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Where is the Middle Class?

Ari Goldfarb is communication director with Buffalo-based Goldfarb Financial, and published novelist whose works include Just Under the Sky. His series with Buffalo Rising comments on the intersection between finance, economics, and pop culture.

There has been a growing concern brought up by politicians for decades about the shrinking, American Middle class. It is no secret the strongest economies in the world are bolstered by a strong middle class, while nations with the worst income inequality find themselves in stagnant or shrinking economic scenarios. All one has to do is look at struggling countries like Russia, Greece, and Brazil to see the importance of a middle class. Urban unemployment was almost 8% in Brazil last September. No new jobs were created, inflation rose, the income inequality spiked and now the nation’s economy is in shambles.[1] Bloomberg Business reports that Russia’s middle class population could halve since its 2008 peak, bringing it down to numbers matching its 1998 financial crisis.[2] In March 2015 the Moscow Times wrote the average monthly income in Russia was equivalent to $500 in America.[3]­ The United States has been the strongest economy in the world, in part because it had the strongest middle class. In 1980, America was the only country in the world with a median income over $15,000.[4] The next closest was Canada at 14 thousand. This success was built on both a boom in productivity and proportional hourly compensation.


In his book Saving Capitalism, Economist Robert Reich writes how a typical salary for an employee at General Motors in the 1960s could reach around $35 an hour when adjusting to the dollar amount today (note this was not the minimum wage, but it was a wage many workers ere able to achieve through internal advancement). However, despite a continued increase in overall productivity, one can see on the chart from the Economic Policy Institute (also used in Reich’s book) that hourly wage compensation flattened around 1973. Even more interesting is that hourly compensation has only increased 9.2% since 1973, while productivity has gone up by 74.4%. In fact, despite the slight bump in hourly compensation, when adjusting for inflation the minimum wage in 1973 was higher than it is today ($8.42 per hour).[5]

To combat the need to raise wages, some argue these minimum wage jobs are placeholders for individuals until they graduate college. This may have been a valid argument at some point in time but college degrees no longer guarantee the same wages they could less than 20 years ago. Time Money reported in April 2015 the median salary of all college graduates was around 45 thousand a year. This number changes based on gender. According to the Economic Policy Institute, the hourly wage of young college women in 2014 was $15.29, which only adds up to a little over 30 thousand a year.

Not only is hourly wage remaining stagnant, or decreasing (due to inflation), but annual debt is increasing. The Wall Street Journal wrote the class of 2015 is the most indebted graduating class of all time. The average debt per student was over $35 thousand.[1] As stated in the previous paragraph that’s almost a year salary for the median wage of female college graduates. Compare that to 1994 or 1993, when most of these students were born, the average debt per student was less than $10 thousand.[2] Even the more affordable routes to education are far more than seen in previous generations. The current tuition of Erie Community College is $4,595. However, when including average fees per student and textbooks the total grows to $6,777 annually.[3] Yale’s tuition in 1980 was only $9,180.[4] The minimum wage in 1980 was $3.10 ($8.46 today).

So why have wages remained stagnant despite continued growth in overall productivity? Three key reasons are 1) Decrease of Unions, 2) Technology replacing workforce, and 3) Outsourcing for cheap labor.

Some cringe when they hear the term Union, and consider these organizations obstructions to progress. It is true when a union, or union leadership, gain too much power they can cause a number of issues, but the same can be said of CEOs and boards of directors. The point of a Union is to level the playing field and give the working class a seat at the table during negotiations. Besides the World War 2 economy, the strongest growth we have seen took place when between 20-30% of our workforce were members of Unions.[5] In the 35 years since Reagan busted the Airline Union in 1981, our GDP has grown by a double digit percentage only once (1983-11.39%).[6] To put that in perspective, the decade before the airline strike our annual GDP grew more than 10% six times (’72, ’73, ’75, ’77, ’78, ’79). Note these growths were seen by Presidents in both parties.

Walmart is America’s leading employer (Over 1 million employees in the US and over 2 million globally) and actually costs the country money.

The second, improved technology, is inevitable and one cannot fault a company for preferring economic efficiencies. However, one can fault a company for exploiting cheap foreign labor forces. While this employment practice benefits the output of an individual company, it does not benefit the rest of the country. As shown on the chart above, productivity in America’s industries has not been the problem with our stagnant economy. The middle class has very little negotiating power, especially without unions. Their choices are to accept low wages or remain unemployed. Both of these scenarios often lead them to needing government assistance. Walmart is America’s leading employer (Over 1 million employees in the US and over 2 million globally) and actually costs the country money. Clare O’Connor of Forbes wrote in 2014 the chain store costs American taxpayers over $6 billion.[7] Why? Because the company undercompensates its staff knowing the government will pay for food stamps, Medicaid, housing and heating; and when the government pays that means you pay.

The tighter we squeeze the middle class the more people will either slip into elite status, or far more likely join the growing ranks of working poor. A strong middle class is the true source of job creation and a strong economy. It is as simple as supply and demand; the more people with money to spend, the higher the demand. The higher the demand, the more need to expand, and with expansion comes further employment. If we do not build a future around a strong middle class, our stagnant growth may cause us to lag behind more youthful economies.


This article is courtesy of Goldfarb Financial, a Buffalo boutique independent financial firm.

Ari Goldfarb is not affiliated with Raymond James. Views expressed are the opinions of Ari Goldfarb and the Financial Advisors at Goldfarb Financial and not necessarily those of Raymond James.

Goldfarb Financial is an independent firm. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Goldfarb Financial, 295 Main St Suite 914, Buffalo, NY 14203 716-842-0145

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

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