Middle Class has Narrowed in California

 

Middle income groups have steadily lost ground as the California economy has shifted away from traditional middle class income employment, and increasingly to a two-tiered pattern of jobs creation primarily at the higher and lower wage levels.  Combined, the middle three income groups (200-499% of poverty income) went from 46.9% of the population in 1980 to 36.6% in 2015 and 36.8% in 2016.  Movement out of the middle incomes, however, has been in both directions:  the lowest two income groups grew from 29.7% in 1980 to 34.4% in 2015 and 32.7% in 2016; the highest level—500% and more of poverty income—grew from 23.4% in 1980 to 29.0% in 2015 and 30.5% in 2016. 

 

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While growth in the higher incomes has positive attributes, the hollowing out of the middle has diminished space and opportunities on the upward mobility rungs for both middle and lower income aspirations.  With fewer supporting job opportunities being created at the necessary wage and income levels, the middle income tranche has become increasingly a gap separating the extremes rather than the path for generational economic progress.  [5]

 

Growing Costs of Living are a Barrier Making Lower Income Californians Risk Averse to Upward Mobility Opportunities

 

The growing costs of living—especially for housing—are swamping any progress many lower income Californians are now able to make in moving ahead economically.  

 

• From the focus groups, respondents in all cities reported facing a rising cost of living that outpaces their earnings.  Rent, food, gas, and electricity have all increased significantly and steadily in the major California cities where these respondents live.  Despite working one or more jobs, getting additional hours or clients, or benefiting from an increase in the minimum wage, respondents can’t seem to get ahead of their monthly expenditures.  [1]

 

• High cost of living was the highest perceived barrier to getting ahead financially by far (56% of survey respondents), distantly followed by jobs without benefits that might help respondents otherwise keep up with the high cost of living (9%).  [3]

 

• Employers recognize employees are also having a hard time meeting expenses. Nearly 9 in 10 (86%) employers believe the cost of living has increased for their employees, the majority of which is centered on housing.  [4]

 

• While employers struggle with increasing costs of business, they also recognize their employees are facing rising costs of living.  Even though wages are rising and benefits are expanding, employees still don’t seem to be able to keep up with the cost of basic necessities, resulting in longer commute times and stagnant net worth.  [5]

 

• As housing costs have risen in response to housing supply constraints and the state’s increasing utility costs, the percentage of persons considered rent cost burdened has increased not just in the lower income ranges, but the middle income groups as well.  While housing tends to be treated as a low income policy issue, rising rent and utility costs increasingly represent a barrier—by otherwise absorbing available household income—to movement into or through the middle income ranks as well.  [5]

 

• Although housing assistance programs are available, these programs at their base are intended to relieve poverty conditions in the state rather than solve the underlying problem and promote broader affordability, and increasingly are being reshaped to prevent and combat homelessness for those in very low and extreme poverty.  While a few are open to moderate incomes, the key program in this respect—redevelopment agencies—no longer exists in California.  Rising housing costs, however, are a much broader state-wide issue affecting low and middle incomes and, especially in the Bay Area and coastal regions, upper middle incomes as well.  [6]

 

• These programs are also limited in their potential scope.  Using 2016 data, housing subsidy and public housing programs combined were sufficient to cover only a quarter of persons living below poverty, and just over 1 in 10 if those in the 100-199% of poverty income group are included as well.  Other current policy responses such as inclusionary housing being adopted by local governments simply raise the barriers to upward mobility higher.  By shifting the costs of affordable housing within a development to the market units, the cost of the market rate units goes up.  As a result, those shut out are the working poor and the lower rungs of the upwardly mobile who no longer qualify for or have access to the subsidized units and now are unable to afford the higher market rate rents as well, further intensifying the two-tier economic divide in the state.  [6]

 

The primary government response in recent years to this situation has been to increase transfer payments and mandate wage levels in an attempt to ameliorate the effects of these cost impacts, rather than serious reforms tackling their underlying causes.  Lower income Californians, however, have come to view their situation as overwhelming, with costs escalating beyond their ability to keep up.

 

• The survey respondents were nearly twice as likely to believe that their salary doesn’t keep up with expenses, rather than that their income isn’t growing fast enough.  [3] 

 

• This perception is reflected in a more detailed look at the distribution of wages within industries.  The Lower Wage industries generally show higher wage growth, with a higher growth rate at the 10th percentile coming primarily as the result of increasing minimum wage, and growth in the subsequent percentiles likely the result of employer responses to wage compaction.  While this cascading effect shows general wage improvement across all levels, the result is also seen higher prices especially those felt at the lower income levels.  Wage stagnation—considered as wage increases below the CPI rate—is the most prevalent in Middle Class wage industries, particularly in the middle ranges from the 25th to 75th percentiles.  These industries are generally traditional, more mature businesses that are generally more subject to the cost pressures from the state’s regulatory and taxation policies affecting labor, energy, transportation, rent, and other basic costs of doing business.  Wage stagnation is also evident in the Higher Wage industries, but primarily in the lower wage percentiles particularly for the Information and Professional, Scientific & Technical Services industries that have provided the primary growth at this wage level.  [5]

 

The extent of these costs and the potentially severe—if not disastrous in the case of homelessness—consequences of making the wrong choice on education, training, or a job change has made many lower income Californians risk averse.  While there is a high awareness of the different avenues for upward mobility, the consequences of making the wrong decision now make them hesitant to pursue these options.

 

• For the most part, participants in the focus groups expressed not anger but resignation over the economic challenges they face. Without any safety net (savings, confidence in future earnings, stability/security for immigrants), most were highly risk averse.  Participants in all 4 cities expressed a “bird in the hand” attitude about their job situation, and fear and doubts over the idea of changing careers.  Even some business owners and others who in different circumstances would not be risk averse find themselves severely limited by this situation.  [1]

 

• When asked to describe where they see themselves in 5 years, few respondents have defined plans.  Overall, they tend to spend most of their time and energy trying to get by, with little left to “invest” in improving their situation.  [1]

 

• In the top ranked choice, about half of the lower income survey respondents cited fear of change as a moderate or extreme barrier to getting a new or better job.  However, just over half also indicated their intent to change jobs in the near future, but primarily to gain more job security.  [3]

 

Lower Income Californians Retain a Strong Work Ethic

 

The overwhelming response in both the focus groups and survey indicates lower income Californians continue to show a strong work ethic in spite of the challenges they face.  They are looking for actions to deal with the ever-rising living costs that are sapping the purchasing power of what they earn, and options that enable them to improve their skills and employability but that also accommodate the other demands on their time due to commuting, multiple jobs, and family responsibilities.

 

• Focus group respondents in each city indicated a willingness to work hard, and don’t want “something for nothing” from the government.  Instead, what they seem to be looking for is help managing the gap between what they make and the high living costs they face.  Many also seek on-the-job programs where they could more easily manage additional education or training.  [1]

 

This commitment extends to hopes for their children as well.

 

• The survey respondents generally believed that their children will be better off than they are, because of the opportunities that advances in technology offer. Several Latino respondents note that they are better parents to their children, as they “know the system” better than their immigrant parents did, and are able to prioritize education for their children.  [1]

 

• Less acculturated Latinos (immigrants) are more invested in their children’s future than in their own, and are more committed than their more acculturated counterparts to creating generational upward mobility.  For many, it is not so much about working to make a better life for themselves, but rather to make sure their kids have the tools to improve their economic situation.  [1]

 

In this respect, both the focus groups and survey group showed widespread rejection of universal income as policy option that can address their situation:

 

• The concept of universal income is perceived with suspicion; the focus group respondents believed it would only drive up the cost of living even more.  [1]

 

• Focus group respondents in each of the cities also expressed concern that this type of program might foster laziness and dependency; people would not manage the money properly, and would choose to just take the “handout” instead of working or studying.  Most believed that there should be an education, work, or community service requirement attached to this type of program.  [1]

 

• Universal income was not well received.  Participants believed working develops self-worth, sobriety, independence, purpose, and a sense of community.  [2]

 

• While considered helpful by two-thirds of the survey respondents, universal income was ranked the second lowest out of a list of 8 potential assistance programs.  Programs developing jobs skills and employability—including tuition-free community college, apprenticeship programs, and skills training—ranked at the top.  [3]

 

Reaction to minimum wage increases was more mixed.  While many noted they benefited personally from higher minimum wage, there was also a strong perception that it has and will continue to increase the living costs they face.

 

• Focus group respondents in all cities noted that the minimum wage is increasing across California.  However, they were also quick to add that they have experienced two important types of setback as a result of this policy:  (1) many businesses just reduce hours in order to reduce the total wage amount and to avoid paying benefits, often leaving workers earning less overall and feeling worse off about their financial situation than before the wage increase; (2) minimum wage increases are not keeping pace with increases in the cost of living, so respondents feel as though they have ended up in the same place (at best) or at a net loss.  [1]

 

• Eight in 10 survey respondents agree (“strongly agree” or “somewhat agree”) that the blame for food prices falls on restaurants and grocers raising prices.  However, seven in 10 also agree that increased labor and production costs are responsible for food costs going up.  [3]

 

• Two thirds of survey respondents agreed that a higher minimum wage helps workers like themselves.  However, three fourths also agreed that a higher minimum wage leads to higher prices, which only exacerbates the problem of their salary not keeping pace with rising expenses.  [3]

 

• These perceptions are mirrored in the employer survey responses:  73% of employers are somewhat or extremely likely to raise prices in response to the mandated wage increases compared to 48% likely to increase automation, 46% likely to reduce hours, and 39% likely to reduce the number of employees.  [5]

 

California has Split into Two Economies

 

In a trend that began in the 1990s but that has accelerated through the recent recovery period, California has evolved into a two-tier economy, producing higher wage and middle class wage jobs primarily in the Bay Area and a dominance of low wage jobs and jobs dependent on public spending in much of the rest of the state.

 

• The focus group respondents noted that while there appear to be plenty of job opportunities in California, the available jobs are not necessarily suitable for them.  Available jobs are either entry level or very low-paying positions, appropriate for recent high school graduates but not heads of household.  Jobs that pay more require skills, education, certification, and/or experience that they don’t have and are not able to get.  [1]

 

• The focus group respondents also noted that the growing California economy has resulted in more jobs available than in recent years.  However, these jobs tend to be low-skill, low-wage positions in the fast food industry, housekeeping, or agriculture.  [1]

 

• A number of focus group respondents lost good jobs during the recession, and reported not being able to get a comparable job since then.  [1]

 

• Between 2010 when the recovery began and 2016, California generated 2.2 million wage and salary jobs, producing a net increase of 1.1 million jobs compared to the pre-recession level.  However, the nature and distribution of those jobs shifted notably from patterns in the past.  While job opportunities for lower educational attainment groups have grown during the state’s recovery, they are at significantly lower wage levels.  The opportunities this economic mix now provides either to avoid poverty—especially cost of living adjusted poverty—or provide a base from which to pursue upward mobility are as a consequence significantly diminished.  [5]

 

• The distribution of jobs growth has also shifted.  Overall, the Bay Area—with 19.4% of the population—accounted for 30.2% of the recovery jobs growth between 2010 and 2016, and nearly half (46.2%) of the net jobs growth between 2007 and 2016.  Breaking these totals out by wage and skills level, the distribution is even more skewed.  Los Angeles Region accounted for 47% of the net jobs loss between 2007 and 2016 for the Middle Class, Blue Collar jobs in construction and manufacturing.  At the other extreme, the Bay Area secured 84% of the net jobs growth in the Higher Wage industries and 31% of the net jobs growth in the Middle Class, White Collar industries.  [5]

 

• Rather than sustainable private jobs growth, a significant portion of California’s recovery growth came from expanded public spending.  Health Care & Social Assistance—much of which was directly or indirectly the result of expanded Medicaid and other public health care spending—accounted for 47% of the net jobs growth between 2007 and 2016.  Combined with direct job expansions in Government, many of the middle class wage and lower wage jobs created over that period are dependent on uncertain or volatile public funds, which in turn are largely dependent on the economic performance of a single region in the state—in 2014 and 2015, Bay Area taxpayers produced 40% of all personal income tax paid in the state.

 

Labor Mobility Eroding

 

While jobs continue to expand in the state, there is a growing disconnect with the available labor supply as living costs have eroded labor mobility.  Reliance on established family/friend networks to cope with rising costs, escalating housing costs, and increasing commute times produce higher costs for food, child care, and commute expenses as workers must travel further for jobs at their skill levels.  This trend in turn has eroded the time available for workers to pursue upward mobility strategies such as training and additional education.

 

• Focus group respondents in each of the cities noted that California cities are getting too crowded, which contributes to high expenses in these cities.  People are having to move to the outskirts of their city and commute for longer periods. The exception seemed to be Fresno, which is seen to have lower housing costs overall.  [1]

 

• Not surprisingly, traffic was seen as a major problem in these crowded cities.  For most, public transportation is not really alleviating the problem.  In San Diego, the new trolley is called out as inefficient and not helpful.  Even in Fresno, where traffic is not as heavy as the larger markets, residents have noticed an increase in their commute time.  [1]

 

• People have had to move farther away from their jobs to find affordable housing, increasing commuting times and leaving less time to pursue education or have an acceptable family/work balance.  [1]

 

• One main source of dissatisfaction with their jobs concerns the location of good jobs, which tends to be exacerbated by the overall cost of living and lack of affordable childcare.  Several respondents across markets (with the exception of Fresno) note that they can’t earn enough to be able to live close to where they work; this tends to affect their ability to progress and their overall quality of life.  [1]

 

• In addition, the pressure caused by the fact that today’s salaries and raises are not keeping up with the cost of living is perceived as reducing overall quality of life.  People have had to move farther away from their jobs to find affordable housing, increasing commuting times and leaving less time to pursue education or have an acceptable family/work balance.  [1]

 

• Approximately one third of the survey respondents don’t believe they have the education or experience to take advantage of job opportunities in their area, while one fourth can’t afford to live on the salary offered by jobs in their area.  Three in 10 respondents noted that there are very few job opportunities close to where they live.  [3]

 

• In the employer survey, 66% indicated commute times have increased for their employees.  [4]

 

• The difficulty of matching jobs with available skills has led a significant portion of employers to look outside the state—28% indicated they plan to transfer workers or expand hiring outside of California in the next 6 months to a year, with some of these respondents indicating hiring outside of California is a way of testing the talent pool in other locations before moving the entire company.  [4]

 

• While California has created jobs since the recession that can provide an option for upward mobility, their concentration within the Bay Area means that that cost barriers created by housing and commuting result in these jobs not being a viable option for most lower income families.  [5]

 

Discrimination Still Seen as a Factor

 

Discrimination in the workplace is still cited by a significant percentage of these income levels as a barrier to upward mobility.

 

• Female, African American, and Latino respondents in the focus groups noted that their gender and/or ethnicity often work against them in the workplace, making it more difficult to get a job or qualify for better wages.  Latino respondents in particular noted an increasing anti-immigrant sentiment that can limit their job opportunities.  [1]

 

• Racism/discrimination ranked 6th out of 7 choices of factors contributing as barriers to getting ahead, with 26% indicating it was a moderate barrier and 27% an extreme barrier (53% combined).  This factor was ranked higher in the Bay Area (60%), Central Valley (59%), and Los Angeles (56%), as well as among African Americans (58%) and Latinos (57%).  When asked which factor was the greatest challenge, 7% responded racism/discrimination vs. 56% choosing high cost of housing.  [3]

 

• The ethnic/racial distribution for the 300-399% income group in 2016 substantially reflects the population distribution overall in California.  Differences, however, exist in the higher and lower income groups.  Latino and Black Californians show a higher relative share in the lower income ranges.  In the highest, 500%+ income range, the relative share for non-Latino Blacks is 20% below the income range share, and for Latinos, 60% below.  [5]

 

• On a relative share basis, the race/ethnicity distribution has been essentially stable since before the recession in 2007.  The changes shown in the distribution within each income group are largely explained—with some slight differences—instead by the underlying changes in the overall population distributions as Latinos and Asian-Pacific Islanders have grown as a share of total population and the labor force, non-Latino Blacks remained essentially level, and non-Latino Whites declined.  [5]

 

• Incomes, however, reflect the differing effects of the recession on each of these groups.  Unemployment rates for Latinos and non-Latino Blacks peaked at much higher levels, and through 2016 still had not returned to recovery levels, in particular for Blacks.  While Latinos maintained a higher labor force participation rate than the other demographics throughout this period, the non-Latino Black rate sank well below the others and began to recover only in 2016.  [5]

 

Many of the cost barriers identified through the project research likely contribute to these perceptions, in particular the lack of housing that now makes access to upwardly mobile job opportunities more costly or absent altogether.  The functioning of the state’s overly complex housing approval process—including CEQA, entitlements, and development permit process—has thereby produced disparate impacts on low income Californians, reducing the available housing supply they can afford in the coastal areas creating the most jobs.  Opportunities to move beyond these income levels are also limited by disparate impacts that result from the current focus of the public schools on college-track preparation combined with their persistent failure to close the performance gap between demographic groups.  These gaps are becoming even more significant at a time when occupations and the nature of work are shifting in the face of growing technology applications.

 

• Educational attainment remains associated with income level, but despite a 30% increase in Prop. 98 funding from 2007-08 to 2017-18 and a redirection of significant resources to focus on disadvantaged students through the Local Control Funding Formula (LCFF), major gaps remain in educational outcomes by demographic and region.  General comparison of relative performance both before and after 2014 shows a large and continuing gap by Latinos and Blacks especially in the Math skills critical to current jobs in Higher Wage industries and to occupations at all wage levels that are changing in the face of technology.  [5]

 

• Comparing completion rates of the A-G courses required for application to University of California and California State University, the K-12 schools are preparing White and Asian students for college at levels significantly above Latino and Black students.  Males, especially Latino and Black Males, show completion rates well below Female levels, with SDA (socioeconomically disadvantaged/low income) students as a group at only just over a third of SDA graduates in the latest 2016 results.  In a time of transition when required skill levels are likely to change substantially for many occupations—both the current mix and the yet-to-be-known evolving structure—California schools remain largely focused on college-track education.  And in this respect the schools no longer are functioning as the primary asset for adjusting to technological change, but instead now come close to serving as a winnowing process that risks relegating another generation—especially Blacks, Latinos, and low-income males—to the income levels in which they are now without the skills necessary for upward mobility in a changing state.  [5]

 

Current Public Assistance Programs Do Not Assist in Upward Mobility

 

As currently structured, the multiple public assistance programs are not effective as a means to promote upward economic mobility.  Barriers from accessibility, eligibility, and caseload capacity mean in practice they are too little, too intermittent, and not directed on the primary barriers lower income Californians face.

 

• Focus group respondents were frustrated with aid programs that are underfunded, require significant time off work, and have seemingly out-of-touch income eligibility levels.  Several mentioned that as soon as programs begin to help them manage their expenses, they become ineligible.  In addition, the waiting periods for housing and food assistance rendered the programs essentially unavailable.  [1]

 

• Overall, respondents are frustrated by the fact that these programs are all underfunded, there is too much red tape in the application process, and the help does not come as quickly as people need.  They cited personal examples where food stamps took 6 months to go into effect, insurance coverage that didn’t kick in until after a baby was born, and the Section 8 program with a waiting list of 10 years.  [1]

 

• Single mothers in particular noted that when these assistance programs fail to work as designed, it puts them even further behind.  Few seemed to have been able to access a childcare assistance program that would allow them to get a job and/or improve their work situation.  [1]

 

• The safety net system is difficult to navigate, takes too much time, and has no personal contact.  A big problem is monitoring income levels for qualification of benefits and having to repay with penalties and interest any payments made once income levels disqualify benefits.  Turning benefits on and off is difficult to navigate and time delays in doing so come with big penalties that can set recipients back.  As a result, some chose not to seek assistance for which they might be qualified.  [2]

 

• Survey respondents prioritized assistance programs that would help them move on to that next job and those that would help manage their most pressing expense: housing.  [3]

 

• Only about half of survey respondents felt they were “probably” or “definitely” receiving all the help they’re entitled to.  [3]

 

• While many of the safety net programs retain their original focus of moving Californians out of poverty, others have evolved more into a purpose of income support and ameliorating the effects and conditions of poverty rather than combating the underlying causes.  This policy shift is perhaps best seen in the increased prominence given to expansion of spending on the state’s poverty programs in recent Governor’s Budget Summaries, under the general heading of “Counteracting the Effects of Poverty.”  [6]

 

• This policy shift is also fundamentally grounded in an assumption that many of the core conditions defining the challenges to upward mobility in the state—in particular, the increasing prevalence of low wage, part time jobs outside the Bay Area and the growing cost of housing, energy, and other costs of living—are an inevitable feature of the state’s economic future instead of challenges that can be changed and not just offset through government assistance.  This outcome is seen in the increasing use of targeted funds and programs to compensate—at best partially—for the cost effects of state policies in areas such as in energy and housing.  These ameliorative programs are not reaching the full range of people affected, are not easily accessible due to qualification limits or application burdens, or at best are capable at reaching only a portion of the populations affected due to available funding.  [6]

 

• Individual programs, especially those adopted separately by California, challenge applicants with a broad and inconsistent range of income eligibility criteria.   But in particular, the guidelines of the poverty programs and programs supported largely by federal funds are based primarily on federal poverty level either as a hard dividing line or as the base for eligibility determined as a multiple of this income level.  As such, the potential for the programs’ effectiveness varies widely due to the significant differences in costs of living between California and other states in general, and specifically through the wide differences in living costs between regions in the state.  While these disparities reinforce the critical need for actions to reduce rather than subsidize living costs in the state, at least in the near term these cost differences—especially when considering the barriers to labor mobility raised by housing—make the potential effect and eventual success of the current programs structure heavily dependent on geography and where the program beneficiaries live.  [6]