracting erosion of the labour market status of the middle class. 7 Governments have given way to employers’ demands for more flexible labour, introducing legislation allowing the creation of non-standard work (e.g. part-time jobs, temporary contracts, sub-contracting through job agencies). 8 Yet those most affected by this type of labour supply are those with low qualifications or the long-term unemployed. 9 At the same time, the members of the middle class (especially the middle-middle and higher-middle class), who usually possess professional qualifications, have been given access to the core labour force with permanent contracts. The result has been an increasing divide between the lower and the upper parts of the middle class.

In most European countries, the middle class has been better protected not only in the labour market, but also by social security systems, especially in comparison with American public policy. In many countries, public policy has tailored social security systems that closely connect the right to receive financial benefits to labour market participation. These systems insure the employed against the risks that come with old age, unemployment, illness and being in need of care. Welfare states also comprise measures that protect the poor, but usually social security measures aimed at the working middle class are the largest, most expensive part of the social expenditures.

Signs of dualization can also be observed within social policy programmes, too. 10. Although tax-based minimum protection for the poor and contribution-based social security are in reality interwoven, the trend seems to be for redistributive components targeted at the poor to get smaller while social security measures are increasingly targeting the middle class. Social spending has become less directed at those without work and focuses now on making work more profitable. This means investing in people who already had better job prospects, believing that the others will follow. In other words, social spending is no longer related to distribution in favour of the poorest.

Drivers of public policies

These arguments assume that the middle is not that endangered, at least in the field of public policies. Therefore it is important to have a better look at who drives public policies, including taxes, social transfer programmes like pensions, sickness allowances, employment protection and regulation policies. Here the middle class has hardly been a ‘problem child’. Instead, from a political economy perspective, the scale of the middle classes make them the group among the electorate with the required political power to direct social security and public policies. 11According to models common in the literature on public income redistribution, democracy gives power to majorities and in most countries this majority can be found in the middle. The middle majority or median voter is also the constituency of market-correcting policies.

If the middle class is such a decisive political force, it should therefore decide on taxes and social transfer programmes, equal access to education and health care, etc. In ‘democratic capitalism’ public policy and regulated industrial relations can mitigate market outcomes and make disparities between top and bottom regarding access to important resources like income, health care and education less severe. If they really are the powerhouse of public policy, why have the middle income strata not used their political power to implement market-correcting politics that tackle unequal distribution of wages, worsening labour protection for employees or cutbacks in social provisions during the past two decades?

The middle class is not a homogeneous group. As can be seen in figure 1, the income position of the middle class has developed very differently for each segment. Consequently, the political interests of the middle class are also divided. 12 The lower and upper middle class have different income positions, different political preferences and different voting behaviour. Both groups seek different coalition options. The lower middle class does not necessarily vote for the same parties as the middle and the upper middle class; voting for more conservative forces is also attractive to the lower middle class. Christian-democratic parties offer inclusive programmes attractive to the broad middle class. In terms of long-term trends in ideological political positions, the Christian-democratic parties have moved to the centre-left of the political spectrum, while social-democratic parties have moved right towards the centre, where they hope to get electoral majorities. Each of these ideological camps seeks to respond to the demands of lower and the lower middle-class voters. While the social-democrats seek a cross-class compromise with old (industrial) and new (simple service sector occupations) labour, the conservative Christian-democrats hope to generate a cross-class coalition between the middle class and the more affluent. 

The error of democracy theory

However, cross-class coalitions of the middle class with those at the bottom cannot be taken for granted. And the role ascribed to the middle class by political economy as the politically most decisive group in a democracy to heal income inequalities is not realistic. In some European countries with a left tradition and a lack of Christian-democratic parties, like those in Scandinavia, cross-class compromises were quite common, especially during the 1960s and 1970s. Other European countries more often had social democratic governments expressing a cross-class compromise between middle and lower social strata than the US. The US majoritarian voting system by contrast excludes such ’left-leaning’ cross-class coalitions of the middle class. Here the upper middle is looking up the social ladder, which leaves the lower middle without a strong coalition partner. Low turnout of lower class voters further prevents them from having a political influence. In European countries absolute majority electoral systems enforce coalition governments that have to find consensual policies between the conflicting positions. Yet the majoritarian electoral system also leads to polarization in politics and is one of the reasons for the decline of the middle class.

The most significant shortcoming of democracy theory is that it conceives power only as emerging from large numbers of voters. But, as some rather disillusioned scholars have argued, democracy might also be just an ‘electoral spectacle’. 13 In reality, power emerges in different ways, not just by large numbers. One reason given why the middle does not stop increasing income inequality is that it is more amenable to the argument that market-correcting policies are detrimental to the economy and for future employment. The middle class predominantly gains its living by income from employment and employment-related social security, while lower-income groups depend more on social transfers. The powerful middle class voter tends to respect the veto power of ‘bad economic circumstances’ which they assume can be caused by too much social intervention. When public debates and the media complain that market-correcting public policies harm economic growth, the middle will be open to compromise on budget cuts in social spending that seems to destroy job opportunities: too expensive public policies, which are, however, important to lower income groups.

The role of welfare state institutions and social protection

In a post-industrial economy, in which especially the richer part of society can improve its income position, redistribution policies are an important measure to counter income disparities. However, the middle class as a whole does not necessarily benefit. This is the case for the lower middle class and of course for the poorest groups, while the upper middle is heading towards the rich. Redistribution measures have different effects on the three middle class groups. The lower middle class will improve its income position, but less so than the poorest groups. The middle-middle group does not feel the impact of redistribution as it does not improve or worsen their income position.  The upper middle group pays for redistribution and will not be a coalition partner of the poor.

Photo credit main picture: Jason Ox4 / You've been a Friend via flickr

Footnotes

  • 1.

    Dallinger, U. (2013), The endangered middle class? A comparative analysis of the role played by income redistribution, Journal of European Social Policy, 23(I) 83-101


  • 2.

    Dallinger (2013)


  • 3.

    e.g. Grabka, M. and Frick, J. (2008) ‚Schrumpfen der Mittelschicht – Anzeichen einer dauerhaften Polarisierung der verfügbaren Einkommen?’, Wochenbericht des DIW 75: 101-107; OECD (2008) Growing Unequal? Income Distribution and Poverty in OECD countries. OECD Paris; Chauvel, L. (2013) Welfare Regimes, Cohorts and the Middle Classes. Pp. 115-144 in Gornick/ Jäntii (eds.); Gornick, J.C./ Jäntii, M. (eds.), Income Inequality. Economic Disparities and the Middle Class in Affluent Countries. Stanford, University Press; Niehus, Judith/ Schaefer, Thilo/ Schröder, Christoph (2013) Arm und Reich in Deutschland: Wo bleibt die Mitte? Definition, Mythen und Fakten. IW Köln. Forschungsbericht Nr. 89.


  • 4.

    Atkinson, A.B./ Brandolini, A. (2013): On the Identification of the Middle Class. pp. 77-100 in Gornick/ Jäntii (eds.).


  • 5.

    Other boundaries are possible as well.


  • 6.

    See: Alderson, A.S./ Beckfield, J./ Nielson, F. (2005) Exactly how has income inequality changed? Patterns of Distributional Change in Core Societies. International Journal of Comparative Sociology 46: 405-423; OECD (2008) Growing Unequal? Income Distribution and Poverty in OECD countries. OECD Paris.


  • 7.

    Emmenegger, P./ Häusermann, S./ Palier, B./ Seeleib-Kaiser, M. (Hrsg.) (2012c): The Age of Dualization. The Changing Face of Inequality in Deindustrializing Societies. Oxford


  • 8.

    See also The Broker discussion paper Low wages and job insecurity as a destructive global standard for the FNV Mondiaal conference on Precarious Work (November 2014).


  • 9.

    Also women are over-represented in non-standard employment. But the preference of women for part time work in order to combine child-care and labour market participation is a different topic and is beyond the scope of this article.


  • 10.

    Palier, B./ Thelen, K. (2010) Institutionalizing Dualism: Complementarities and Change in France and Germany. In Politics and Society 38: 119-148.


  • 11.

    Meltzer, A./ Richard, S.F. (1981) A Rational Theory of the Size of Government. Journal of Political Economy 89: 914-927; Korpi, W./ Palme, J. (2004) Robin Hood, St. Matthew or simple egalitarianism? Strategies of equality of welfare states. S. 153-179 in: A Handbook of Comparative Social Policy; McCarty, N./ Pontusson, J. 2009: The political economy of inequality and redistribution. pp. 665-692 in Salverda, W./ Nolan, B./ Smeeding, T. (eds.) Oxford Handbook of Inequality. Oxford UP.


  • 12.

    Dallinger, U. (2013a) The endangered middle class? A comparative analysis of the role played by income redistribution. Journal of European Social Policy 23 (1): 83-101. And: Dallinger, U. (2014) Middle Class as Median voter: Political power and public policies. Unpublished conference paper. General Conference Glasgow of the ECPR. Paper available on request.


  • 13.

    Bartels, L. (2006) Unequal Democracy. New York: Russell Sage Foundation.


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Summary

  • The influence of social spending and the role of welfare states is significant for the stability of the middle class.
  • Employment protection legislation, collective wage bargaining and coordinated industrial relations have helped the European employed to maintain their status.
  • More flexible labour and legislation allowing the creation of non-standard work have affected the lower end of the middle class, while the middle-middle and higher-middle class have been given access to the core labour force with permanent contracts.
  • Public policy has tailored social security systems that closely connect the right to receive financial benefits to labour market participation, benefitting the middle and upper part of the middle class more than the lower middle class.
  • Redistributive components targeted at the poorer are declining while social security measures are increasingly targeting the middle-middle class.
  • The result is a division of interests within the middle class, separating the lower and the upper ends. And this has political consequences in increasing polarization.

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