26-04-11 middle class under stress
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The American Middle Class
Under Stress
Sherle R. Schwenninger and Samuel Sherraden
New America Foundation
April 2011
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The American Dream is now to get
out of debt.
David Rosenberg
Chief Economist & Strategist, Gluskin Sheff
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Tottering Pillars of Americas
Middle Class1. Jobs and Wages
2. The Social Wage: Education, Health Care and Other
Essential Goods
3. Wealth and Home Ownership
4. Retirement Security
5. Signs of Middle Class Decline
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Jobs and Wages:
High UnemploymentJobs that pay middle class wagesare essential to a healthy middleclass.
Nearly two years after the recessionofficially ended, the unemployment rateremains high at 8.8%.
The broader rate of unemployment,which includes people who work part-time but want a full-time job and peoplewho have given up looking for work,was 15.7%, nearly double the officialrate.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%16.0%
18.0%
20.0%
1995 2000 2005 2010
Official and the BroaderRate of Unemployment
Recessions
Broader Rate of Unemployment (U-6)
Official Unemployment Rate
Source: Bureau of Labor Statistics, New America Foundation
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A Jobless RecoveryEmployment inrecent recessionshas reboundedmore slowly than in
the past.
The jobs recovery fromthe Great Recession isthe weakest yet.
At the current pace ofjob creation, theeconomy wont returnto full employmentuntil 2018.
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
1 3 5 7 9 11 13151719212325272931333537394143454749
Months into Recession
Payroll Employment Relative to Peakduring Recessions
1948
1953
1957
1960
1969
1973
1980
1981
19902001
2007
Source: Bureau of Labor Statistics, New America Foundation
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More of the Employed Have
Low-Income JobsMiddle-income jobs aredisappearing from the economy.
The share of middle-income jobs in the
United States has fallen from 52% in1980 to 42% in 2010.
Middle-income jobs have been replacedby low-income jobs, which now makeup 41% of total employment.
0%
10%
20%
30%
40%
50%
60%
1980 1985 1990 1995 2000 2005 2010
Share of Total Employment
Private Sector Middle-Income
Private Sector Low-Income
Government Jobs
Source: Bureau of Labor Statistics, Westwood Capital
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The Under-Employed AmericanThe problem is not lack of skills,
but the structure of the jobmarket.
17 million Americans with collegedegrees are doing jobs that require lessthan the skill levels associated with abachelors degree.
Just under 30% of flight attendants and16% of telemarketers have bachelorsdegrees even though this credential isnot necessary for these jobs.
Occupation
Percent with
BA/BS Number
Waiter/Waitress 13.4 317,759
Flight Attendants 29.8 29,645
Laborers 5.07 118,441
Janitors 5.01 107,457
Truck Drivers 5.09 85,205
Bartenders 16 80,542
Food Preparation 7.24 63,737
Telemarketers 15.85 54,713
Postmen/women 13.95 49,452
Parking Lot
Attendants 13.74 18,749
Source: Bureau of Labor Statistics
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Real Wages are FallingReal wages have stagnated overthe past two decades, and inrecent months, have actuallyfallen.
Over the past year, nominal wages grewonly 1.7% while all consumer prices,including food and energy, increased by2.7%.
The spending power of many Americanfamilies has therefore declined.
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2007 2008 2009 2010 2011
Annual Change in Wagesand Prices
Recessions Wages CPI
Source: Bureau of Labor Statistics
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Government Transfers Have Partly
Offset the Stagnation of WagesWages and salaries havefallen from 60% ofpersonal income in1980 to 51% in 2010.
Government transfers haverisen from 11.7% of personalincome in 1980 to 18.4% in2010, a post-War high.
There are 8.5 million peoplereceiving unemploymentinsurance and over 40million receiving foodstamps.
0%
10%
20%
30%
40%
50%
60%
70%
1980 1985 1990 1995 2000 2005 2010
Share of Personal Income
Wages and Salaries
Government Transfers
Source: Bureau of Economic Analysis, New America Foundation
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The Erosion of the Social Wage:
Rising Health ExpendituresDespite an increase in governmenttransfers, Americas social wagehas been eroded by the rising costof health care and education.
Health care spending increased from9.5% of personal consumption in 1980to 16.3% in 2010.
Many households cannot afford risinginsurance premiums and out-of-pockethealth care costs, leaving nearly 50million Americans without adequatehealth coverage.
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
1980 1985 1990 1995 2000 2005 2010
Health Care Spending as aShare of Personal
Consumption
Source: Bureau of Economic Analysis
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Higher Education is Not
AffordableA college education is considerednecessary to get a good job, butfor many families college is nolonger affordable.
The average cost of one year of collegeis $21,000. After adjusting forinflation, it has risen 72% since 1990.
For households with incomes at the40th and 60th percentiles, one year ofcollege tuition makes up 54% and 40%of their annual income, respectively. 0%
10%
20%
30%
40%
50%
60%
1980 1985 1990 1995 2000 2005 2010
Cost of 1 year of CollegeTuition as a Share of Annual
Household Income
60th Percentile of Income
40th Percentile of Income
Source: US Census Bureau, National Center for Education Statistics
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The Emergence of ScrewflationScrewflation, a term coined by
Wall Street guru Doug Kass,describes how falling wages andrising costs of basic goods are
squeezing the middle class.
The share of personal consumptionspent on food and energy has risen from13.4% in 2002 to 15.3% in 2010.
Elizabeth Warren warned that the risingcosts of basic middle class goods andstagnant incomes have put manyAmericans in an economic vice.
12%
13%
14%
15%
16%
17%
18%
19%
1990 1995 2000 2005 2010
Food and Energy as a Shareof Personal Consumption
Expenditures*
* Market-based PCESource: Bureau of Economic Analysis
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The Great Recession Dealt a Blow
to Middle Class Wealth
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
USDb
illions
Household Net Worth
Source: Federal Reserve
Household net worth declinedfrom $65.7 trillion in the secondquarter of 2007 to $56.8 trillion inthe fourth quarter of 2010.
The middle class, which has much moreof its net worth tied up in home equity,has borne the brunt of this decline.
Wealth recovered $8.1 trillion since thefirst quarter of 2009 due mostly to therecovery in stock prices.
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Home Equity and WealthHome equity makes up a greatershare of total wealth for themiddle class than it does for
wealthy families.
For families up to the 90th percentile ofnet worth, home values make up over50% of total wealth.
But with the decline in home values,many homeowners are now underwater,meaning that the value of their home isless than the amount owed on theirmortgage.
0%
10%
20%
30%
40%
50%
60%
70%
0-50 50-90 90-95 95-99 99-100
Wealth Percentile
Home Equity as a Percent ofTotal Assets
Source: Kennickell, 2009
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Uneven Recovery:
Stocks & Home Prices
40
50
60
70
80
90
100
110
120
130
2006 2007 2008 2009 2010 2011
Equity and Home PricesDiverge
S&P 500 Case-Shiller Home Price Index
Source: Standard and Poors, New America Foundation
Equity markets have recoveredmuch of their losses, but housingprices have not.
While the outlook in the equity marketis uncertain, housing prices haveresumed their decline and could fallanother 10% to 20%, due to thepressure from the shadow inventory.
At the end of 2010, 23.1% of allresidential properties with a mortgagewere underwater, with total negativeequity nationwide of $750 billion.
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Deleveraging Remains a Painful
RealityOver the past threedecades, householddebt as a share ofdisposable income
increased from 68%to 116%.
Households have begunto pay down debt, buthave a long way to go to
get back to the 1990saverage of 85% ofdisposable income.
0%
20%
40%
60%
80%
100%
120%
140%
1980 1985 1990 1995 2000 2005 2010
Household Debt as a Share ofDisposable Income
Source: Federal Reserve, Bureau of Economic Analysis
1990-1999 = 85%
1980-1989 = 70%
Average 2000-Present = 114%
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A Less Secure RetirementMany Americans were relying onrising home values to finance theirretirement and have thus under-saved.
The median value of retirement savingsfor retirees is $45,000.
The average retiree has a retirementsavings shortfall of $47,732, with largershortfalls among low-incomeAmericans.
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
1stQuartile
2ndQuartile
3rdQuartile
4thQuartile
ShortfallinDolalrs
Source: Employee Benefit Research Institute, 2010
Retirement SavingsShortfall by Income
Quartile
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Shifting the Risk of Retirement
Onto EmployeesOver the past threedecades, Americancompanies haveshrunk their
private pensionprograms.
Defined benefitpensions now make uponly 3% of private
sector pensions.
Public employeepension programs arealso in decline.
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Relying on Social Security
SocialSecurity
39%
AssetIncome
13%
PensionIncome
19%Public
Assistance1%
OtherIncome
2%
Earnings26%
Income Sources for PersonsAged 65 or Older as a Share
of Aggregate Income
Source: Congressional Research Service
Half of married couples andnearly three quarters ofindividuals over the age of 65depend on Social Security for the
majority of their income.
But, Social Security is far less generousthan most seniors need for a secureretirement.
When Social Security is needed most,Social Security is under attack.
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Signs of Middle Class Decline:
More at the Top, Less for the MiddleThe top 1% of income earners inthe United States account for 21%of aggregate income.
The wealthiest 1 percent own about 35%of the nations wealth.
The top 20% of income earners accountfor nearly 40% of total consumption.
0%
5%
10%
15%
20%
25%
30%
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Income Share of the Top 1%of Earners*
* Including capital gainsSource: Top Incomes Database, UC Berkeley
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Signs of Middle Class Decline:
Low Social Mobility
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Correlation ofIntergenerational Earnings
Source: OECD
Parental incomes in the UnitedStates are more correlated withchildrens incomes than in mostother OECD economies.
Educational achievement of children inthe United States is more closely linkedto parental background than in anyother OECD country.
Intergenerational mobility is worse incountries with unequal wealthdistribution, like the United States.
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