t's been dubbed the middle-class squeeze. In wealthy nations across the world including the United States, Britain and Japan, the incomes of middle-class households have been stagnant or in decline. A recent study by the Pew Charitable Trusts found the percentage of middle-class households dropped in every US state between 2000 and 2013. Income growth in America over the past decade has gone disproportionately to the top end.
Until very recently Australia seemed to be bucking the trend. The share of national income going to middle-income earners was not in decline like other advanced nations. A report by the International Monetary Fund in June said Australia was among the few "important exceptions" to the middle-class squeeze.
But income distribution figures released by the Bureau of Statistics this month cast doubt on how long Australia will remain an exception. They showed the income share of Australia's middle class shrank between 2012 and 2014 while the split going to richest families increased. The proportion of all national income accruing to the highest quintile of households (the richest 20 per cent) rose from 39.5 per cent in 2011-12 to 40.8 per cent in 2013-14. That well-to-do quintile was the only group to increase its share. At the other end of the pay scale, the share of the poorest 20 per cent remained steady at 7.5 per cent of all income. The stability of income for this population group is most likely due to Australia's highly targeted welfare system.
But the income share of the middle 60 per cent of households saw its share of national income fall from 52.9 per cent to 51.6 per cent. In short, since the last official measure of Australia's income distribution the richest fifth of households gained a bigger slice of national income at the expense of middle Australia.
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As a result, the most common international measure of inequality – the Gini coefficient – rose from 0.320 to 0.333 in Australia meaning greater inequality (if everyone had exactly the same income the Gini coefficient would be zero but if one household had all the income then it would be 1). Australia's latest Gini coefficient result is now a whisker away from the 20-year peak reached just before the global financial crisis in 2007-08.
Because each extra dollar means much more to a pauper than a millionaire the distribution of income has a significant bearing on national wellbeing. Economists estimate that every additional dollar of income received by the poorest fifth of households adds at least five times more collective wellbeing than each additional dollar earned in the wealthiest fifth of households. So when the share of national income drops for middle and lower quintiles but increases for the richest quintile – as has happened in Australia recently – national wellbeing suffers.
The Fairfax-Lateral Economics wellbeing index, which measures changes in Australia's collective welfare, shows inequality has been a consistent drag on national wellbeing since its quarterly measurements began more than decade ago.
The index's author, Dr Nicholas Gruen, said the growth in inequality revealed by the bureau's new income distribution figures had reduced Australia's collective wellbeing by $2 billion each quarter since mid-2012.
"That's the equivalent of robbing us of around half a per cent of our gross domestic product," he said. "It shows how slight changes in income distribution in our $1.6 trillion economy can have a significant impact in terms of wellbeing. By the index's methodology, the rise in inequality costs the economy more in wellbeing than the best estimates suggest will be added to the economy by the activation of the Japan, Korea and Chinese free trade agreements put together."
And that cost will spiral higher if Australia's middle class continues to feel the income squeeze.

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Australia's international competitiveness is affected.