Manufacturing jobs.

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Germany's Middle Class Is Endangered, Too

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The plight of the middle class is one of the hottest topics in the U.S. presidential campaign. Candidates compete to offer plans for the revival of the dependable middle, the foundation of society. The polarization isn't only occurring in the U.S., though. In Germany, with its far more socialist income redistribution model, the middle class also is endangered. 

In both countries, the middle class is shrinking as a share of the general population, and so is the share of income that accrues to it. But the reasons for the contraction tell a lot about the different priorities of the two societies.

QuickTake Income Inequality

Markus Grabka, Jan Goebel, Carsten Schroeder and Juergen Schupp explored the comparison in a paper published last week by the German Institute for Economic Research. They defined the middle class as those with income between 67 percent and 200 percent of the nation's median. (The U.S. median income was $54,629 and it was $47,773 in Germany, according to the latest data from the World Bank.)

In the U.S., the comparable group declined to less than 50 percent of the population in 2015 from 59 percent in 1983. In Germany (then West Germany), it included 62 percent of the population in 1981, and it shrank to 54 percent by 2013.

The drop in the middle class's share of income was steeper in the U.S. than in Germany, while the upper class's share also increased faster in the U.S. In both countries, the poorest pretty much kept their share:

DIW Berlin

The two countries have in common that they're quickly shifting from industrial to service-oriented economic models. The steady, unionized industrial jobs are being replaced by more precarious, often part-time service ones. In Germany, an increasing number of people hold so-called "minijobs" that pay up to 450 euros ($512) a month. In the U.S., the sharing economy and part-time employment are much-discussed trends. That helps explain the downward social mobility in both countries. More people from the middle income group have slipped than risen since the beginning of this century.

These downward movers have been disproportionately young. Retirees' incomes have improved in the last 30 years, but young workers have faced more deprivation, both in Germany and in the U.S.

In both countries, immigrants and minorities have mostly done worse than the native-born white population. In the U.S., middle class whites, and in Germany, locally born Germans, mostly moved up the income ladder. 

DIW Berlin

The two countries have completely different tax and social security systems and labor market rules. Germans are also far more egalitarian than Americans. That might explain why the rich aren't getting richer as glaringly fast in Europe's biggest economy. The income difference between the lower and upper classes is far smaller in Germany than in the U.S.: the former's Gini coefficient is 28.3 and the latter's is 40. That doesn't ease the depressing general trend for the middle class, but it does make the pill easier to swallow for Germans. The upper class's wealth is not as in-your-face as across the Atlantic.

Compared to the U.S. rich, the German upper class is pretty poor. The net worth of upper-class Americans is 6.6 times as high as that of the middle class ones. In Germany, the ratio is about 3. And, unlike in the U.S., where the assets of the poorest and middle classes have been stagnant or declining, Germany's poor and middle-income households have been accumulating wealth: Their net worth rose by 11 percent and 17 percent, respectively, between 2002 and 2012. 

"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries," Winston Churchill said. Yet Germany, conscientious about taxing the rich and helping the poor, has made the decline of the middle class a somewhat less relevant issue than it is in the U.S. The differences in living standards between the low and high ends of the income distribution are not so pronounced as to inspire major social tension, and living standards have been rising rather than falling for the people Hillary Clinton would call "everyday Germans."

In the final accounting, however, the milder character of the middle class's plight may not be to Germany's benefit. It should take notice of the trend as the U.S. has. As Grabka and his colleagues point out, this problem cannot be fixed with changes in the tax and social transfer systems. More sophisticated policies are needed, on both sides of the Atlantic. These include changes to the educational system to better match young people's qualifications to demand and driving up pay in the increasingly important service industries. If the middle class is expected to survive the post-industrial revolution, its members should be able to find decent jobs in services.

The contributions of technology to that sector may improve the situation rather than eliminate jobs: Experiences, as opposed to goods, are in ever higher demand, and it takes qualified work to create them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net