A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Lora, Eduardo; Fajardo, Deisy Johanna Working Paper Latin American Middle Classes: The Distance between Perception and Reality IDB Working Paper Series, No. IDB-WP-275 Provided in Cooperation with: Inter-American Development Bank (IDB), Washington, DC Suggested Citation: Lora, Eduardo; Fajardo, Deisy Johanna (2011) : Latin American Middle Classes: The Distance between Perception and Reality, IDB Working Paper Series, No. IDB- WP-275, Inter-American Development Bank (IDB), Washington, DC This Version is available at: http://hdl.handle.net/10419/88953 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Latin American middle classes : the distance between perception and reality / Eduardo Lora, Johanna Fajardo. p. cm. (IDB working paper series ; 275) Includes bibliographical references. 1. Middle class—Latin America. 2.Latin America—Economic conditions. 3. Income—Latin America. I. Fajardo, Johana. II. Inter-American Development Bank. Research Dept. III. Title. IV. Series. http://www.iadb.org Documents published in the IDB working paper series are of the highest academic and editorial quality. All have been peer reviewed by recognized experts in their field and professionally edited. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This paper may be freely reproduced. Abstract1 The main contribution of this paper with respect to previous work is the use of data on subjective perceptions to identify the Latin American middle classes. This paper provides a set of comparisons between objective and subjective definitions of middle-class using data from the 2007 W orld Gallup Poll. Seven objective income-based definitions of social class are contrasted with a self-perceived social status measure. Mismatches between the objective and the subjective classification of social class are the largest when the objective definition is based on median incomes. Mismatches result from the fact that self-perceived social status is associated not just with income, but also with personal capabilities, interpersonal relations, financial and material assets, and perceptions of economic insecurity. Objective definitions of the middle class based on absolute incomes provide the lowest mismatches and the most accurate differentiation of the middle class from other classes. JEL Classification: D3, I3, D6 Keywords: Middle class, Social status, Income distribution, Latin America 1 Chief Economist and General Manager a.i., Research Department, Inter-American Development Bank. Email: [email protected]. Research Fellow, Research Department, Inter-American Development Bank. Email: [email protected]. We acknowledge useful comments obtained from anonymous referees and participants of seminars at the OECD, IDB, and LACEA 2010 where previous versions of this paper were presented. 1 1. Introduction Definitions of the middle class used in the economic literature are mainly based on obj ective measures that classify as such the group of people who are neither at the top nor at the bottom of the distribution of a statistically measurable characteristic such as income or consumption. However, as these definitions often rely on arbitrary boundaries around measures of central tendency, quantiles of the distribution or absolute thresholds, there is little agreement on what the middle class is. In addition, the economic literature has ignored that social class also refers to social status, meaning place in a social hierarchy on the basis of life opportunities, life-styles and attitudes. Sociologists (Hodge and Treiman, 1968; Jackman and Jackman, 1982; Wright and Singelmann, 1982) argue that no consideration of social class is complete without taking into account the perceptions of individuals, as these may not coincide completely with their objective class position but are likely to affect their behavior and choices. In the context of today’s Latin American countries, social class should be understood as both a subjective and an economic phenomenon that is the result of a more dynamic social mobility fostered by increases in income per capita and changes in people’s subjective interpretation of their class position and of their aspirations. This paper has two objectives. First, it aims to identify which objective definitions are closest to a subjective classification of middle-class status by exploring different income-based measures of social class and their association with a self-perceived social ranking. Since the mismatches between the objective and the subjective classifications are fairly large, the second objective of this paper is to explore what factors, in addition to income, are associated with the self-perceived social ranking of Latin American households. The remainder of this paper is organized as follows. Section 2 presents a brief literature review of the concept of middle class. The data source is introduced in Section 3. In Section 4, we present alternative measures of the objective middle classes and their matching with the self- classification. Section 5 explores the correlates of self-perceived social status and their ability to identify self-perceived social classes. The main conclusions are summarized in Section 6. 2 2. What Is the Middle Class? Social class is a concept long studied in the fields of sociology and economics. The sociological approach goes back to Marx and Weber’s works on s ocial stratification in the emerging industrial societies of the nineteenth and early twentieth centuries. Karl Marx defines social classes on the basis of their distinctive relationships to the means of production and property ownership: the capitalist class and the working class (Gilbert, 2008). From another standpoint, Max Weber adds occupation, educational qualifications and life chances for upward mobility to the Marxist theory of social class based on property. The Weberian theory also contributes to the study of social stratification by making a clear distinction between class and status. A social class, an objective economic fact, is a group of people shaped by a similar relationship to the production and acquisition of goods, i.e., people who share the same economic opportunities but who are not aware of their common situation and lack class consciousness. In contrast with social class, status is a subjective concept, a ranking by social prestige and styles of life (Gilbert, 2008). In economics, there is a large literature on defining the middle class. The middle class is broadly defined as the group of people who are neither at the top nor at the bottom of the distribution of a particular indicator, such as a statistically measurable characteristic like income or consumption. These definitions rely on the (ad hoc) definition of boundaries and, in general, we identify five main groups of objective definitions: i) definitions based on pe rcentiles, ii) definitions based on measures of central tendency, iii) definitions based on absolute thresholds, iv) definitions based on mixed measures, and v) endogenous definitions. The definition of social class based on percentiles of the income distribution usually classifies as poor those individuals belonging up to the first two deciles or up to the first, or even the second, quintiles, and as rich those individuals belonging to the top decile or quintile. The middle class is, therefore, the group of individuals belonging either to deciles third to ninth (Solimano, 2008), or to the three middle quintiles (Easterly, 2001; Foster and Wolfson, 2009), or to the third and fourth quintiles (Alesina and Perotti, 1996). However, as pointed out by Cruces, López-Calva and Battiston (2010), measures based on quintiles of the income distribution do not permit analyzing