Germany’s Shrinking Middle Class

The DIW has released an alarming new study on the shrinking middle class in Germany. It also links neatly into the debate of rising income inequality. New calculations based on the Socio-Economic Panel (SOEP) revealed that Germany’s middle class shrunk by 6 percentage points from 1991 to 2013 (Grabka, Goebel, Schröder and Schupp, 2016). This is as alarming as the adverse developments in the USA.

Germany income inequality 1
Diagram 1 (Source: Grabka et al., 2016; World Bank, 2016)

Germany’s middle income class includes all people in households that earn a gross total income of 67 to 200 percent of the median. The country’s middle class is still the largest income group today. However, the DIW study reveals that Germany’s middle class is now on decline. This is due to the fall in the middle-income group’s share in the adult population, meaning that less people earn a wage (high or low enough) to be classified as ‘middle class’. On the other hand, there has been an equal increase in people earning more or less (Grabka et al., 2016).

The DIW states that over the period from 1983 to 2013 the middle income group’s share in the adult population declined from 62 percent to 54 percent. This 8 percent decrease has been redistributed evenly to the other income groups. While 4 percent entered the low income and lower-middle income group, the other 4 percent entered the upper-middle income and high income group (diagram 1). Furthermore the middle class also saw a significant decrease in its share in total income while the high income group saw a significant rise in its share in total income. The study finds that the middle class’ share fell by more than 10 percentage points over the period from 1991 to 2010 (Grabka et al., 2016).

 Table 1

Gini Coefficient – Net Household Income

Year Germany West East
1991 0.247 0.245 0.205
2011 0.288 0.291 0.257

(Source: Sachverständigenrat Wirtschaft, 2015)

The DIW findings are not completely new. The Sachverständigenrat Wirtschaft releases a periodic study on income and wealth distribution in Germany. Its analysis published in 2014/15 (also based on the SOEP) showed similar trends. The study revealed that Germany’s Gini coefficient in net household incomes increased from 0.247 to 0.288 in 2011. Thereby it actually peaked in 2005 with a coefficient of 0.293. Importantly, income inequality is still greater in West Germany (0.291) compared to East Germany with a Gini coefficient of only 0.257 (2011).

 Table 2

Gini Coefficient – Equalised Disposable Income

Year Germany West East
1991 0.411 0.406 0.375
2011 0.485 0.472 0.529

(Source: Sachverständigenrat Wirtschaft, 2015)

When one looks at equalised disposable incomes (Marktäquivalenzeinkommen), the problem of income inequality becomes even more apparent. The Gini based on equalised disposable incomes has seen an increase from 0.411 in 1991 to 0.485 in 2011. Importantly, East Germany has seen a significantly greater increase than West Germany and is now more unequal than its counterpart. While East Germany’s Gini was 0.375 in 1991 it had risen to 0.529 in 2011. Over the same period West Germany’s Gini only rose from 0.406 to 0.472.

Germany income inequality 2
Diagram 2 (Source: BPB, 2014; Sachverständigenrat Wirtschaft, 2015)

The rise in the Gini coefficient can be shown graphically if one constructs Germany’s Lorenz curve for 1991, 2005 and 2011 based on the SOEP data (diagram 2). It has shifted outward and, because the Lorenz curves do not cross, it is clear that income inequality has risen from 1991 to 2005 while it somewhat improved from 2005 to 2011. The diagram shows nicely that the main shrinking in the middle class happened in the 1990s and the early 2000s. When one looks at equalised disposable incomes, the story remains the same even if it is less pronounced (diagram 3). However, this Lorenz curve was already significantly farer away from the line of equality than the net household income distribution Lorenz curve in 1991.

Germany income inequality 3
Diagram 3 (Source: BPB, 2014; Sachverständigenrat Wirtschaft, 2015)

 

While Germany’s middle class is in decline and income inequality on the rise, it should be noted, that the country still performs considerably better than the OECD average and other highly developed countries. Germany’s society is still a rather equal society in international comparison. The inequality adjusted HDI sat at 0.853 in 2014 and recorded a loss of 6.9 percent in potential human development due to inequality. Thereby inequality in life expectancy at birth (3.7 percent) and inequality in education (2.4 percent) played only a minor role. The main driver is income inequality at 14.1 percent, dampening potential human development. In international comparison, however, inequality in income is at 22.5 percent for very high HDI countries and even at 23.6 percent for OECD countries (UNDP, 2015).

Hence income inequality is of concern now but it is not too late to revert these adverse developments. It should be a key priority to stop a further increase in income inequality so that the fruits of economic growth and development continue to benefit the larger share of the population. Germany needs to ensure that it does not miss out on people at the lower end of the income distribution and does not further diminishes its middle class which has been one of the drivers of the country’s economic success since the mid-2000s.

Thanks for reading my post today as this is an issue one should care about.

Jasse


BPB (2014). Die Soziale Situation in Deutschland: Zahlen und Fakten – Einkommen und Vermögen [pdf]. Retrieved from: http://www.bpb.de/system/files/dokument_pdf/08%20Einkommen%20und%20Verm%C3%B6gen_1.pdf

Grabka, M.M., Goebel, J., Schröder, C., and Schupp, J. (2016). Shrinking Share of Middle-Income Group in Germany and the US. DIW Economic Bulletin, 18, 199-210. Retrieved from: https://www.diw.de/documents/publikationen/73/diw_01.c.533123.de/diw_econ_bull_2016-18.pdf

Sachverständigenrat Wirtschaft (2015). Analyse: Einkommens- und Vermögensverteilung in Deutschland [pdf]. Retrieved from: http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/gutachten/jg201415/JG14_09.pdf

UNDP (2015). Human Development Report 2015: Briefing note – Germany [pdf]. Retrieved from: http://hdr.undp.org/sites/all/themes/hdr_theme/country-notes/DEU.pdf

World Bank (2016). World Development Indicators: Germany. Retrieved from: http://data.worldbank.org/country/germany

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