US wealth gap widens as middle-class shrinks

New economic data warns that America's dwindling middle class could be an obstacle to future US economic growth and make social mobility more difficult. According to data from the Pew Research Centre, the percentage of US households classified as middle-class, currently measured as those earning between $42k and $125k for a family of three, fell from 55% in 2000 to 51% in 2014. The widening wealth gap, as more households move into either higher or lower income groups in major metropolitan areas, is said to threaten the country's economic fabric, as those who fall into the lower bracket will be less able to invest in everything from housing to education. The declining middle class is viewed as a reflection of rising income inequality in the US, which has been a central issue in the 2016 presidential campaign. 

Across America's cities, the middle class isn't what it used to be.

The middle class has retreated in nine out of 10 U.S. metropolitan areas since 2000, as income inequality widened after the recession, according to a new study from the Pew Research Center. The report expands the organization's research into the fortunes of the country's middle class, which Pew in December found had declined to less than 50 percent of households, representing a major shift in America's economic fabric.

The picture at the level of the metropolitan region isn't any sunnier, although the new research illustrates that economic health -- or lack of it -- can vary dramatically depending on the local labor market and which industries are thriving or withering.

While the middle class is losing ground across urban America, the dynamic is complex: Some families dropped into the lower-income bracket, but many others climbed up from middle class and into the upper-income bracket. Overall, the share of adults living in middle-income households fell in 203 of the 229 U.S. metropolitan areas Pew studied.

"It is a very, very widespread phenomenon. North, south, or west, the middle class was losing ground in almost every metropolitan area," said Rakesh Kochhar, associate director of research at Pew. "It wasn't that more populated areas or poorer communities were disproportionately affected. This was a change affecting almost every community in the country."

Middle class can be a confusing definition, given that almost all Americans describe themselves as part of the economic group. While it can be considered a state of mind, middle class also indicates a certain economic status, such as having a basic level of financial security. In Pew's analysis, members of the middle class are those with annual household income between two-thirds to double the nation median, or about $42,000 at the low end to $125,000 at the upper limit for a family of three.

By that measure, the share of Americans living in middle-income households shrank from 55 percent in 2000 to 51 percent in 2014.

So where did those families end up? A fair number of them climbed into the upper-income range. The share of wealthy households rose from 17 percent in 2000 to 20 percent in 2014. Poor households also rose, from 28 percent to 29 percent during the same time period.

"The other commonality isn't just the shrinking of the middle class, but a movement both up and down the ladder," Kochhar said. "There's a polarization. There are more in the upper tier and more in the lower, and fewer in the middle."

While more Americans are now part of the upper-income group, that's not necessarily a positive trend because it reflects widening income inequality. The gap between rich and poor prompted the ratings agency Standard & Poor's in 2014 to warn that the trend could hamper America's long-term economic growth.

Without a healthy and growing middle class, fewer Americans with purchasing power will be able to invest in everything from education to housing, leading to a weaker economic fabric.

Not every city is experiencing these changes in the same way. Some metropolitan regions are coming out as winners, while others have witnessed significant declines in economic status. (Pew measures that by considering the change in the share of adults who were upper income minus the change in the share who were lower income.)

But many of the biggest losers have a common thread: ties to manufacturing, which has been hard-hit in the last decade.

The Rust Belt city of Springfield, Ohio, saw a 16 percent decline in economic status, tying it with Goldsboro, North Carolina, the home to Seymour Johnson Air Force Base, as the biggest losers of economic status. On the other hand, some winners were buoyed by the recent oil boom, with Odessa, Texas, and Midland, Texas, both gaining 26 percentage points in economic status.

The cities with the largest shares of upper-income residents tend to be located on the coasts, such as Boston and San Francisco, and have ties to high-paying industries, such as finance, technology or energy. In only 17 out of 229 cities are one-quarter of adult citizens considered upper-income. In the vast majority, the upper-income tier represents less than 20 percent of all households.

Along with the hollowing out of the middle class, Americans are generally making less money than they did in 2000. The median income of U.S. households in 2014 was $62,482 compared with $67,673 in 2000. Earnings for all groups -- low income, middle class and upper income -- suffered during that time.

For instance, the upper-income group earned median annual income of $173,207 in 2014, down 7 percent from more than $186,000 in 2000. Middle-class and lower-income families saw their incomes shrink 6 percent and 10 percent, respectively.

Those findings may help shed light on the discontent that many Americans, regardless of income, are feeling these days. Despite improving economic metrics such as lower unemployment, many workers feel as if they're still struggling to get ahead. In a December poll, Pew found that most Americans feel the government isn't doing enough to help the middle class.

"There has been a lot of talk about the 1 percent and income inequality," Kochhar said. "This report shows they really are reflections of two sides of the same coin. There is a tight relationship between the size of the middle class and how the size of it changes over time, with inequality and how it changes overtime."