Relative Wealth: A Response

A recent Michigan Daily article has been making the rounds not only around campus, but has garnered national media attention as well. The column Jesse Klein: Relative wealth has more than 137,000 reads on The Michigan Daily website, 282 comments, and has been picked up by Business Insider. While the response to the article has been largely negative, the article raises an interesting topic: how does one compare relative wealth across the nation? While there are many ways to determine household "wealth," this analysis will be contained to the economic data point of household income to make a comparison of what is considered "middle-class" across the United States.

The important first step in this analysis is to define exactly what is considered middle class in the United States. For purposes of my analysis, I will take the definition of a fixed middle class as offered by Anthony B. Atkinson and Andrea Brandolini in their working paper On the identification of the "middle class". In their paper, they explain:

In economics, interest in the middle class appears to stem in part from the perception that distributional studies have focuses on the poor, at one end, and on the rich, at the other end, leaving out the middle. Solow's references to the "middle 60 per cent" could be interpreted in this sense, being bracketed between the bottom 20 per cent...and the top 20 per cent.

This definition allows us to analyze the definition of household income as an indicator of the middle class. According to the Census Bureau, the second through fourth quintiles of national household incomes was between $20,901 and $105,901 in the year 2013. From the Michigan Daily article, the author cites a $250,000 household income that she considers to be middle class; however, according to Census Bureau data, this would be well within the Top 5% of earners nationally.

However, looking at data at a national level can ignore fundamental differences across geographical regions. This idea of "relative wealth" that was touched upon in the Michigan Daily article was expanded upon in the Wall Street Journal article Middle Class, Undefined: How Purchasing Power Affects Perceptions of Wealth. In the article, Jo Craven McGinty explains how differences in prices of goods and services can have a large impact on actual household wealth:

Costs for goods and services in different metropolitan areas vary by as much as 40 percentage points, and the disparity in rents is even greater. The differences cause some people to feel squeezed, while others who earn the same amount but live in a different area feel flush.

By utilizing the price factor, as further analyzed in the Bureau of Economic Analysis Regional Price Parities, we can understand the differences across regional "real" incomes. As noted by the BEA, the San Francisco Metropolitan Area has a RRP of 121.3, indicating that the price levels of goods and services are 21.3% higher than the national average. Applied to the definition of middle class national household incomes, the "real" wage for the SF area would be between $25,352 and $128,457. While this analysis can show a large differential from the national average, the divide becomes even larger when compared to cities with low levels of RRP. The lowest five Metropolitan Areas have an average RRP of 81.1, more than 18% lower than the national average and approximately 33% lower than the SF area, with a corresponding middle class household income between $16,954 and $85,906. This analysis reveals that citing a single national average cannot fully explain the underlying economic differences between different geographical regions.