(The Wall Street Journal, Roland Fryer, May 19, 2026)
Median household incomes in the United States have increased by over $38,000 since 1975 in real terms, but much of this gain is absorbed by fixed costs that are much higher than in the past: mortgages have risen from $16,000 to $25,000 per year, health insurance premiums have doubled, and new expenses for daycare that previously did not exist for many families.
The real culprit is the “Baumol cost disease”: productivity gains are concentrated in goods, causing their prices to fall, while labor-intensive services such as healthcare, education, and childcare inevitably become more expensive because wages must rise everywhere to retain workers, explaining why the typical middle-class expenses of the 21st century have increased two to three times faster than overall inflation.
Despite the feeling of tightness, the middle class is objectively better off thanks to real advances such as safer cars, cleaner air, a 3.6-year longer life expectancy at age 65, and digital technologies valued at $30,000 per year, but hedonic adaptation and constant social media comparisons with those better off make everything seem more expensive, while fixed costs reduce the safety margin for unforeseen events.
1. Fixed costs absorbing income gains.
“Since 1975, median household income has increased by more than half, from about $68,000 to $106,000 in real terms. But for families with young children, much of these additional $38,000 is spent before it even reaches the bank: mortgages, healthcare, and daycare.”
2. Baumol cost disease.
“Productivity gains are concentrated in goods, causing prices to fall. But many services, like teaching a kindergarten class, change little over time. As incomes rise, wages must increase everywhere, or workers leave.”
3. Sharp increase in spending on services.
“The services that define 21st-century middle-class life – healthcare, childcare, education – have increased two to three times faster than overall inflation since 2000.”
4. Less safety margin.
“When a greater share of income is committed to fixed costs, even a similar disposable income feels more constrained. For many families, this means the cushion has disappeared.”
5. Unperceived progress.
“In 1975, the middle-class family might have had more cash at the end of the month. But they also faced higher risks of violent crime, breathed dirtier air, and waited for the evening news to find out what was happening in the world.”
(Excerpt from the newsletter by Giuseppe Liturri)
