Ireland’s middle class: Who they are, how they’re being squeezed

It’s not always clear how to define Ireland’s middle class. Is it based on household income, consumption habits, savings and investment, or home ownership or aspirations?

Whichever way you look at it, a major new report from the Organisation for Economic Co-operation and Development (OECD) argues that the middle class is under threat from a combination of stagnant wages, soaring house prices and the rise of robots. And governments need to do more to support middle-class households who are struggling to maintain their economic weight, it recommends.

So what does it tell us about the Irish middle class – and the threats facing them?

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Who qualifies to be middle class/middle income in Ireland? The numbers might surprise, as they are lower than one might have expected.

The OECD has found that 60 per cent of single people in Ireland are "middle class", 31 per cent are in the lower-income class and 9 per cent are in the upper-income class. This is in line with trends across the OECD, where on average, 61 per cent are in the middle-income class, 30 per cent are in the lower-income class and 9 per cent are in the upper-income class.

When we look at it by income, we see that a single person would need an income of between €19,079 and €50,878 per year to be in the middle-income class in Ireland. For a family of four, a household would need between €38,159 and €101,756 per year to be deemed middle class. A family with four children meanwhile, would need between €46,735 and €124,626 per year to be in the middle-income class.

And how does this compare with other countries?

It's very much a moveable barometer. With an income of $23,000, for instance, people would be in the middle-income class in 25 of the 34 OECD countries – even Ireland. Only in Luxembourg, Norway, Switzerland and the United States would the amount be insufficient, while in Lithuania, Greece, Turkey, Chile and Mexico, it would put people in the highest income class.

In the UK, a family of four would need income of between €33,542 and €89,447 to fall into the middle class, while in the US, it's as high as €47,719 and €127,252, and in France it's €35,509 and €94,691.

Ireland’s middle class is growing – while others are shrinking

One key trend where Ireland differs compared to other OECD countries is when it comes to growth trends.

Across the OECD for example, the middle classes are shrinking. The report shows that between the mid-1980s and mid-2010s, there was a drop of three percentage points in nine of the 17 countries with available data, with a particularly steep fall in Sweden and Finland, with declines also in Germany, Luxembourg and the United States.

In Ireland the opposite is true. In 2017, for example, a survey from the Pew Institute found that among 11 western European countries, Ireland experienced the most rapid growth in income and the biggest expansion of the middle class in the period 1991 to 2010.

And the more recent OECD study has the same conclusion; the Irish middle-income class increased by 2.3 percentage points between the mid-2000s and mid-2010s, while the upper income declined, by 0.6 percentage points, and the lower income also fell, down by 1.6 percentage points. France was the only other OECD country to experience a similar sizeable expansion of its middle class during the period.

But, stricken with high unemployment and a difficult economy until the 1990s, Ireland, rather than going in an opposite direction to the trends, could just be behind them.

Given the challenges outlined below, it could be a case that Ireland’s middle class, like those other OECD countries, will also start to shrink in the years ahead.

House prices have increased much faster than middle incomes

A major conclusion of the report is that achieving a middle class lifestyle has become more difficult because of the strong rise in the price of middle-class consumption items.

Of these, housing is the most important.

Around the OECD, housing now accounts for about one-third of disposable income, and it constitutes the largest expenditure item for middle-income households – up from about a quarter in the 1990s.

Not only that, but the cost of housing has also been growing more than one-third faster than the median household income in the last three decades.

As the report notes, “Housing is more than just a standard consumption good: in many countries, being middle class is traditionally associated with owning a home, so soaring house prices have touched on the very meaning of being part of the middle class”.

It also hinders upward social mobility as current and future generations are less able to purchase property than their parents.

In Ireland, this trend is in strong evidence. Home ownership figures have dipped substantially in recent years, and Ireland now has a home ownership rate of 68 per cent – down significantly on 1991, when the numbers owning their own home reached a peak at about 80.1 per cent.

Part of this is down to the different pace of growth in house prices and incomes. Recent figures from IBEC, for example, show that since 2015, Irish households have seen growth of real income, per person, of just over 11 per cent. But in the same period, house prices have rocketed ahead by some 37.6 per cent across the country.

Another way of looking at it comes from the OECD study, which shows that in 1985, a typical middle-class family with two children needed just 6.8 years of annual income to buy a 60sq m property in the country’s capital or financial centre. While this peaked in 2005 at 10.3 times income, it was fast approaching this previous high at 10.2 times income in 2015, and by now, may have surpassed it.

Since the baby boomers generation, each new generation has seen its chances of belonging to the middle-income class fall, the report finds

We can also consider this in an Irish context, where the difference is even more stark. Back in 1985 for example, a couple on 166 per cent of average earnings would have had an income of about €19,274 – but the average second-hand home cost just €45,608. So this couple would have needed just 2.4 times their annual income to acquire this property. But recent Central Bank figures show that the average Dublin house now costs more than nine times the average salary.

You’re more likely to need two incomes to be middle-class today

Another big change seen in the middle classes is that many of the expectations a middle class family might have – ie foreign holidays, two cars, own their own home – now need two incomes to achieve.

As the OECD study notes, in the past, one earner with a high-skill job would suffice to bring a family into the middle class. Today a family is more likely to need two earners to achieve this, and “at least one of the partners is highly skilled”.

You’re also likely to be older; since the baby boomers generation, each new generation has seen its chances of belonging to the middle-income class fall, the report finds.

The middle-class lifestyle is increasingly expensive

With house prices rising so substantially, the cost of a “typical” middle-class lifestyle has also increased.

Of course, if two partners are working to obtain what a single earning family might have achieved in the past, families more often than not have to pay for childcare. And this, as we all know, is particularly expensive in Ireland.

As the OECD notes, “out-of-pocket childcare costs for families with moderate earnings are particularly high in Ireland”.

Rising costs means that some middle-class families have had to give up on what they might have previously considered essential.

Health insurance for example, may have previously been a given for the middle class; but as its price has risen, so too have numbers fallen.

In 2008 some 2.3 million people had private health insurance in Ireland. Despite the growth in population since, latest figures for September 2018 show that we still haven’t yet breached this figure, with just 2.2 million PHI policies in place as of this date. This means that while 50.9 per cent of the population had a private policy in 2008, this had shrunk to 45.4 per cent by 2018.

And as costs rise, so too does the potential for taking on more debt.

“Worryingly, these trends have also lead to an increasing debt burden on middle-class families, which is not sustainable in the longer-run,” the OECD report says.

The middle classes pay more taxes

Across the OECD, middle-income households contribute the bulk of income tax revenues – an average of almost two-thirds of revenues from personal direct taxes, a proportion similar to their share of income.

And in Ireland? Well, the OECD study points to the middle class for families beginning on earnings of €38,000 – which isn’t so far off the standard rate cut off point of €44,300 for a one-income family, and is above the limit of €35,300 per partner where both are working.

If we look at people paying tax at the higher rate, we find that our middle class do pay a disproportionate amount, in Ireland, as elsewhere. For example, in 2015, just 17.6 per cent of taxpayers were paying income tax at the higher rate but they accounted for 47 per cent of earnings.

Looked at another way, about one in five of the population pays tax at the higher rate, but they contribute three-quarters (or almost four-fifths in fact) of all income tax revenues. Those paying tax at the standard rate, on the other hand, account for 43 per cent of all taxpayers but just 25 per cent of tax revenues.

The OECD study also shows that lower income households pay a smaller share, at just 7 per cent on average across the region. In Ireland, however, the figures is as low as 2 per cent.

It’s more difficult to be middle class if you’re self-employed

In most countries, fewer self-employed workers head middle-income households than three decades ago. For example, in the 20 OECD countries where data is available, the average share of middle-income households headed by self-employed workers fell by 2 percentage points between the mid-1980s and mid-2010s. The fall was particularly steep in a number of countries, including Ireland, where the probability of a household headed by a self-employed worker would be middle class fell by about 7 per cent. Declines were also noted in Italy, Mexico, Norway and Spain. In the UK on the other hand, the probability rose by more than 10 per cent.

But not so if you’re part-time. The survey shows that part-time workers head more middle-income households than three decades ago – including Ireland, where the likelihood of part-time workers heading middle-income households climbed by 10 percentage points or more between the mid-1980s and mid-2010s.