April 24, 2017

Middle Class Fortunes in Western Europe

1. The middle class is large in many Western European countries, but it is losing ground in places

A large majority of adults in the selected Western European countries live in middle-income households. In 2010, the shares of adults who are middle income ranged from 64% in Spain to about 80% in Denmark, the Netherlands and Norway. These shares were considerably higher than in the U.S., where fewer than six-in-ten adults were middle income in 2010.

Across the countries examined, a smaller middle-income tier signals a more economically divided population. Among these countries, the U.S. has not only the smallest share of adults living in middle-income households, but also the largest shares of adults in lower- and upper-income households. By comparison, the lower- and upper-income tiers in Denmark, the Netherlands and Norway are of modest size. The size of the middle class in a country also signals the degree of income inequality there: Countries with smaller middle classes have higher levels of income inequality.

Most of the countries examined in this report experienced a widening of economic divisions since 1991. There was a shared tendency in the majority of countries for the middle class to shrink and the lower- and upper-income tiers to expand from 1991 to 2010.16 These shifts were most pronounced in Finland and Germany. However, France, Ireland, the Netherlands and the United Kingdom represent significant exceptions to this trend as the shares of adults who are middle income in these countries increased, mostly by lifting people out of the lower-income tier.

The decrease in the share of middle-income populations in most countries was not all bad news. With the exception of Luxembourg and Spain, there was relatively more movement of people into the upper-income tier than into the lower-income tier in all countries. The net result was a general improvement in the economic status of people in the selected Western European countries and the U.S.

Many countries in Western Europe have significantly larger middle classes than the U.S.

The share of the adult population that lives in middle-income households varies considerably across Western Europe and the U.S. In 2010, the latest year for which data are available for all countries, the middle-income share was near 80% in Denmark, the Netherlands and Norway, the highest three among the countries examined, and as low as 59% in the U.S. Among the eight countries with data for 2013, the middle-income share ranged from 58% in the U.S. to 79% in Norway.

The size of the middle class across the selected Western European nations is related to the countries’ overall standards of living. The countries fall into three groups based on their national median disposable incomes in 2010. National incomes and the middle-income shares were the lowest in Ireland, Italy, Spain and the UK (64% to 69%); higher in Finland, France and Germany (72% to 75%); and higher still in Denmark, the Netherlands, Luxembourg and Norway (75% to 80%).

Generally, the ranking of countries by the shares of their middle-income populations has not changed much since 1991. Denmark and Norway – among the countries with the largest middle-income tiers in 2010 – also had among the larger middle-income tiers in 1991. At the other end, Spain, the UK and the U.S. had some of the smallest middle-income tiers in both 1991 and 2010.

However, Finland, where 82% of adults lived in a middle-income household in 1991, saw the middle-class share fall to 75% in 2010. Conversely, Ireland moved up the ladder, with the middle-income share rising from 60% in 1991, the lowest at the time, to 69% in 2010.

The U.S. has larger lower- and upper-income tiers than the selected countries from Western Europe

Americans are more economically divided than many Western Europeans, with larger shares of adults living in households at opposite ends of the income distribution. The relatively small middle class in the U.S. translated into the largest share of people in lower-income households, at 26% in 2010. Meanwhile, 15% of Americans were in the upper-income tier, the highest share among the countries examined.

The shares of people in lower- and upper-income tiers in Spain were similar to that in the U.S. In 2010, 24% of Spanish adults were lower income and 13% were upper income. Although alike in this respect, a key difference between the two countries is that the median disposable household income in the U.S. ($52,941 in 2010) is much higher than in Spain ($31,885).

Generally, the larger the middle-income share, the smaller the shares of the lower- and upper-income tiers in a country. In the Western European countries examined, the middle-income share was highest in Denmark, the Netherlands and Norway in 2010, and these countries also had the smallest lower-income tiers in 2010, around 13% to 14% of the population in each. They also had among the smallest upper-income tiers in 2010, from 6% to 8%.

Income inequality is related to the size of the middle class in a country

The shares of adults who are in the lower-, middle- or upper-income tiers in a country is related to the degree of income inequality in the country, or the gap between the earnings of households near the top of the income distribution and those near the bottom. Countries where incomes are more equal have larger shares of middle-income adults, and vice versa.

Using the ratio of the median income of upper-income households to the median income of lower-income households as a measure of inequality, the lesser the degree of inequality, the greater the share of the middle-income tier.17 (A lower level of inequality is also associated with smaller lower- and upper-income tiers.)

For example, in 2010, Denmark, the Netherlands and Norway, which had the largest middle-income tiers, also had lower to moderate levels of income inequality. In these three countries, the ratio of the median income of upper-income households to that of lower-income households was 4.23, 4.26 and 4.52, respectively.

The U.S. and Spain stood at the other end, with the smallest middle-income tiers and among the highest levels of income inequality. The ratio of the median income of upper-income households to that of lower-income households in 2010 was 5.70 in the U.S. and 4.97 in Spain.

The relationship between income inequality and the middle-class share reflects the income distribution in a country. When the incomes of households near the bottom of the distribution are closer to the incomes of households near the top, more households may be found located within the band of income that defines the middle class – two-thirds to double the national median income. But, if the distance between the top and bottom of the income distribution is wide, households are spread more thinly across the income distribution and fewer fall within the middle-income band.18

The middle class is shrinking in the majority of countries examined, but there are notable exceptions

The share of adults in middle-income households is on the decline in the majority of countries examined. From 1991 to 2010, the share of the middle-income tier decreased 5 percentage points or more in Finland, Germany and Spain. In Finland and Germany this represented more of a move up the ladder as the increase in the share of the upper-income tier exceeded the increase in the share that was lower income. In Spain, however, the 5-percentage-point decrease in the middle-income share was accompanied by a 4.2-point increase in the lower-income share.

Ireland and the UK posted the most significant expansions of the middle-income tier from 1991 to 2010. In Ireland, the middle-income share increased 8.5 percentage points, from 6o% to 69%. Meanwhile, the share of Irish adults who are lower income fell 7.3 percentage points. In the UK, an increase of 6 points in the middle-income share was accompanied by a decrease of 4.8 points in the lower-income share.

The Netherlands is another country that experienced a sizable decrease in the share of its lower-income tier. From 1991 to 2010, the lower-income share in the Netherlands fell by 5.8 percentage points and this resulted in increases in the shares of both the middle-income tier (plus 3.4 percentage points) and the upper-income tier (plus 2.4 points).

More recent data for 2013 are available for eight of the 12 countries covered in this report. The period from 2010 to 2013, which encompasses the beginning of the recovery from the Great Recession, reveals little change in the trend through 2010. In the UK, the middle-income share edged up from 67% in 2010 to 68% in 2013. The middle-income share slipped slightly in the Netherlands – from 79% in 2010 to 78% in 2013 – but it remained higher than its share in 1991. (See Appendix A for the estimates for 2013.)

Most countries that experienced drops in middle-class shares from 1991 to 2010 remained on that path through 2013. The economic divisions strengthened within Luxembourg, the Netherlands, Norway, Spain and the U.S., with further reductions in the middle-income shares and increases in the lower- and upper-income shares, albeit modestly in most cases.

Adults in the Netherlands and Ireland experienced the greatest progress up the economic ladder

The movement of people into both lower- and upper-income tiers, or out of both tiers, suggests that the overall change in the economic status of a country is perhaps best measured by the difference in the magnitudes of these moves. Generally, movements up the income ladder were more pronounced than movements down the ladder, and there was an improvement in the economic status of adults the post-1990 era in most of the countries examined.

In the U.S., the share of adults in the upper-income tier increased 1.9 percentage points from 1991 to 2010. Meanwhile, the lower-income share also increased, by 0.9 points. The difference – 1 percentage point – is the net gain in the economic status of American adults.

Among the Western European countries examined, the biggest gainers in economic status from 1991 to 2010 were the Dutch. In the Netherlands, the share of adults in the lower-income tier decreased 5.8 percentage points in this period and the upper-income share increased 2.4 points. Both these movements represent an economic gain, and their combined effect was an 8.2-point gain in the overall economic status of adults in the Netherlands.

The net gain in Ireland was 6.2 percentage points from 1991 to 2010. This is the result of two countervailing movements – a decrease of 7.3 points in the lower-income share but also a decrease of 1.1 points in the upper-income share. People in the UK (up 3.5 points) and Denmark (3.1 points) were also among the bigger gainers in this period. Gains in the other countries from Western Europe ranged from 0.4 points in Italy to 1.8 points in France.

But adults in Luxembourg and Spain were more likely to have moved into the lower-income tier than into the upper-income tiers. In Spain, the increase in the lower-income share exceeded the increase in the upper-income share by 3.2 percentage points from 1991 to 2010. The loss in Luxembourg was a modest 0.3 points.

Little changes when expanding to the longer time period from 1991 to 2013. The gain in the Netherlands over this period – 7.9 percentage points – is well ahead of the gains in the other seven countries for which data are available through 2013. Luxembourg and Spain extend their losses, to 2.6 points and 3.5 points, respectively (see Appendix A).

Changes in a country’s labor market conditions are correlated with changes in the income status of adults. The unemployment rate in Spain, which is much higher than in the other countries, increased from 16.3% in 1991 to 19.9% in 2010. It then spiked to 26.1% in 2013. The unemployment rate in Luxembourg is not nearly as high, but it increased from only 1.4% in 1991 to 5.9% in 2010, and then further to 6.9% by 2013.19

At the other end of the spectrum, the unemployment rate in Ireland fell from 19% in 1991 to 13.9% in 2010. The unemployment rate also trended down in Denmark and the UK during this period. More generally, countries that experienced a decrease in the unemployment rate from 1991 to 2010, or less of an increase, experienced more of an improvement in the income status of adults.

Growth in the national median household income in a country is also related with the movement of adults up the income tiers. As shown in the next section, Denmark, France, Ireland and the UK recorded among the highest rates of growth in national median household income from 1991 to 2010, and adults in these countries experienced more of an improvement in economic status. On the other hand, Germany, Italy, Spain and the U.S. were among the countries experiencing the lowest rate of growth in national median household income, and adults in these countries experienced minimal gains in economic status, or a loss in the case of Spain.20

  1. For some countries the 1991 estimates are from the following survey years: Denmark – 1992, France – 1989, Germany – 1989, Ireland – 1987, Netherlands – 1993, Spain – 1990. The year 1991 is used as the common reference point for the sake of convenience. The 1991 estimates for Germany are based on a sample of (former) West German households only (see Methodology for details).
  2. A more general measure of inequality is the Gini coefficient, which is based on the shares of aggregate income held by percentiles of households. Estimates of the Gini coefficient are also closely related to the shares of the population that are middle income across the countries examined. A previous report from Pew Research Center found a strong relationship between the degree of income inequality and the size of the middle class across metropolitan areas in the U.S.
  3. Appendix E shows the detailed income distribution for the 12 countries covered in this report.
  4. Unemployment rate data is from the International Monetary Fund’s World Economic Outlook database. A recent report from the International Labour Organization highlights the relationship between labor market institutions and the size of the middle class.
  5. The Netherlands, which stood in the middle of the pack with respect to income growth, and Luxembourg, with fairly high growth in income, are notable exceptions.