Investigating a Middle Class Squeeze and its Potential Causes in European Countries

An extensive middle class is a key interest of national economies. However, there has been a prevalent myth over several decades about decreasing middle classes in industrialized countries. Academic literature has failed to dismantle this myth, giving no clear evidence on the subject. Of course, the issue is complex and answers greatly depend on the scope and definitions of approaches. Nevertheless, this paper aims to provide evidence on a middle class squeeze in two steps. First, it investigates a potential middle class squeeze in European countries between 2004 and 2016. In order to deal with measurement issues, the approach includes different middle class and income measures. In the second step, a fixed-effects regression model is used to discover potential causes of the middle class squeeze. The causes, which all have been named in past literature to possibly explain a squeeze, can be divided into three points of view: The effects of financial crises, an increasing skill-premium and decreasing social expenditure.
The results imply a middle class squeeze predominantly at the market income level. Using this income concept, twelve out of seventeen countries lost middle class shares by on average 11,5%. Further, of the presented variables to explain the squeeze, the unemployment rate and the share of social expenditure show a highly significant negative correlation. The negative correlation to the unemployment rate, which is used to proxy financial crises effect on middle classes, reveals clear spillover effect of the financial crises on middle classes in European countries. On the other side, the proposed theoretical explanation falsely anticipated the link between social expenditure and middle class shares. This fact does not allow for an appropriate interpretation of this result.