SINGAPORE (Apr 15): With income growth falling increasingly far behind the rise in house prices, the middle class is struggling to keep up. Governments need to give more support and help address gaps in social inequality, says the Organisation of Economic Co-operation and Development (OECD) on April 10.
“Today the middle class looks increasingly like a boat in rocky waters,” says OECD secretary-general Angel Gurría. “Governments must listen to people’s concerns and protect and promote middle-class living standards. This will help drive inclusive and sustainable growth and create a more cohesive and stable social fabric.”
OECD defines the “middle class” as those earning between 75% and 200% of the median national income. Middle-income individuals constitute the largest proportion of citizens across OECD member countries, with 61% of the population falling within this classification, 30% in the lower-income class and 9% in the upper-income class.
OECD’s report “Under Pressure: The Squeezed Middle Class” observes that the middle class has shrunk in most OECD countries. It has become more difficult for younger generations to make it to the middle class. Nearly 70% of the baby boomers, riding the widespread post-war economic and population boom, were considered part of middle-income households. By contrast, just 60% of millennials today are in that category.
Over the past 10 years, middle class incomes have increased by just 0.3% a year. By contrast, the average income of the top 10% has been growing three times faster.
“This has fuelled perceptions that the current socioeconomic system is unfair and that the middle class has not benefited from economic growth in proportion to its contribution,” says OECD.
Gabriela Ramos, the organisation’s chief of staff, calls this trend “a bleak picture”. “The middle class is at the core of a cohesive, thriving society. We need to address their concerns regarding living costs, fairness and uncertainty.”
According to the report, the cost of a middle-class lifestyle has increased faster than inflation. Housing, for example, makes up the single largest spending item for middle-income households, at around one-third of disposable income. In the 1990s, it was only a quarter. Over the last two decades, the growth in housing prices outpaced that of household median income by three times.
OECD notes that more than one in five middle-income households spends more than they earn. They carry a higher proportion of debt than both low- and high-income households.
Exacerbating matters is the growing risk of jobs getting displaced because of automation. By contrast, just one in five low-income jobs and one in 10 high-income jobs are facing a similar risk, says OECD.
The organisation is a club of 36 wealthy, mainly Western countries. Japan and South Korea are the only two East Asian members. Singapore, while not a member of the OECD, has ratified certain OECD treaties on specific areas such as cross-border taxation.
OECD is calling for governments to act. They should provide targeted grants, financial support for loans and tax relief for homebuyers. They should help tackle other cost of living issues by ensuring better social protection coverage and other forms of quality public services.
To assuage worries over middle-income jobs getting displaced, governments can invest more in vocational education and training systems, and provide social insurance and collective bargaining coverage for contract, part-time or self-employed workers.
Last but not least, governments should shift the tax burden from labour income to income from capital and capital gains, property and inheritance.
