middle class. We set the lower threshold of the middle class at an absolute level: a 10 percent probability of falling into poverty. Using a regression-based approach we exploit panel data to determine the amount of comparable income associated with that probability level –using income as the relative measure of vulnerability to poverty. Based on our findings from applying this methodology to three countries, we set an absolute lower bound for the middle class of 10 dollars PPP. This creates an absolute lower threshold that can be used to measure the middle class across countries over time. We, then, apply the 10-dollar PPP absolute lower threshold to cross-sectional surveys (household data from 1992 through 2008-09) to measure the size of the middle class in Chile, Mexico and Peru and analyze its evolution over the last two decades. Lastly we contrast this new absolute definition with existing absolute definitions of the middle class presented by B&D and Ravallion.

Evidence from the application of the vulnerable-to-poverty approach shows that both the proportion of middle class households and the income share appropriated by this group have significantly increased in all three countries during the period under study –in-tandem with economic growth in these countries as we should expect. We also find that the proposed lower threshold of middle class is at or above the median of the income distribution in the countries analyzed. We show that alternative absolute definitions (B&D and Ravallion) lump people who are still vulnerable to poverty into their definition of middle class, which has resulted in counter-intuitive trends in the size of the middle class –the middle class expands during economic downturns and shrinks in times of growth– a problem the vulnerability-to-poverty measure corrects.

In summary, the vulnerable-to-poverty approach defines the middle class in absolute terms as those households with income or consumption in a specific and comparable range, and it makes two important contributions to the measurement of the middle class. First, methodologically, it ensures that no lower class or poor households are being identified as middle class. Second, conceptually, it establishes a well-defined conceptual framework for the analysis of the middle class over time.

This paper is structured as follows. Section 2 provides a brief literature review on the relationship between vulnerability and middle class. Section 3 presents an overview of existing measures of middle class and their shortcomings. Section 4 describes the data used in this paper. Section 5 describes the empirical strategy to estimate an absolute-standard for middle class analysis. Section 6 presents the results and contrasts it with other existing absolute definitions. Finally, section 7 concludes.

# **2. Linking the notion of vulnerability to the definition of middle class**

The concepts of class and middle class have been widely discussed in sociology and other social sciences, but mostly ignored in modern economics. The conceptual roots of class can be found in the work by Carl Marx and Max Weber. The Marxian approach defined class in terms of common structural positions within the organization of production, where class stratification is based on the concept of exploitation and property relations (Wright, 1979). The Weberian view, on the other hand, conceived class as individuals with common economic ―life

- 3 -