More than five million Germans were squeezed out of the middle classes between 1997 and 2010, according to the study, carried out by the German Institute for Economic Research (DIW) and the University of Bremen. In 1997, the middle classes made up 65 percent of the population: this had fallen to 58 percent by 2010.
The movement has been overwhelmingly downwards. While the group of top-earners expanded by 500,000 over this period, the number of people in the lower income brackets shot up by almost four million.
"In terms of real wages, real household income, and assets, middle-income earners have suffered real losses in recent years," the authors wrote.
This trend has serious implications for the health of society as a whole, the authors of the study cautioned. Rising wealth has not led to "prosperity for all," the great rallying cry of the 1950s post-war Germany.
Instead, benefits have become increasingly restricted to a handful of "social elites", while the rest of society has struggled to maintain its standard of living.
At the same time, social mobility has declined: those born into poor families are more likely than ever to remain there. As many as 70 percent of those in the lowest income categories were still to be found there three years later.
"A social mingling of the population is happening less and less," claimed the authors. "The polarisation of income distribution corresponds to an increasing segmentation of society into upper, middle, and lower."
The study highlighted a number of factors that have contributed to the increased inequality: a rising numbers of single households, single-parent families, and immigrants with limited education, as well as reductions in the top rate of income tax and the failure of social welfare payments to keep up with inflation.
Researchers behind the study urged the government not to be complacent about the situation. DIW analysts Martin Gornig and Jan Goebel warned in a statement that "a strong middle class is important for the maintenance of social stability."
"A growing number of poor people risks the development of ghetto areas," they said.
Decisive government action is needed to address the situation - and the rich should take their share of the burden, they argued. The planned austerity measures are likely to be counter-productive, Goebel said.
"The concrete suggestions up to this point only affect those on lower incomes. But the proportion of rich people is constantly growing, and the rich are also earning more than ever. We've got to ask whether this group shouldn't also make a contribution to the cuts," he said.