The Shrinking Middle Class: How We Got Here, And Why
Most Americans consider themselves part of the âmiddle class,â but no one can agree on what term that means. The problem? If sizing up the middle class is difficult enough, itâs even harder to say that circumstances within this group have changed. But they certainly have. As youâll 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 dissect the growing income gap by asking experts how we got hereâand why. What we learned: Chasing the American dream was once exhilarating; now itâs exhausting.
The Gig Economy Squeezes Workers
For millions of Americans, work brings income but none of the secondary benefitsâsuch as health insurance, paid holidays, or retirement contributionsâassociated with employment. Though many folks who forgo benefits do so by choice for the autonomy and flexibility (and some are able to plan for retirement independently), a recent McKinsey survey of 162 million non-payroll workers in the U.S. and Europe classified 23 million as âreluctants,â who would prefer to be in the regular workforce (26 million more were characterized as âfinancially strappedâ).
App-based gig employers like Uber and TaskRabbit have helped drive the ratio of payroll workers to contract or freelance workers from 8.3 to one in 1997 to six to one today. This arrangement often overlaps with hardship. A 2018 study of California gig-economy workers conducted by the Public Religion Research Institute found that 48% struggled with poverty. It also found that gig workers reported higher rates of abusive labor practices and racial discrimination than those who worked as employees.
There is also anecdotal evidence the gig economy is taking a punishing toll on workers. In New York City, eight cabbies have committed suicide in 2018 aloneâspurring some to highlight the fact that Uber and Lyft have driven down wages.
As the gig economy has expanded, so, too, have initiatives to improve the labor conditions that go with it. Most notably, there are calls for a âportable benefitsâ regime that would oblige companies like Uber to make mandatory contributions to a health or 401(k) pool that would follow workers across different gig jobs. There is support for such a regime in Congress, notably a bipartisan bill from Senators Mark Warner (D-Va.) and Todd Young (R-Ind.), but the initiative is currently stalled. According to the Brookings Institution, the best hope for workers is now with state and city governments, including a Washington State proposal that would require companies that rely on workers taxed under 1099 status to make contributions to nonprofit âbenefit providers.â Still, thereâs a long way to go before these âgigsâ equate to jobs. âBy Jeff John Roberts
Tim Chen
CEO and Cofounder, NerdWallet
For the 40% of Americans who donât have the cash reserves to cover a $400 emergency expense, payday and other high-cost loans may be the only options when they face an unexpected cost. But these loans quickly drain pocketbooks, as interest rates Âballoon into the triple digits.
Fortunately, the Office of the Comptroller of the Currency has proposed a solution: national banks and federal savings associations could offer short-term, small-dollar installment loans. These loans, for $300 to $5,000, are now a $90 billion market. If banks follow the OCCâs advice, consumers could have new options with trustworthy lenders that enable them to pay their bills, build credit, and return to the road of financial solvency.
Because Being Strapped is Exhausting
Linda Tirado caused a firestorm in 2013 after a blog post detailing her experience trying to make ends meet went viralâand some conservative critics accused her of not being poor enough. It led to the publication of her book, Hand to Mouth: Living in Bootstrap America, which details the contradictions that many Americans bouncing back and forth between technically âpoorâ and barely middle class are facing: You can go to private school and end up not making enough to live on. You can be married to a veteran and not be able to afford dental care. You can work 16 hours a day and struggle to keep the lights on. We asked Tirado what three things she wishes people better understood about this increasingly common existence:
⢠Low-wage work is Chronically Stressful: âPeople can very easily imagine having to stand 20 hours in a row one day. But they canât imagine what itâs like to be on day 14 of that, or then to get a one-day break and go back to another 16 days. The cumulative impact is that youâre more and more exhausted as time goes on.â
â˘Itâs Expensive: âIf youâre buying a roll of toilet paper for 99¢, youâre paying an insanely inflated price. But upfront, you only have to pay 99¢. Now if youâve got $50 and you can go to Target and get a multipack, youâre buying it at 19¢ a roll. And that same economy of scale applies to everything else.â
â˘It Defies Labels: âThereâs this genteel poor that weâre seeing more and more of. This middle-class poor where they donât have $400 in the bank for emergencies. But they do have access to $50,000 on a credit card, so theyâre keeping up appearances, and they wouldnât think of themselves as poor.â âBy Lisa Marie Segarra
Our Neighborhoods Are Failing Us
Dying business corridors hurt the middle class.
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The South Shore neighborhood boasts a lakeside park with commanding views of Chicagoâs skyline. Itâs only a 25-minute commute by train from the downtown Loop, the kind of short hop that young professionals crave. It features stately brick homes that sell for $500,000 and up, magnets for academics and doctors.
What South Shore doesnât have, however, is a supermarket. It hasnât had one since 2013, when grocery giant Safeway shuttered its Dominickâs subsidiary and closed all its stores. More than five years later, the hulking storefront at Jeffery Plaza that neighbors still call âthe Dominickâsâ remains vacant. For many residents, its emptiness is a dual affront: Itâs a symbol of the hollowing-out of the local middle class and an obstacle to working people struggling to get ahead.
âThis has always been a âfirst houseâ neighborhood,â says Carlo Rotella, a Boston College professor and South Shore native whose history of the area, The World Is Always Coming to an End, will be published in April. Its orderly brick bungalows were financial Âcornerstones for thousands of middle-income familiesâincluding those of Oracle cofounder Larry Ellison and Michelle Obama. But ÂRotella estimates that 3,000 South Shore residents lost factory jobs in the 1960s and 1970s. And more recently, the Great Recession hammered the areaâs teachers, managers, and service workers, leaving many upside-down on their mortgages.
As families left town or slipped down the economic ladder, household income in South Shore dropped; among residents with jobs, incomes now sit about 40% below the national average, according to Census data. That helps explain why the Jeffery Plaza location is the only one of 11 former Dominickâs in Chicago that hasnât been acquired and reopened by another grocery chain. Not coincidentally, South Shore residents travel an average of 2.9 miles to buy groceries, a greater distance than residents of any other Chicago neighborhood, according to research by the JPMorgan Chase Institute.
Thatâs a modest inconvenience for upper-income professionals. But itâs been âthe biggest disruption to our Âmiddle-class and working families, and our poor families,â says Val Free, lead steward of the Neighborhood Network Alliance, a community activism group. A six-mile roundtrip can be a prohibitive time suck for hourly-wage earners, especially if theyâre juggling childcare or depending on public transit. So more households shop at local bodegas, where selections are small, and where higher prices eat into lean budgets. Among the few reliable local sources of good produce: the charity food pantry at St. Philip Neri, the Catholic Church around the corner from the Dominickâs.
This summer, a city Âcommission approved a $10 milÂlion tax subsidy to bring a retailer to South Shore, but a deal remains elusive. To local activists, getting a grocer is an existential necessity. âWe have a lot of smart people in the community, we have some of the best transportation in the city, and we have the amenities we need to attract younger families,â says Free. But to nurture the middle class, she adds, âyou need strong business corridors.â âBy Matt Heimer
Blame Private Equity
Since 2008, Private equity has quintupled to $5 trillion. As with the opioid crisis, America is addicted to its quick fix of financial painkillerâdespite the pain it also causes. âTheir superpower is obscurity,â says Diane Standaert of the Center for Responsible Lending. Apartments, colleges, hospitals, prisonsâitâs often âprivate equity behind the curtain,â borrowing heavily to buy companies, then wringing cash from holdings to repay the loans and pay dividends to investors. That can leave workers last in line. Toys âRâ Us, Claireâs, Radio Shack, and Sears were all gutted by private equity this year. Indeed, labor leaders made headlines for securing a $20 million severance fund for Toys âRâ Usâs 30,000-plus workers, but that was out of $75 million owed. âItâs not a condemnation of profit,â says Standaert. âItâs a condemnation of the basic business practice.â Adds Jim Baker of the Private Equity Stakeholder Project: âThese are peopleâs lives reduced to lines in ledgers.â âBy Richard Morgan
Rashida Tlaib
Democratic Congresswoman-elect for Michiganâs 13th Congressional District
The rate at which leaders roll over and beg corporations to set up shop is alarming. Just four years after Detroitâs bankruptcy, weâve had two billionaires and one mega corporation ask for millions of dollars in public money for private developments.
So more working-class communities are creating community-benefits movements requiring corporations that want public handouts to enter into legally binding agreements demanding sustainable resources for host communities. From capitalizing housing trust funds, which allow low-income people to fix up and stay in homes, to creating job training programs in schools, these economic stimuli will give families the opportunity to thrive.
Blue-Collar WoesâŚ
Since the recession of 2008, blue-collar work has been booming. One problem: These workers are still mostly men. Men hold three-quarters of the 15.4 million U.S. manufacturing jobs, leading to what economists refer to as âoccupational segregation.â Meanwhile, women are overrepresented in other âmiddle-skillâ industries that donât require a degree (such as health care and eldercare) and that provide less security and fewer opportunities for full-time work. The Institute for Womenâs Policy Research reports that in 2016, women represented 83% of workers in middle-skill jobs paying less than $30,000 a yearâbut only 36% of workers in occupations requiring similar levels of training and paying at least $35,000 a year. Experts say societal bias plays a part in this type of job segregation, but a study from the National Partnership for Women and Families also reported that 74% of low-income (non-welfare) women said childcare was a barrier to employmentâone factor among many leading women toward part-time, lower-security work. âBy Emma Hinchliffe
âŚHealthcare WorriesâŚ
43.3 million. That is the number of working Americans living in families that struggled to pay medical bills in 2017, according to the Centers for Disease Control. And while that figure is actually an improvement over many previous years, it still means that some 16% of U.S. residents under the age of 65 had trouble paying their medical billsâincluding more than 12% of people classified as ânot poorâ by the government.
Consider: Employer-sponsored private health plansâwhich covered 56% of Americans younger than 65 in 2017���saw average premiums rise 5.5% for family plans last year, while out-of-pocket deductibles now siphon off 4.8% of all workersâ median income.
That last bit might be the most revealing when it comes to the health care crunch. Premiums, deductibles, and medical costs generally have been rising, but income hasnât kept pace for the middle class. With Obamacare under fresh attack in the courts, experts donât see downward pressure on costs for individual consumers anytime soon. The bottom line? Even if youâre lucky enough to be covered by an employer plan, youâre still feeling the squeeze. âBy Sy Mukherjee
âŚHousing ConcernsâŚ
The charming image of a house ringed with a white picket fence has long been synonymous with the American Dream. But for many Americans, home ownership remains just that: a dream.
Rising interest rates, tougher access to credit, increasingly high levels of debt, and slowing construction of new houses are all making it tougher for some Americans to own their home. âHomeownership is not just about owning a home; itâs the best way to build future wealth,â says Jung Hyun Choi, research associate at Washington, D.C.-based Urban Institute, which studies economic and social policy. âIf it stays this way, itâs going to exasperate inequality for future generations.â
Thatâs the case for Millennials in particular, many of whom carry crippling college debt and still-fresh memories of the 2008 recession. As twenty- and thirty-somethings seek opportunities in urban areas, they confront steep housing costs. Some price tags are extreme: The median home in San Francisco or New York City costs more than $1 million, according to Zillow. But data show the problem is hardly limited to major metros. âIf you want to bring prices down, you have to increase the supply,â says Eric Sussman, senior lecturer at the Ziman Center for Real Estate at the University of California, Los Angeles. âThe solution has to be a relaxation of regulations and building codes.â
Look no further than Minneapolis for an example of such progress. To combat rising costs, the city announced a plan in December to end single-family home zoning and allow three-family homes in residential areas. Whatever the path, experts agree: Change is needed. âBy Danielle Abril
âŚA Credit CrunchâŚ
In November, the Federal Reserve Bank of New York reported that total household debt in the U.S. had risen to a record $13.51 trillion in the third quarter of 2018. It was the 17th consecutive quarter in which that number had increased, and it meant that the total debt burden on American households was now $837 billion above its previous peak exactly 10 years earlierâin the third quarter of 2008, when the global financial system was on the brink of collapse.
Consumer debt has become as big a burden as ever. The Fed pegged total U.S. credit card debt at $844 billion at the end of the third quarter; other studies have placed it even higher. âAmericans began the year with more than $1 trillion in outstanding credit card debt, which broke all previous records,â according to WalletHub anaylst Jill Gonzalez. âAlthough consumer confidence is high, wage growth is not. And yet weâre overextending ourselves anyway.â
Consumer debt isnât an entirely bad thing. Consumer spending represents more than two-thirds of the national economy, according to the U.S. Bureau of Economic Analysis. But rising levels of credit card debt also reflect some unsavory realities about the finances of the average American. âThe amounts that people are paying on a monthly basis in terms of debt are really striking,â said Emily Holbrook, director of planning at Northwestern Mutual. The firmâs 2018 Planning & Progress Study shows that Americans are now allocating virtually the same percentage of their monthly income toward debt repayment (36%) as they are for discretionary expenses such as dining, clothing and leisure (37%).
What happened? According to Emory Nelms, a senior behavioral researcher at the Common Cents Lab at Duke Universityâs Center for Advanced Hindsight, âchanges in the way that we use and think about money in the last 30 to 40 years have led to a world in which weâre living with much more consumer debt.â New digital payment methods, for example, have made it easier than ever to spend money without having to incur the psychological âpayment painâ that comes with spending physical cash. âThe easier and faster it is to spend, the less encumbered our spending decisions are,â he says.
Just as the last recession forced Americans to pump the brakes on spending, another downturn would likely prompt people to think twice before swiping their cards or tapping âpay.â But the consequences could be devastating. Economic changes could leave people âin worse financial standingâ with less means to pay off debt and less credit available from banks, Nelms says. And âthat will restrict peopleâs ability to make things work.â âBy Rey Mashayekhi
âŚAnd Student Loan Burdens
The student debt crisis may soon force another generation to subsist on ramen: parents. Given the elimination of caps for federal Parent PLUS loans, rising college tuition, and changes in the tax code, typical parent borrower liability rose from $6,200 in 1990 to $38,800 in 2014. For 3.4 million Americans, PLUS loans can fund the dream of higher education, but if the parent or student canât repay, they can cascade into a nightmare of accruing interest, ruined credit, and depleted emergency funds. PLUS borrowers can be approved even if they have existing debt, and payment plans are eligible to be capped monthly at 20% of the parentsâ discretionary incomeâso that can mean more money, for now, and a bigger burden later. Another minus: Under Trump administration changes, if your child withdraws, the loan will be forgiven, but the balance is taxed as income. Sadly, parent loan repayment tends to be the worst at shady, for-profit institutions, which often over-promise and under deliver when it comes to giving kids degrees that pay off in the real world. âBy Dan Reilly
Josh Hoxie
Director, Project on Opportunity and Taxation, Institute for Policy Studies
Even black and Latino families who have achieved the traditional markers of middle-class lifeâa good-paying job and a college degreeâstill lag far behind their white counterparts in terms of wealth. Changing our priorities around tax incentives, as well as investments in bold new programs like Childrenâs Savings Accounts (CSAs) and a federal jobs guarantee, could reverse the decades-long rise in the racial wealth divide. Had Congress instituted a robust universal CSA program in 1979âseeding small savings and investment accounts for all children, which could matureâthe white-Latino wealth gap would have disappeared by now, and the white-black gap would have dropped by 82%.
Read part III of III. âHow We Can Fix It.â
A version of this article appears in the January 2019 issue of Fortune, as part of the story âThe Shrinking Middle Class.â