CORRECTION | Decline of middle class in Germany comparable to that of the US

Press Release of May 6, 2016

Correction to the press release from May 6, 2016

Please note: The original version of Wochenbericht 18, which compares the decline of the middle class in Germany and with that of the United States, contained a calculation error that came about while adjusting standard German reference values to the basis used by the reference study for the US. We apologize for the oversight.  

We have recalculated these figures and are re-releasing the corrected Wochenbericht. The revised figures are shown here in bold. Additional explanations of the different measurement methods can be found at the end of this press release.

The key finding of the report remains unchanged: the German and US middle classes are shrinking at roughly the same pace. An application of the method commonly used in Germany and in previous DIW Wochenberichten reveals a similar development. For comparison purposes, the resulting calculations can also be found in the table at the end of this press release.  

The Calculation Method

The calculation method typically used in Germany for calculating the size of the middle class, which follows international conventions, was not the one used in the US study used as a reference by the Wochenbericht. In Germany, disposable household income including the rental value of owner-occupied housing, and taking into account the modified OECD equivalence scale, normally serves as the basis. This method allows for the comparison of the requirements of different-sized households. All persons residing in the household, including children, are taken into account and reported.

The US study, however, also looks at household market income—including government transfers and pensions—before taxes and social security contributions. The weighted requirements are based on the square root of the household size. Only adults are reported, and the result is normalized to a three-person household.

Applying this specific methodology to the German data unfortunately caused an error in our calculations, which made it appear as though all households were three-person households. As a result, not only was the level of the normalized average income underestimated, but also the income-related advantages of larger households through economies of scale were not taken into account. 

DIW Berlin study compares proportion of middle-class individuals over time in Germany and US - share declining in both countries - average income has dropped since 2000

The middle class in both the US and Germany is on the decline: according to a study conducted by the German Institute for Economic Research (DIW Berlin), the share of middle-class individuals in the total population sank in both countries by more than five percent (in the previous version of the report, this figure was “roughly six”) between 1991 and 2013. The “middle class” comprises all adults whose total household income—before taxes and social security contributions—falls between 67 and 200 percent of the median, which separates the higher-income half from the lower-income half of the population.

In Germany, it is primarily foreign citizens who are dropping out of the middle class, while in the US, it is Latin American immigrants. White US citizens, on the other hand, have been able to advance into higher-income groups at above-average rates. Germany’s employment growth in recent years has not contributed to a stabilization of the middle class, explain Markus Grabka, Jan Goebel, Carsten Schröder, and Jürgen Schupp, SOEP (Socio-Economic Panel) distribution experts at DIW Berlin.

For their study, the researchers compared the latest data from the SOEP, a longitudinal study in Germany, with data from the US. They examined total real household income including pension earnings and government transfers but excluding taxes and social security payments (which ensured that institutional differences as well as changes to tax laws did not impair the comparability of results).

Overall, the development in the US was more pronounced, because the relative income losses among those who were dropping out of the middle class in the low-income group and the income gains among those entering the high-income group were significantly greater than those in Germany. The median income in real terms among the US middle class increased from 55,000 dollars in 1970 to about 77,000 dollars in 2000. But by 2014, this figure had dropped by about four percent. In Germany, there was a seven-percent (previously, “four-percent”) increase to around 54,000 euros (previously, “31,000”) between 1991 and 2000, followed by a roughly one-percent decrease (previously, “roughly five-percent”) by 2013 to 53,500 (previously, “29,500”) euros.

Income share of high-income individuals in Germany has risen to 31 percent (previously, “33 percent”)

In 1980, the US middle class’s share of the total income stood at roughly 60 percent; in 1990, it was 54 percent; and by 2014, it had dropped to 43 percent. Since 2010, the income share attributable to high-income US citizens has been greater than that attributable to the middle-income group. Since 1980, the share of low-income individuals remained at around ten percent, whereas by 2014, the share of high-income individuals had increased to 49 percent.

In Germany, on the other hand, middle-income individuals made up the largest group over the entire observation period, though their share in total income did decline by more than ten percentage points, down from roughly 67 percent in 1991. High-income individuals’ share in total income, however, increased to 33 percent by 2010, up from 22 percent (previously, “23”) in 1991 to 31 percent (previously, “33”) in 2013 (previously, “2010”). In contrast, the share of the middle class in the total income decreased by around ten percentage points (previously, “more than ten”) after 1991, down from roughly 68 percent (previously, “67”).

In both countries, individuals between the ages of 30 and 44 were the ones dropping out of the middle class: in Germany, the share of this age group decreased by more than ten percentage points (previously, “roughly 15”) after 1983. What the DIW researchers find most striking is that the share of young adults between the ages 18 and 29 increased primarily in the lower-income bracket, while the share of individuals between the ages of 30 and 44 increased in both the lower- and upper-income brackets.