August 22, 2007

Middle-class gap widening
Divide between high-, low-wage earners grows
By Michael Rappaport and Matt Wrye, Staff Writers

Pat Rizzotto will be 90 soon, and he loves to talk with his neighbor about the old days.

They live in one of Southern California's pricier neighborhoods, and Rizzotto has lived in his home since it was built in 1949.

Its value is pushing seven figures now, and Rizzotto loves to tell his neighbor that he had a chance to buy his house as well in 1952.

"I knew it would be a good investment," he said. "But the guy wanted $15,000 for it, and I was only making $50 a week."

It's hard to tell which part of this story is more poignant, but it's a good bet most folks would choose the fact that a working-class guy with his wife staying at home and raising their kids could buy a house.

And think about buying a second one.

Yes, once there was a time in California that there was not only a thriving middle class, but there was a working class that could invest in the future and dream of someday being able to sing that old Depression favorite, "We're in the Money."

These days, not so much.

In March, the Southern California Association of Governments held its economic conference in Ontario with a theme of "The Middle Class on Life Support," and today the California Budget Project

The report looks at the years 1979-2006 and identifies a growing divide between the earnings of the state's low- and high-income workers, as well as pointing out that California's middle-income workers have barely kept pace with inflation.

"By slow degrees, California has changed from a state where opportunities abounded and prosperity was more broadly shared, to one with an increasing divide between the rich and the poor," said Jean Ross, executive director of the CBP, a nonpartisan public policy research group. "This is bad news for California because inequality adversely impacts our communities and our society."

Consider these facts:

Adjusted for inflation, the average California worker's wages increased by 1.3 percent from 1979 to 2006. Those in the bottom fifth of the employment market actually declined by 7.2 percent, while those in the top fifth increased by 18.4 percent.

In 1979, the typical female worker made 63 cents for every $1 her male counterpart made. In 2006, that had increased to 87 cents, partly because the typical male's purchasing power had declined by 11.5 percent.

In considering income, which includes investments and other ways of making money in addition to wages, the top 1 percent of California taxpayers saw their reported income increase by 107.7 percent between 1995 and 2005. Meanwhile, those in the middle fifth of the population saw a 9.3 percent increase.

Those are numbers, and there are always plenty of numbers economists and academics use that overwhelm us. But anyone who brings home a paycheck these days knows that times have changed.

As much as anything else, that's due to 464,700 manufacturing jobs that disappeared from California between 1990 and 2006.

We used to be a state and a country that made things. Now we sell, deliver or serve things that as often as not were made somewhere else.

It has become a cliche to suggest that our modern mantra is "would you like fries with that?" but these days California workers are far more likely to be helping customers than working to build something heavier than a balance sheet.

That may not even be the biggest problem. The CBP report suggests that the most jobs are being created in the top fifth and the bottom fifth of the spectrum.

Indeed, 55 percent of new jobs between 1979 and 2006 were in those two quintiles, while the second from the bottom grew by only 6 percent and the third quintile, the middle one, grew by 14 percent.

"This has created a `hollowing out' of job growth," Ross said. "When you're not creating jobs in those middle quintiles, you're taking steps out of the ladder by which people have traditionally worked their way up."

Couple that with the explosion in home prices that ended only recently, and you've created a situation where, as Anil Puri, dean of business and economics at Cal State Fullerton, said, "People who are part of the middle class cannot actually afford the middle-class lifestyle."

Owning a home, having two cars, sending the kids to college ...

If you have a true middle-class income, which in California means a range of $40,000 to $65,000 a year, forget it.

"That dream is no longer attainable, given the increase in costs in housing and transportation," Puri said. "When you adjust for that, the middle class and the working class have not fared nearly as well."

Ironically, part of it is just a question of being in the right place at the right time. Six years ago, the median home price in the Inland Empire was $135,000. In June, according to the California Association of Realtors, that median was just above $390,000.

Folks who owned their houses before 2001 may not have seen the value triple, but their net worth certainly received a major bump.

In fact, there are more than a few Inland Empire residents who couldn't afford to buy their own houses if they were shopping today. Steve Johnson, director of the Southern California office of real estate think tank MetroStudy, says homeowners won't have any trouble spending their profits.

"The run-up in housing prices has created a great deal of wealth," he said. "But these people will spend a lot of that money visiting their children in other states because their children won't be able to afford to live in California."

To borrow from an old advertising slogan, their children are going to "fall into the gap."

The ones who get good educations will do better than others. The CBP's report said between 1979 and 2006, inflation-adjusted wages for those with bachelor's degrees increased by 19.8 percent, while those with a master's degree or more rose by 34.4 percent.

Those who weren't college graduates didn't keep pace with inflation.

"There are some valid questions about the role in education in all of this," Ross said. "It is much more difficult than it once was to move up through hard work and learning on the job."

Regional economist John Husing of Redlands is even more blunt.

"Education is the dividing line," he said. "Particularly these days, with globalization, our oceans no longer protect our uneducated workers. When you compare apples to apples, our uneducated workers can't compete economically with those from other countries."

The growth in lower-paying, service-sector jobs - the kind that don't require much education - has affected the Inland Empire more than some other regions.

Retail jobs have skyrocketed to keep up with the shopping needs of people who live in San Bernardino and Riverside counties but work in the Los Angeles area. This type of job growth will continue, according to economics professors in the region.

High-wage jobs, however, aren't pouring into the region as fast as some experts might've wished for, and the middle-wage job foundation is starting from ground zero.

"On the one hand, you have tremendous growth of service activities, but then you've got the (middle-income job) outsourcing," said Jim Mulvihil, urban planning/urban-economic professor at Cal State San Bernardino. "That's what we've lost over the last generation, the industrial middle class."

Mulvihil remembers a better time for high school graduates. In 1962, just out of high school, Mulvihil could have gotten a steel mill job in Buffalo, N.Y., his hometown, for what would amount to $60 to $70 an hour in today's dollars.

For today's middle-class worker, that kind of pay is unheard of.

The reasons for this erosion are numerous, but experts say one sticks out more than others: The loss of unions and the bargaining power that goes along with them.

When Kaiser Steel and Norton Air Force Base pulled out of San Bernardino County, it left a big hole in manufacturing opportunities for local uneducated, blue-collar families.

"Some of it has to do with the decline of unions, a structure that was set up for people with (a limited education)," said Mindy Marks, economics professor at UC Riverside. "There has been a big decline in the percentage of unionized jobs."

Unions added a competitive edge to workers' profiles.

But a different competitive edge - education - has taken the place of unions and will continue to do so in the coming years, both professors said.

"We expect California to attract more high-paying jobs, but Riverside and San Bernardino (counties) are less educated than California (as a whole)," Marks said.

She noted recent census data, which shows 26.6 percent of the state's adult population having bachelor's degrees. In Riverside and San Bernardino counties, that number is 16.6 percent and 15.9 percent, respectively.

Both Marks and Mulvihil said vocational and college education will play a key role in drawing more than just low-paying retail service jobs.

"It's not that we don't have the work force - we don't have the jobs," Mulvihil said. "We need to get the jobs out here. The people who are buying homes are middle class. If we can just get the (local) economic development people to capture that, it would help."

While the hollowing out of the middle class can be seen to a certain extent in the Inland Empire's economy, Marks said people in different income levels can still reach the next level.

They just have to work harder.

Workers with no education need to get one, and post-graduates with a bachelor's degree will need to think about attending graduate school.

"There is still an awful lot of income mobility," Marks said. "I don't think that's changed much in the last generation. It's still possible to rise up from a lower class and possible to fall down as well."

Husing agrees.

"So much of my work over the years has concentrated on how to get education to people," he said. "We simply don't know how to do this."

WAGE GAINS IN CALIFORNIA

(1979-2005)

* Wages increased 1.3% on average
* Wages declined 7.2% for jobs paying in the bottom 20 percent.
* Wages increased 18.4% for the top 20% highest paying jobs
* 2 million working families in California are below the state poverty line

WAGE GAINS NATIONWIDE

(1979-2005)

* Wages increased 4.9% for typical U.S. workers
* Wages declined 4% for workers in bottom fifth

THE LADDER IS DISAPPEARING

Most new jobs being created are among the lowest paying. Fewer high paying jobs are being created, which means fewer chances for advancement

* In 2005, about 43% of new jobs paid among the bottom fifth - the lowest-paying - of all jobs.
* Between 1979 and 2005, about 27% of jobs were in the bottom fifth.
* 6 percent of jobs were created in the "upper middle class" range, and 14 percent in the "middle class."

Healthcare

Those under 65 who had job-based heath care:

61% in 1987 | 55.5% in 2005

Those under 65 who had lacked health care:

18.5% in 1987 | 21.3% in 2005

Pensions

Workers with job-based pension plans:

57.7% in early '80s | 49.4% in 2004

Workers with defined benefit pension plans nationally:

83% in 1980 | 39% in 2004
Taxes

The top 0.01% of taxpayers paid federal taxes of:

74.6% in 1970 | 59.3% in 1980 | 34.7% in 2004

The middle fifth (40-60, the true middle class) paid federal taxes of:

20.2% in 1970 | 21.4% in 1980 | 16.1% in 2004

Staff writer Michael Rappaport can be reached by e-mail at m_rappaport@dailybulletin.com, or by phone at (909) 483-9395.

Contact writer Matt Wrye at (909) 386-3871 or at matthew.wrye@sbsun.com