What Causes the Middle Class Squeeze

Tap to Read ➤ Priyanka Kosta Sonkushre

What do you understand by the term "middle class squeeze"? I am sure, most of the people living a middle class lifestyle will surely find themselves familiar with this term. Read on, to know what does it mean and what are the causes behind it.

In earlier times, families leading a middle class lifestyle enjoyed the security of a reliable job, a secure home, proper health care facilities, education for children and a few getaways with the family, to have a good time together. People were able to maintain this lifestyle with their earnings.

The income during that time was sufficient to provide a sensible living for them. However, since past few years, middle class families are facing problems in maintaining their lifestyle. Rising inflation and poor increase in earnings are adding to difficulties of the people.

Studies reveal that the average rise in income of people falling under 1% of top earning group, was found to be 42% whereas, people falling under the bottom 90% category, gained only 4.7%.

It is clearly evident from this statistics that high income group are enjoying a significant rise in their disposable income, while the middle class is getting squeezed between the soaring prices and not-so-enough disposable income.

The term "middle class squeeze" refers to a situation in which the income of middle class families does not suffice to keep up with rising prices or inflation. On the other hand, people falling under the high income category are not affected. This happens because the overall increase in their wages is high enough to remain unaffected by inflation.

► What Causes the "Squeeze"?

There are several factors contributing towards middle class squeeze. Rising inflation is directly affecting the prices of consumer products and services. Basic requirements like food, housing, education, energy, etc., are observing significant price rise. It is getting difficult for people to manage this price rise with their income. Let's check out the causes of middle class squeeze.

Basic Necessities

► Real Estate

Home is the basic need of every individual. Rise in real estate prices lead to increased expenditure towards housing. People also find it difficult to purchase a house due to high costs of real estate, causing them hard for buying a property.

Also, people owning homes tend to sell off their property to gain liquidity in order to meet basic living requirements. Statistics reveal that less number of Americans own homes now as compared to what they did during the 1970s.

► Energy

Electricity, fuel and other energy products have seen a significant rise in their prices since the year 2000. The direct and indirect costs associated with rising energy prices have created much pressure on middle class people.

In the year 2006, families spent $155 more on energy products as compared to what they did in 2000. This expenditure has risen even more today owing to rising inflation.

► Education

Middle class families believe in education as for them, it is the only key to a secure and fulfilling life. But nowadays, the costs of education is also rising. People tend to take loans to pay college fees thus, increasing the burden of expenses.

► Health Care and Insurance

The cost of health care and insurance has also seen a vast increase from what it was earlier. Increased health care costs have forced people to skip treatments in case of any health issue.

The premiums to be paid for insurance policies have also increased. According to a survey, people paid around $153 towards insurance premiums which was increased to $226 per month in 2005 and is still rising.

Other Contributing Factors

◆ Changes in Disposable Income Earlier, the rise in disposable income of middle class families was enough to manage inflation. But now, the situation is different. Today, the effect of inflation on commodity prices is so high that even a significant amount of rise in the salary, leaves a person with insufficient disposable income.

◆ Rise in Debt It is observed that Americans are using credit cards more often to match up with their expenses due to which, a household is spending more than its total earnings. This is increasing their debt and monetary burden.

◆ Decreasing Savings for Retirement Increase in expenses has left middle class people with less savings. As their savings are reduced to a large extent, they have less money to manage the expenses after retirement. This reduces their retirement security.

◆ Job Insecurity In 2003, majority of the people who filed for bankruptcy were leading a middle class lifestyle. Job insecurity puts additional tension on this class as they have no other means to survive, if they lose their jobs.

All the above factors play a role in creating the middle class squeeze. Americans believe that they are being squeezed very badly and if the inflation is not controlled, they can observe the worst economic crisis of all times.