Remarks by Angel Gurría
10 April 2019 - New York, USA
(As prepared for delivery)
Dear friends, Ladies and Gentlemen,
A strong and prosperous middle class is crucial for any economy, crucial for every society. It is needed to sustain consumption and investment in education, health and housing. Societies with a strong middle class have lower crime rates and enjoy higher levels of trust and life satisfaction. The taxes the middle class pay are essential to fund social protection. Moreover, the middle class is also essential for political stability and good governance.
For these and many other reasons, I am delighted to present the OECD’s new work on this crucial segment of our societies. This new report “Under Pressure: The Squeezed Middle Class” contributes to the OECD’s Inclusive Growth Agenda, and builds on our longstanding work on inequalities, which started with the “Growing Unequal?” report in 2008 and was followed by “Divided We Stand” report in 2011”, our Inclusive Growth Inititiave in 2012, our “In it Together” report in 2015, and our “A Broken Social Elevator” report on social mobility in 2018. We have been looking at this problem for a long time!
For many generations, being part of the middle class meant owning a comfortable house, having a stable job with career opportunities, along with a comfortable standard of living and the hope of an even better future for your children. Yet, for many, the reality no longer lives up to the dream. The report we launch today shows that the middle class in OECD countries is struggling. The number of people in the middle-income group has shrunk and its economic influence had declined.
Since the baby boomer generation, the middle-income group has grown smaller with each successive generation. Overall, the total population share of middle-income households has shrunk by 3 percentage points between the mid-1980s and the mid-2010s, with two thirds of that change going to the lower income class. Over the past three decades, the economic weight of all middle income households – that is, their aggregate income – has gone from 4 times that of high-income households to less than 3 times.
Pressure is mounting
Increasingly, pressures on the middle class are translating into a sense of anxiety about their economic situation. Our report identifies three main sources of pressure.
First, many middle class households view the socio-economic systems as unfair. 58% of middle-income households in OECD countries feel that, given the taxes they pay, they do not receive their fair share of benefits and public services. In addition, they have not benefitted from the same income growth as the top 10%. Indeed, over the past 30 years - across OECD countries - the median income has grown a third less than the average income of households in the top 10%.
Second, the middle class lifestyle is increasingly expensive. The cost of education, healthcare and especially housing have risen well above inflation over the past 25 years. House prices alone have grown 3 times faster than the median household income. Today, a growing number of middle income households find themselves unable to save at the end of the month, squeezed between rising costs and lagging incomes. In addition, more than one in five middle-income households spend more than they earn, and around 11% of middle-income households are over indebted, a higher proportion than for both low and high-income households. Our evidence also shows that more than one in three people are economically vulnerable, as they lack liquid financial assets to maintain a poverty-level living standard for at least three months.
Last but not least, labour market prospects are increasingly uncertain for many in the middle class. Mid-level skills no longer guarantee making it to the midde-income group. Moreover, one in six middle-income workers are in jobs that are at high risk of automation. Middle-income households have seen their income more than double in emerging economies between the mid-1980s and mid-2010s. Granted, this growth comes from a much lower starting point and living standards remain below those in advanced economies. However, this rapid growth dwarfs the 20% rise experienced by middle-income households in OECD countries
It’s therefore critical that policy makers take action now to relieve these pressures bearing in mind the diversity of the middle class. A thriving middle class is the heart and engine of inclusive growth. The promise of a middle class lifestyle constitutes one of the foundations of the social contract. Through its Framework for Policy Action on Inclusive Growth, the OECD aims to ensure that all our citizens have the resources, skills and opportunities to fulfil this promise.
Our report makes concrete recommendations to help achieve this objective, giving priority to lower middle-income households, as they are especially vulnerable to these pressures.
First, countries need to adapt their tax and benefit systems. Middle-income households are the main stakeholders of both taxes and benefits: they contribute two thirds of direct tax revenues and they receive 60% of public spending on cash benefits. Our report suggests making income taxes more progressive and fair, eliminating the tax bracket creep, and shifting the tax burden from labour income to income from capital and capital gains, property and inheritance. The automatic indexation of tax brackets to inflation implemented in some countries, including Canada for example, is a step in the right direction.
Second, we must tackle the rising cost of housing, education and healthcare. As such, expanding the supply of affordable housing, while giving targeted access to demand-side support, is essential to address rising housing costs. Publicly subsidised provision and price regulation of childcare, and - in some countries - support for tertiary education expenses are the most effective tools for containing the rising cost of education.
Third, countries must tackle labour market vulnerability by developing attractive Vocational Education and Training programmes (VET) and strengthening access to adult learning for the low and middle-skilled, especially in industries and skills with growing demand. In this respect, extending social protection and collective bargaining to non-standard workers will also help provide a more secure future for middle-income households.
Ladies and Gentlemen:
The author of ‘Inequality’ Anthony Atkinson said: “If we are concerned about equality of opportunity tomorrow, we need to be concerned about inequality of outcome today.”
This report is an urgent call for action to strengthen what is a core pillar of our economies, societies and democracies and to shape a better, more equal tomorrow. The OECD remains committed to working with and for you to design, develop and deliver better policies for better lives. Thank you.