26-04-11 Middle Class Under Stress

8/6/2019 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


2/21

The American Dream is now to get

out of debt.

David Rosenberg

Chief Economist & Strategist, Gluskin Sheff

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3/21

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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4/21

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

3


5/21

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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6/21

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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7/21

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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8/21

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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9/21

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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10/21

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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11/21

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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12/21

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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13/21

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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14/21

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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15/21

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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16/21

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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17/21

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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18/21

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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19/21

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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20/21

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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21/21

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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26-04-11 Middle Class Under Stress