Globalisation and Its Impact on the Middle Class

Another indicator of the size of the middle class is based on the share of middle incomes in the total income of a country. Here, middle incomes have been defined as incomes between the 20th and 80th percentile, or the middle 60%. The share in the total income is calculated by adding together the incomes in this bracket and dividing the sum by the total income. This indicator thus measures the size of the middle class on the basis of its income share instead of the number of individual members.

In the context of this indicator, the relative size of the middle class does not change. The worldwide average is 42%. At 50%, Switzerland substantially exceeds the average. The lowest percentages (around 18%) occurred in Burkina Faso and Mauritania in the 1960s. Sweden and Austria recorded the highest percentages (over 55%), also in the 1960s. In the 1970s, percentages in excess of 50% mostly occurred in the former Eastern Bloc countries.

Chart G 7 shows the percentages for the years 1970 and 2010. In general, the percentages have declined over time. However, in Europe, Canada and Australia, the figures have remained relatively stable. The biggest differentials can be found in Asia and Latin America. The former Soviet republics, which showed very high percentages of middle incomes until the breakup of the Soviet Union, represent a special case. Since the breakup, the percentages have been on the decline, especially in the countries bordering Russia, such as Kazakhstan or Ukraine. The USA is also showing a marked drop in the percentage of middle incomes.

Economic globalisation has a substantial impact on the share of middle incomes

Principally, the decline in the income shares of the middle class is due to a number of different reasons. However, according to the data, one specific reason is economic globalisation. This comprises any economic exchange between countries, with a distinction being made between de facto and de jure measures. While de facto measures comprise actual flows, such as imports, exports and foreign direct investment, de jure globalisation measures are associated with regulatory principles, such as import restrictions or financial regulation.

Analysis of 132 countries in the period 1970 to 2014 shows that de facto measures of economic globalisation have a significant impact on the income shares of the middle class. A decline in income shares was measured in the wake of escalating waves of globalisation. However, this effect can be exclusively attributed to actual flows of goods and services. Regulatory changes, for instance the introduction of import duties, do not have any statistically significant impact on income shares and hence on income distribution. This difference is not surprising since an increase in de jure globalisation in the form of reduced regulation may, but does not have to, lead to greater de facto globalisation.

High incomes absorb losses in low and middle income brackets

Further analysis also shows that increased de facto globalisation also leads to income losses among the poorer population, while high incomes record a statistically significant increase. Hence, high incomes absorb the income losses of the low and middle incomes and economic globalisation leads to greater inequality.

Chart G 7 clearly shows that the biggest changes in the shares of middle incomes in the period 1970 to 2010 occurred in lower-income countries. Middle incomes in the developed western countries remained largely unchanged. Consistent with these findings, statistically significant effects of economic globalisation on the shares of middle incomes were only found in the less developed countries. States which the World Bank classifies as middle-income countries recorded more substantial effects than developing countries. This is perhaps due to the marked decline in income shares in the former Eastern Bloc countries and China. Developed countries did not show a statistically significant effect.