The New Poor: How the Middle Class is Disappearing in the West 0 9

The decline in trust towards political institutions and the rise in support for populist politicians in recent years may have economic reasons as well: global economic growth has ceased to automatically convert into the wealth of the middle class. For millennials and zoomers, the social lift has not just slowed down — it has become stuck on the lower floors: in the U.S., the likelihood that a child will be wealthier than their parents has dropped from 90% (for those born in the 1940s) to 50% (for the generation of the 1980s). On paper, incomes are rising, but inflation on key 'tickets to the middle class' — housing and education — is outpacing wage growth by several times, making the living standards of the previous generation unattainable.

The Great Divide: When the Economy Became Detached from People

In the history of economic thought, the period from the end of World War II to the mid-1970s is referred to as the 'golden age' or the 'Great Compression.' During this time, the graphs of productivity growth and real wages moved inextricably together: if a worker began to produce more parts per hour due to technology, their hourly wage increased almost in the same proportion.

However, by the end of the 1970s, a completely different phase began. Today, following Paul Krugman’s lead, it is referred to as the 'Great Divide.' According to data from the Economic Policy Institute, from 1979 to 2022, labor productivity in developed economies increased by 64.7%, while hourly wages for ordinary workers rose by only 14.8%. This means that the economy became more efficient, but the super-profits went to owners and top management, not to those who create the product. The middle class also stopped receiving its share of the growth in national wealth.

At the same time, most countries managed to eliminate absolute poverty. This success created an illusion of prosperity that obscures the real problems of the middle class. According to World Bank data, the level of extreme poverty in the world fell from 44% in 1980 to less than 10% in the 2020s. In developed countries, this figure is close to zero. If in the 1950s or 1960s there were still pockets of chronic malnutrition in many regions of Europe and the U.S., today government social protection tools (such as food stamps in the U.S. or benefits in the EU) provide a basic safety net.

Today, the average resident of a developed country consumes more calories and has a more varied diet than the affluent classes in 19th century Europe (thanks to the availability of vitamins year-round), as historical data from Our World in Data shows. And the main marker of poverty — the share of food expenses in total consumption — has noticeably decreased. For example, in the mid-20th century, the average family spent more than 50% of its budget on food. Today, according to OECD data, in developed countries this figure is only 10–15%. Russia lags behind this indicator. According to Rosstat data, the share of food expenses hovers around 35% (even in the best times, in 2010, it only dropped to 29.6%).

Moreover, items that were once luxuries have turned into cheap mass-market products. This has happened thanks to globalization and the transfer of production to countries with cheap labor (first China, now other Asian countries). The cost of household appliances, clothing, and furniture has collapsed. Today, a smartphone with computing power exceeding that of NASA computers from the 1970s is available to everyone.

All of this creates a picture of 'universal wealth': a poor person can be dressed like a rich person and use the same social media interface. A person can be 'full,' but at the same time be completely cut off from the mechanisms of social mobility. The freed-up money was supposed to make people wealthier, but instead, it was instantly absorbed by the swelling costs of 'development assets' — housing, healthcare, and education.

Politicians often appeal to the growth of nominal wages, which in the U.S. have more than doubled since 1995. However, when these figures are adjusted for overall inflation, the real increase in income was about 50% in the U.S. and only 34% in France. The problem is that real estate, education, and healthcare have risen in price faster.

If 90% of children born in the U.S. in the 1940s earned more than their parents by the age of 30, among Americans born in the mid-1980s, only 50% achieved this. And the growth of offspring's wealth compared to the previous generation is one of the components of the 'American Dream.' When assessing men's incomes separately, the picture is even more depressing: by age 30, 95% of boys born in 1940 earned more than their fathers, while only 41% of those born in 1984 did.

As a Result, Adult Americans are Dissatisfied with Their Financial Situation

About 75–80% of them believe that today's children will find it harder to achieve financial success than their parents. The cost of home ownership relative to income has nearly doubled even compared to the not-so-distant 1990s. People see that their moms and dads owned homes and had stable families by age 30 — all on one salary. Meanwhile, they themselves continue to pay off student loans and rent housing collectively at the same age.

Currently, more than a quarter (28%) of residents in Europe consider their financial situation unstable. This means they are managing for now, but if unexpected expenses arise, their balance will not add up. 56% responded that they are doing well for now, but need to be cautious with spending.

28% of Europeans say they are managing for now, but if unexpected expenses arise, their balance will not add up.

Overall, the situation in Europe appears softer than in the U.S., but only at first glance. From 1995 to 2019, labor productivity in the Eurozone increased by 28%, while in the U.S. during the same period, it grew by 50%. At the same time, the European professional today works in a less dynamic environment, where their real purchasing power has stagnated for decades.

In the UK, 56% of citizens born before 1975 outperformed the previous generation in income, but among younger Britons, this share has dropped to 33%. An exception is Sweden, where 84% of men and 86% of women earn more than their parents. This is one of the highest rates in the region, explained by the initially low level of inequality in the country.

Russia's 'Great Divide' has lingered. In the 2000s, wages grew on average against the backdrop of high oil prices, outpacing productivity growth. During the full-scale invasion, a 'wage race' began due to labor shortages, but again, it was not supported by greater efficiency. It may seem that the Russian middle class has the opportunity to get rich and realize the 'American Dream.' But this chance shines for a small number of residents of large cities, while the rest of the population sees very modest income growth.

The Illusion of Growth

Let’s consider how the standard of living has changed, using the example of the U.S., France, and Germany. These countries, on one hand, are the largest and most developed Western economies, and on the other hand, represent different types of it. The U.S. is a distinctly liberal economy with high labor mobility, minimal restrictions (including in the social sphere), and weak government involvement. It mainly ensures compliance with the 'rules of the game.' France has a social-democratic system, with high restrictions for employers, a progressive tax scale (the rich pay more), a developed social assistance system, and extensive government intervention in the market. Germany occupies an intermediate position, although it is closer to the French model.

To understand whether broad segments of the population are indeed becoming poorer, let’s look at the dynamics of nominal and real wages (that is, adjusted for inflation), and also calculate how many average salaries in each country are needed to buy 1 square meter of housing, a Toyota Corolla (as a middle-class brand), and the cost of services, considering how much it costs to treat teeth (say, to get a filling). These calculations are, of course, very approximate, but they allow us to show the overall picture.

Over the past 30 years, nominal wages in all three countries have grown. The average annual salary in the U.S. in 1995 was about $35,000, and in 2023 it is over $81,000 (an increase of about 130%). In France, during the same period, the average nominal salary rose from €25,000 to €43,500 per year (an increase of 57%). In Germany, it increased from €42,000 to €48,300 (about 15%). In terms of real growth, the U.S. also emerged as a leader: over the past 30 years, wages have increased by 10–15%, while in Germany and France, they have grown by 5–10%.

In other words, real wages are rising, albeit slowly, and median wages are also increasing. It would seem that this means that people should be getting wealthier in general. But paradoxically, both goods and many basic services, as well as housing, have become on average less affordable in all three countries over the past 20 years. Even in the U.S., where wage growth is particularly noticeable, more average salaries are needed to buy a car than 20 years ago.

Housing affordability has decreased dramatically (by a third). And this is on average — residents of large cities have felt this much more acutely. Overall, in the EU, real estate prices have risen by 50% over the past 15 years (2010–2025), and rental costs have increased by 25%, raising the price-to-income ratio by 20–30%. In the U.S., the house price index has risen by 100–150% since 1995 — to four to six monthly salaries per square meter (compared to three in 1995). In the EU, the peak of housing inflation (23.3%) was recorded in 2022. This led to an affordability crisis: one in ten Europeans spends more than 40% of their income on housing.

Measuring services is more complicated, as dynamics can vary significantly by category, but, for example, dentistry, one of the most universal medical services, has also become less accessible. This trend cannot help but affect public sentiment. While Elon Musk prepares to become the first trillionaire in history, the average family understands that it will take a lifetime to pay off their mortgage. The recent wave of inflation, a consequence of the coronavirus and rising energy prices amid the war in Ukraine, has made this problem particularly acute.