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Residents of this Kentucky town seek a post-coal revival.Residents of this Kentucky town seek a post-coal revival.
Residents of this Kentucky town seek a post-coal revival.Bruno Silva for Fortune Magazine

The Shrinking Middle Class: How We Can Fix It

Compelling ideas for narrowing the economic divide.

Most Americans consider themselves part of the “middle class,” but no one can agree on what term that means. The problem? If sizing up the middle class is difficult enough, it’s even harder to say that circumstances within this group have changed. But they certainly have. As you’ll discover in this Fortune special report, life has gotten more difficult for the millions of people within the middle class. We dispatched more than 50 people to discover why the American dream has been fading for far too many.

In this section, we ask some of the sharpest minds for their ideas on how to fix it. What we learned: Chasing the American dream was once exhilarating; now it’s exhausting.

Raise Wages (Or Should We?)

If the big problem with low-wage jobs is that they don’t pay enough to live on, the answer seems obvious: Mandate wage raises. Many local governments such as Chicago and Oakland and Seattle have done just that—in Amazon’s hometown, the minimum wage will rise to $15 by 2021, well above the federal minimum wage of $7.25 an hour. Some corporations, grappling with a shortage of employees, are following suit: In October, Amazon said it would raise its minimum hourly wage to $15 nationwide. At Walmart, it’s $11, the result of three hikes since 2015 for its 1.3 million U.S. workers. Target has pledged to lift starting wages to $15 by 2020.

But is it helping workers? The answer is … complicated. A number of new studies, released last fall, show a decidedly mixed picture. In California, a team from UCLA studied the restaurant industry and found that when the minimum wage was gradually bumped up to $8 in 2008, earnings rose more than 10% at fast-food chains, but employment fell by about 12%. Another move, this time up to $10.50 in 2017, lifted earnings 20%, but employment fell another 10%. And a group of University of Washington researchers found earlier this year that the net effect of a two-part minimum-wage increase in Seattle was fewer hours, effectively meaning that low-wage workers brought home $125 less per month, with the hit to their pocketbook much more pronounced on the second increase. By contrast, a UC–Berkeley study looking at seven U.S. cities that had implemented higher minimum wages found a benefit to wages, with little effect on employment levels.

There’s little question that as wages rise, companies are redoubling efforts to automate. Target, CVS, and Kohl’s are deploying more self-checkout machines, while Walmart is reportedly testing floor-cleaning robots. This holiday season, Walmart is also bucking convention by not hiring more seasonal workers. Further analysis is required, but for workers, higher wages may be a double-edged sword. —By Phil Wahba

Tim Scott

Republican Senator, South Carolina

Illustration by Joel Kimmel
Illustration by Joel Kimmel

Growing up, my single mother—my rock and biggest supporter—worked 16-hour days as a nurse’s assistant to keep a roof over our heads. I failed four classes in high school and almost didn’t graduate. So when people talk about the “working poor” in America, I have a first-hand account.

We need to make sure that folks who grew up in poverty like I did have open doors. My Opportunity Zones legislation aims to help economically underdeveloped communities realize their full potential. Investors and philanthropists who fund projects in these areas can defer capital gains taxes, allowing for job creation and economic growth. —As told to Jake Meth

Tie Politician Pay to Voter Income

Bill De Blasio, the mayor of New York City, campaigned as a fighter against income inequality back in 2013. But once in office, he gave himself a 15% raise, to $258,750. The ostensibly liberal City Council followed suit with their own 32% raise, to $148,500. The council’s $36,000 raise alone is more than the average individual income citywide. Fast-forward to last year, when the enriched mayor and council courted Amazon (owned by Jeff Bezos, the richest man in the world) with $3 billion in subsidies.

On the flip side are lowly state ­legislators. In 44 states, they are paid far less than the median household income for their state. (In New Hampshire, they’re paid just $100 a year.) It means only the wealthy can afford such posts. Then they trickle up into higher office. A 2014 analysis by Peverill Squire, a political science professor at the University of Missouri who has studied American legislator pay back to 1619, determined that the best way to align elected officials’ interests with the public’s is to tie state legislators’ salaries to the state’s median household income. In 2018, he found median nationwide income for state legislators was $32,611, despite a national median household income of $59,039.

“Voters think they save money by keeping salaries low. But it actually guarantees they’ll be ruled by the rich, who tend to legislate by lining their own pockets and ignoring or even hurting those who have less,” says Squire. If pay were changed, he argues, it would make state and citywide legislative roles more viable for average citizens, who would be more empathetic to people like themselves.

In Congress, 40% of which is populated by millionaires, incoming Rep. Alexandria Ocasio-Cortez has vowed to “walk the walk” by becoming one of four congressional liberals to pay interns $15 an hour. She’s taking the lead from Republicans; a 2017 study by Pay Our Interns found 51% of Senate Republicans paid interns vs. 31% of Senate Democrats. Another fair-pay bastion? Alabama. In 2015, it became the first (and only) state to tie state legislators’ salaries to median household income. —By Richard Morgan

Bill McDermott

CEO, SAP

Illustration by Joel Kimmel
Illustration by Joel Kimmel

I can still remember my dad, in the middle of the night, scraping ice off his windshield to go splice cables for Con Edison to keep the lights on for people. That image never left my mind.

Today I think about America as an example of division, and you say, well, why is it divided? More than 50% of the population in America has less than 400 bucks in their savings account. Which means they’re one broken car ride away from complete disaster.

When the United States was economically strong [in the late 1990s], there was a bipartisan effort called Welfare to Work. I had the opportunity to be on the President’s board. In a full-employment economy, companies—and I think this is a best practice that has been completely forgotten for some reason—made a pledge to move former welfare recipients to work. We learned that the public sector couldn’t do it on its own, that the private sector was the creator of jobs. So every company that signed up for the Welfare to Work partnership received tax breaks for getting people to work, because you had to deal with education, transportation, childcare. The government subsidized the companies to create the jobs.

I personally think that we need another cooperative between the public and private sectors to deal with things like retooling and re-skilling the workforce. If people are working, but it’s not meaningful work, they feel left behind. Even if they do get a paycheck, it’s a modest paycheck. But they feel that they’re not on the cutting edge of the new economy, not in the digital environment. And that’s because they’re not. —As told to Andrew Nusca

A Future Beyond Coal

 

Video producer Bruno Silva visited Hazard, Ky., a town that faces an uphill battle in diversifying its economy.

See the stories he found in our video here.

 

Keith Block

Co-CEO, Salesforce

Illustration by Joel Kimmel
Illustration by Joel Kimmel

There’s an opportunity to do a lot of things with education, in particular access. My wife and I funded a Center for Technology and Society at Carnegie Mellon, my alma mater, to address the intersection between policy and technology. The university partnered with Uber to take a look at undeserved areas in Pittsburgh. The challenge was that there are high unemployment rates in certain areas of Pittsburgh because people don’t have access to transportation, so they can’t seek jobs. These single-family households, these underserved and underprivileged—they don’t have access to these opportunities. That obviously has a profound impact on the economics of the community.

The university reached out to Dara [Khosrowshahi, Uber’s CEO] and talked to Uber about a model where the company provides access to these people, to provide jobs. It certainly seems like there could be a partnership with the city of Pittsburgh and other technology providers to provide access. It could be physical access; it could be technology access. That’s not something the government can do by itself. That may not be something a corporation can do by itself. But together, they can certainly do it. —As told to Jonathan Vanian

Find Out Whether Universal Income Works

Ameya Pawar, a puckish 38-year-old second-term Democratic city councilman in Chicago, has a master’s degree in threat and response management and is channeling that expertise unusually: He’s running for city treasurer in hopes of mending the poverty crisis the old-fashioned way—with wads of no-strings-attached cash. He aims to pilot a universal basic income program by giving 1,000 needy families $500 a month.

Pawar, who says he spends 80% of his $108,000 salary on a combination of childcare and paying off his more than $200,000 of student debt, is following in decades-old Republican footsteps.

“Thanks to Republicans’ Alaska Permanent Fund, we already have universal basic income in this country and have had it since 1977,” he says. The fund, which is now around $65 billion, pays annual oil revenue dividends (typically around $1,000) to every Alaska resident as an incentive to live there. Pawar wants to set up something similar with Chicago’s freshwater supply from Lake Michigan, which the city currently sells to suburbs. “The moral sickness in American politics is the idea that some people are more deserving of help than others. I want to break the narrative of deserving and undeserving. We all deserve to share America’s promise.”

Y Combinator, which funds startups, has its own universal basic income experiment, which it plans to launch this summer with the University of Michigan after several delays. Critics argue a well-worn refrain that more research is needed. Pawar agrees—with a catch. “The research can’t ask, ‘Will people cheat?’ or ‘Will people lie?’ ” he says. Instead, he asks, “ ‘Can we strengthen familial networks? Can we build more social flexibility? Does money help?’ We haven’t done anything big since the Great Society in the ’60s. We’re stuck worrying about cures or preventions.”

If elected treasurer, Pawar plans to work with the likes of incoming Rep. Alexandria Ocasio-Cortez for guidance on investment (and divestment). He also wants to persuade treasury counterparts in Cleveland, Detroit, and Milwaukee to join his UBI experiment and serve as a national model. Surprisingly, he says, some of his biggest supporters are the wealthy and privileged. “They know their wealth is based on the system working,” he says. “For too many of us, it’s not.” —By Richard Morgan

Take a Page From Denmark’s Playbook

Rewind to the 2015 U.S. presidential debates, and you may recall Denmark’s unexpected moment in the spotlight, when Democratic candidate Bernie Sanders extolled the nation’s “accomplishments” for “working people.” Rival Hillary Clinton, shot back: “We are not Denmark.”

No, but with the fourth-worst poverty rate in the Organization for Economic Cooperation and Development, it may be worth looking at what Denmark, with the lowest rate of poverty among wealthy nations, is doing. While it’s obvious that a high-tax, high-benefit “comprehensive welfare state” is excellent at eradicating true poverty, what’s interesting about Denmark is that spending is not reserved for just the poorest. “The middle class also benefits,” says Michael Förster, an OECD senior policy analyst. Indeed, Denmark directs more social spending toward working-age people than any other OECD country.

What does that look like exactly? All told, 98% of households with children 15 and under in Denmark receive financial assistance. And that’s just the beginning. Other benefits that fall to the middle class include free college tuition and health care, job-training, as well as a robust system of subsidized childcare. Students over 18 who live on their own receive a monthly subsidy of around $933 (even those living with their parents receive $145). Danish corporations utilize a model known as “Flexicurity”—when layoffs are necessary, a system of training and job assistance kicks in. Denmark’s system, then, is more like a safety harness: The goal is to prevent people from falling into poverty in the first place. In that sense, we’re certainly not Denmark, but perhaps it’s time to reconsider whether our “safety net” approach is enough. —By Claire Zillman

Pramila Jayapal Thinks We All Need To Do Better By Workers

 

Congresswoman Jayapal says her voters just want an even playing field.Noah Willman for Fortune Magazine
Noah Willman for Fortune Magazine

Too many pundits and economists want to join the White House in saying that our economy is strong because unemployment is down and GDP is growing. But the 8.9 million Americans who work full-time and still live in poverty certainly don’t think the economy is booming. Neither do the 40% of Americans who struggle to meet a basic need, such as buying food or covering rent, or the 62% who don’t even have $1,000 in their savings account for an emergency.

The fact is, GDP growth means nothing when 90% of it goes to the top 1%, as is true today. And while unemployment is low, wage growth has been stubbornly slow and not keeping pace with inflation. It’s past time that we acknowledge a simple truth: an economy in which workers don’t benefit from the profits they help produce isn’t strong—it’s broken.

Congress needs to take action to restore the power imbalance between workers and employers. First, Congress should pass the Raise the Wage bill and immediately lift wages for 41 million workers. The bill would raise the minimum wage to $15 an hour and index it to growth in the median wage. Because of government inaction, the real value of the minimum wage has steadily eroded for decades and is now 25% lower than it was at its inflation-adjusted peak in 1968. Poverty rates for African-Americans and Hispanics in particular would be almost 20% lower if the minimum wage had kept up with inflation.

Second, Congress can restore the broken link between corporate profits and wages by putting a stop to the growing practice of corporate executives handing their profits to shareholders rather than to workers. Before the Securities and Exchange Commission made it easier for companies to buy back their stock in 1982, S&P 500 companies spent only about 2% of their profits on buybacks. Last year, those same companies spent 59% of their profits on buybacks. Congress should pass the Reward Work bill, which could result in billions of dollars in increased wages by putting a stop to open-market stock buybacks and ensure that workers have a seat at the table to fight for their fair share of the value they create.

The American people are demanding this as well. This past election brought a historic wave of the most diverse candidates from red and blue districts across the country, sent to fight for the people. They don’t want a handout. They just want us to even the playing field and give them a fair shot. Democrats control only one legislative body, but this is the moment for us to put forward a bold vision and stand up to the biggest corporate interests that stand in the way of ensuring that we all move forward—together. —By Pramila Jayapal

Marco Rubio Believes Business Can Do Better—But So Can Government.

 

Rubio says his parents’ own “American Dream” would not be possible in the current economic climate.Noah Willman for Fortune Magazine
Noah Willman for Fortune Magazine

For too long, Washington and New York have presented American workers with a false choice: economic growth for the few with redistribution, or economic growth for the few without redistribution. Neither framework results in an economy in which regular Americans can provide for a family with their own labor. They deserve a different option.

My parents came to this country as immigrants and built lives worthy of the American dream. But since I was born in the 1970s, the share of men between ages 25 and 34 earning less than $30,000 a year has almost doubled. Like my father, most of these men do not have an education beyond the equivalent of a high school degree. My mother worked most of her life as a maid, a profession with a median annual income of less than $23,000.

The solution cannot be simply to get a degree or retrain every time a job is outsourced or eliminated. Workers are not machines that can be broken down, upgraded, reassembled, and shipped across the country to the next area of high demand. They are moms and dads who pay rent, with kids who have friends in their schools and on sports teams, and grandparents or family nearby. Building a life is as much about stability as it is about pay.

The solution also cannot be a new round of government checks designed to buy off the financial security of the working poor. Work is about creating value. There’s a connection between the dirty shirt or aching feet at the end of the day and the paycheck that fulfills a deeply human need for purpose.

The kind of stability that comes from a good job is only truly possible when Americans work for productive businesses that grow, innovate, and invest. Part of what our country lacks is a consensus on how to create more of these stable and high-­paying jobs. While the work of developing one is just beginning, some general goals are clear: more corporate investment in products and R&D over financial engineering; a more balanced system of international trade that makes the U.S. the unquestioned home of next-generation technologies; and a more pro-family system of social insurance. While not all of these require government solutions, some policies I have proposed will help. Expanding the immediate deduction for capital expenses from the 2017 tax law, pursuing a strategy to compete directly with the Made in China 2025 industrial plan, and passing national paid parental leave and an expanded child tax credit are all projects that I will continue to dedicate my time to.

There is no economic future for American workers without productive businesses. It should be the work of politicians and businesses alike to build an economy that boldly creates the American products and jobs of the 21st century. —By Marco Rubio

Chuck Robbins

CEO, Cisco

Illustration by Joel Kimmel
Illustration by Joel Kimmel

Those who are completely destitute and those who work full-time still need the same thing: housing they can afford. Our country is facing a nationwide affordable housing crisis. There is not a single state, county, or metropolitan area in the country where a person with a full-time minimum-wage job can afford a modest two-bedroom apartment. We recognize that there is an affordable housing crisis in Silicon Valley, and that housing is desperately needed for both low- and moderate-­income families as well as the homeless. Our five-year, $50 million commitment to Destination: Home complements public funds made available through Santa Clara County’s Measure A to build more supportive housing units, faster. —As told to Jonathan Vanian

Ask an Economist: How Can We Reignite The American Dream?

 


James Ziliak
Professor of Economics, University of Kentucky

• Focus on Childcare, says Ziliak. Its price has skyrocketed, outpaced only by the cost of higher education in recent years—out-of-pocket childcare consumes, on average, 16% and up to 25% of incomes—and it’s a major reason behind the nation’s declining labor participation rates, says Ziliak. He proposes overhauling the childcare tax credit, limiting eligibility to families with incomes below $70,000, and making the credit refundable and more generous. (The idea got attention from the Obama administration and a handful of senators but never made it out of committee.)

Jeffrey Sachs
Professor of Sustainable Development, Columbia University

• Health care must be a priority, says Sachs. We could emulate Canada or Australia by adopting a single-payer system. Sachs also recommends empowering workers to organize, providing better school-to-work transition programs (e.g., Germany’s apprenticeship model), and overhauling the economics of higher education so they don’t constrain the choices of future workers. He advocates a 21st-century land grant program that would slash the cost of education. Also on his list: a wealth tax and a serious infrastructure program that would equip the labor force with new skills and jobs.

Esther Duflo
Professor of Economics, MIT

• Follow the data. Duflo has shaken up the economics world with a radical premise: Aid programs should be tested and evaluated with the same rigor as prescription drugs, through randomized controlled trials. She thinks we could see big gains by taking small steps to stop the poor from falling through the existing safety net. Many schoolchildren missed out on free lunch programs until the Bush and Obama administrations simplified the sign-up process, she explains. The same could be done for food stamps and disability benefits, which are often overly complicated to access.

Photos: Ziliak: Courtesy of Ziliak; Sachs: The Oxford Union/Shutterstock; Duflo: Peter Tenzer

Address This Gulf Before It Keeps Growing

She wrote the book on working poverty­—literally. Barbara Ehrenreich’s Nickel and Dimed: On (Not) Getting By in America gave many middle- and upper-middle-class Americans their first raw glimpse of what it’s like to survive on the wages of a waitress, sales clerk, maid, or other low-paying job in various states.

Since the book’s publication in 2001, a lot has changed, including how Ehrenreich tells the stories of those in poverty. As a journalist in the ’80s and ’90s, she felt like a respected part of the middle class, making a comfortable living to support her family. That’s changed. “At a certain point around 2009, I realized that I could keep doing this only because I had savings from the royalties of the book Nickel and Dimed, and I thought, ‘Okay, that’s wonderful. I can do this.’ Then I said, ‘Wait a minute: What am I saying? You have to be rich to write about poverty? That’s sick.’ ”

Indeed, in the past two decades, she’s seen the stress and uncertainty that dogged hourly workers 20 years ago spread. Things got worse, both for the so-called middle class but also for lots of other people working in lower-wage jobs, she says. “One of the strikingly bad developments is the rise of ‘just-in-time employment,’ where you just wait and get a call from your boss to come in. So you don’t know from one day to the next what you’re going to be earning.”

Though she cites some improvements here and there (more access to health care, movements to raise the minimum wage), she’s worried—both by street protests in countries like France and by the increase in anger toward immigrants all over. As she puts it, people don’t always act rationally when they “see their own life chances diminishing.”

More and more, she says, the economic choices of the few have left a huge swath of Americans living with a “tremendous amount of anxiety.” And it’s not just maids and hourly workers, she warns. It’s contract workers, shift workers, teachers, Uber drivers, small-business owners, the middle class. It might even be you. —By Lisa Marie Segarra

A version of this article appears in the January 2019 issue of Fortune, as part of the story “The Shrinking Middle Class.”