The latin American middle class is critical to regional economic development and political stability. A large middle class is thought to bring lower inequality, a more stable investment climate, greater savings and human capital accumulation, and to generate the entrepreneurs who create jobs and foster productivity. As a result, countries with a large middle class are thought to have more robust internal markets and faster economic growth.
Recent changes in Latin America suggest the middle class has grown. Poverty has declined in the last two decades, bringing more households to a level of income above absolute deprivation. In the early 1990s, 44 percent of the population in Latin America lived below $4 a day. In 2009, even after the global crisis, that number had dropped to 29 percent.
Education has also improved across the region, providing the necessary human capital for more productive jobs. More people are pursuing secondary schooling, and, in countries like Brazil, Chile and Peru, access to post-secondary education is rapidly growing.
Poverty reduction and educational expansion are certainly auspicious trends. But has all this positive news resulted in an expanded, more stable middle class in Latin America? Developments in Chile and Mexico provide some answers while also pointing to a larger regional trend.
But first it’s important to quantify the middle class—a process that requires some level of arbitrariness. The standard economic definition consists of ranking households according to income and determining a varying portion in the middle of the distribution as middle class.
To do this, three criteria are most commonly used.
The first defines the middle class as a proportion of households with income around the national median income—for example, between 50 percent and 150 percent or between 75 percent and 125 percent of the median income. Using this relative measure (closely related to the level of income inequality), a reduction in inequality will move households closer to the median, enlarging the middle class, and an increase in inequality will push them toward the extremes. This means that changes in inequality can affect the middle-class status of a family, even if its absolute income level and its relative income position in the broader distribution are not altered.
A second way to measure the middle class is to look at it as a fixed proportion of the population in the middle of the economic hierarchy—for example, the three middle quintiles (comprising 60 percent of the population). This is a relative definition, and it is insensitive to changes in the level of absolute well-being in the country or to changes in inequality over time.
A final approach to measuring the middle class is to consider it as the group of households with income between absolute thresholds. Here, households with income above an upper threshold that defines absolute poverty and below the threshold of what is considered wealthy fall into the middle class. We use the definition of the middle class as households with income above $4 a day and below $26 a day per person. This absolute measure does not set a specific size for the middle class. Instead, this relies on the relative income or number of people that belong to the middle class. Therefore it is affected by economic development; economic growth will place more households above the threshold, and recession will move households below it.
These definitions matter. They affect the roles people attribute to the middle class in national prosperity.1 Under a relative perspective—the first and second definitions—the middle class is seen as having the power to ensure political stability by creating a large bridge or buffer between the poor and the rich. Under an absolute standard—the latter definition of the middle class—the middle class may work as a source of growth and entrepreneurship. This is because it is assumed to have sufficient human and economic capital, values, and growth-enhancing practices, such as savings and investments in education.
Mexico and Chile—countries that have seen different levels of economic growth in the last two decades—are two examples of the extent of middle-class growth. In both countries, economic growth has led to an increase of middle-class households with incomes above an absolute threshold of $4 a day (and below $26 a day).2 From 1992 to 2006, the size of the middle class grew from 56 percent to 72 percent in Chile and from 58 percent to 70 percent in Mexico using this absolute measure.
But when using the proportion of households with income between 0.75 and 1.25 times the national median income, the middle class grew just slightly—from 22 percent to 24 percent in Chile—and remained constant at 23 percent in Mexico between 1992 and 2006. This indicates that the high levels of inequality have only marginally declined in Chile and have remained constant in Mexico. As a result, even though many households have left poverty, the proportion between the economic extremes—the politically moderating group—has hardly changed.
However, income alone cannot determine middle-class trends. Another important factor is a household’s income-producing assets. While income may vary substantially from month to month or from year to year, due to the economic cycle or household shocks, education is one asset that is not affected by short-term fluctuations.
Education strongly shapes access to the middle class by affecting the opportunity for mobility. In both Chile and Mexico, with an increase in the level of education, the probability of belonging to the lower class decreases systematically, while the likelihood of being part of the upper class rises (SEE FIGURE 1).
The single greatest education factor for socioeconomic mobility is completing primary education. Beyond that, the economic returns on attending secondary school really only matter upon completion of the level, not by the individual years completed.
While access to post-secondary education is seen as a marker for middle-class status in the industrialized world, the situation is radically different in Latin America.
In both Chile and Mexico, access to post-secondary schooling largely ensures upper-class status. Of the households in which the head holds a post-secondary degree, almost 70 percent belong to the upper class, and less than one-third have middle-class status. In Latin America, a high school diploma provides a ticket to the middle class.
At the same time, both countries have witnessed a remarkable educational upgrading of the middle class (SEE FIGURE 2).
The definition of middle class affects the impact of education, but all three approaches show an improvement. Mexico displays an impressive change: the average schooling increased by almost two years between 1992 and 2006. Individuals older than the average age of school completion usually do not return to school, so this transformation is solely driven by the replacement of older, less-educated age groups with younger, more-educated ones.
Not surprisingly, change over time is smallest when using the absolute definition of middle class. Here, it is economic growth that pushes families with lower levels of schooling above the absolute threshold to enter the middle class.
Educational improvements have yielded benefits across all classes, but the schooling gap across classes has remained fairly constant, or has even slightly increased.
This is true when looking at the wide educational gap between the middle and upper class using any of the three definitions. In other words, Latin America’s economic elite attain levels of schooling that distance them from the rest of society, with more educational similarities seen across the middle class and the poor.
An important recent consequence of increased access to higher levels of education is a decline in income inequality. As the labor force becomes more educated, unskilled labor becomes scarcer and the economic benefits of education drops.
Educational expansion has offset the earlier increase in inequality driven by the technical change—a result of trade liberalization during the 1980s and 1990s—that made specialized skills more valuable. This change in the educational profile of the labor force and the resulting decline in inequality are common in Mexico and Chile as well as in countries like Brazil and Peru.
However, while education is important for entering the middle class, once families have reached a particular level of economic well-being, education may have a more limited impact on further mobility.
Mobility will be affected only under two conditions. First, the distribution of schooling across the population should be such that it can reward talent and productivity among students regardless of class and location. Second, the labor market should be fluid enough so that people can move around, allowing them to exploit potential gains derived from more productive jobs within or between sectors.
Growth but Vulnerability
Education aside, Chile and Mexico suggest that an increase in the size of the middle class has been driven by economic growth and, to a much lesser extent, by a decline in economic inequality. However, these trends provide snapshots and say nothing about the trajectory of individual households. It may very well be true that the households identified as middle class are not the same over time.
Are middle-class households vulnerable to falling into poverty, or are they able to maintain their economic status over time?
Middle-class households that lack the assets to withstand unexpected shocks, such as macroeconomic downturns, unemployment, or adverse health events, will not develop the long-term consumption capacity and political preferences that are believed to foster economic growth and political stability. In contrast, a stable and secure middle class is more likely to invest in its long-term well-being and to make political choices that support those investments.
Middle-class stability can also reflect the lack of opportunities for upward mobility. In a less fluid society, families that are forced to avoid sliding into poverty may, at the same time, be limited in their ability to improve their economic status.
How much mobility is there? An analysis using a relative definition of class to capture flows independent of overall economic growth shows similar patterns for Mexican and Chilean middle class mobility. About one-sixth of the middle class fell into poverty from 2002 to 2006 in Mexico and between 2001 and 2006 in Chile. In the same period, a similar percentage rose into the top income quintile in both countries. The chances of downward and upward mobility, in other words, were roughly equal.
But there is an asymmetry at the income distribution extremes. In Chile, 57 percent of the upper class in 2001 remained upper class in 2006, while 47 percent of lower-income households remained poor over the same period. Comparable figures in Mexico are 53 percent for the upper class and 40 percent for the lower class. Only 1.4 percent of lower-income households climbed to the upper class in Chile, while in Mexico this rose to 5.2 percent. These findings show that while the Latin American upper class has a negligible probability of falling into poverty—2 percent in Chile and 7 percent in Mexico—the lower classes’ chances of joining the rich are even slimmer.
The substantial mobility that characterizes the Latin American middle class raises the question of what determines such dynamics. Three factors help to explain it: rural residence, adding a household member to the labor force, and experiencing an unexpected income shock—such as illness, accident or weather-related event. Education, even if important in reaching the middle class, is not a major factor.
In both Mexico and Chile, living in a rural area or being geographically isolated substantially reduces the odds of moving up. The figures for these countries also show that when an additional household member enters the labor market, the likelihood of upward mobility is substantially increased. This finding is different from literature on responses to crisis in Latin America, which suggests that the incorporation of additional family members to the labor market is mostly a strategy to maintain a minimum level of consumption during times of economic need, and suggests that adding earners provides a pathway for economic betterment.
But incorporating secondary earners is not necessarily a positive development. In both countries, children are the ones most frequently added to the labor force (65 percent), followed by partners (19 percent) and household heads (21 percent). Approximately one-fifth of children who enter the labor force have less than a high school degree. Although it is not possible to know precisely what would have happened to these youth had they not entered the labor force, for at least a portion of them, employment likely ends their educational careers.
Finally, a shock such as an illness, death or accident increases the chances of downward mobility. This is particularly true in Mexico and in households where the head works in agricultural, independent or manual occupations. One reason for this may be the severely segmented social protection system, which leaves some occupational groups highly vulnerable to unexpected shocks.
Mexico and Chile enjoyed substantial economic growth during the last two decades. Between the early 1990s and 2008, Chile’s per capita GDP grew by 98 percent and Mexico’s increased by 30 percent—a still impressive figure given the lasting effects of the 1995 Tequila Crisis. Together with this positive economic performance, the size of the middle class grew. It also became more educated, but remains a far cry from the upper class.
However, the middle class remains vulnerable, affecting both countries’ overall economic and political stability. Unlike the upper class, where there is only a small possibility of falling from grace, those in the middle class are highly likely to fall into the lower class. That should be a political concern that merits public action.
A vulnerable middle class is less likely to play the positive role in anchoring democracy and promoting economic growth that is often attributed to it. The first policy conclusion from this is that a society that values stability should establish the mechanisms that prevent downward mobility. In part, this should persuade governments to develop or refocus social safety nets not just on the extreme poor but also on the vulnerable segments of the middle class.
In terms of public policy, if enhancing mobility is an objective, certain conditions must be pursued. First, governments have to create the means that allow people to receive the type of schooling that can better reward their talents and promote their development. These include high-quality public education, educational subsidies and credit, as well as conditional cash transfers to poor households.
If educational attainment is not aligned with individuals’ potential productivity and determined purely by family background, inequality will become more persistent. The result: more people will not be taking advantage of potential income gains.
Second, skills-based training programs could allow workers to take advantage of productivity changes, moving across positions and sectors. Publicly funded programs can promote general skill upgrading rather than technology or sector-specific educational investments. This would have the advantage of not favoring specific industries and artificially inducing a competitive advantage against others.
Third, public action should emphasize policies that foster a more fluid labor market so people can move to the jobs that need them most. Artificial or institutional barriers slow down mobility and thwart potential gains for individuals and society. This recommendation is not the same as what is traditionally referred to as labor market flexibility. Instead, it means implementing policies such as making social protection portable for the employee who is willing to explore other job opportunities, instead of linking benefits to a specific employer.
The links between education, middle class and mobility are complex. Education, traditionally seen as a means of mobility, is a determinant of class position, but will not alone affect mobility. Based on the evidence from Chile and Mexico, a substantial fraction of Latin America’s middle classes seem to be vulnerable to poverty. This could weaken their role as a moderating force in societies, unless governments pursue targeted policies that involve safety nets. The challenge here is for governments to go beyond conditional cash transfers for the chronic poor and educational improvement for those who abandon poverty. Without that, the middle class will remain a distant, insecure reality for people across the region.
1. For Chile, data comes from the Socioeconomic Characterization Survey (CASEN) for the years of 1990, 1992, 1994, 1996, 1998, 2000, 2003, and 2006. The CASEN is a nationally representative household survey carried out by the Chilean Ministry of Planning (MIDEPLAN). For Mexico, data is taken from the National Household Consumption and Expenditure Survey (ENIGH) for the period 1992-2006, every two years. This survey is carried out by the National Mexican Institute for Statistics (INEGI), and it provides detailed information on socioeconomic characteristics, living conditions and occupation of all members of the household.