Scope and Structure of this Report
Under a grant from The James Irvine Foundation, California Business Roundtable (CBRT) has convened a collaborative process among a broad range of stakeholder groups to address the issues affecting poverty, jobs, and upward mobility in California. This report provides background data to serve as a base for those discussions, including:
Demographic Data providing basic population information on those in poverty, the working poor, and the income levels providing the ladder for upward mobility.
Jobs Data describing California’s changing jobs structure by industry, wages, and hours worked.
Employment Data detailing the changing structure of the state’s labor force.
Cost of Living Data to address one of the most frequent issues raised in the project’s focus groups—the effect of constantly increasing living costs on their opportunities to move ahead—including comparative costs on housing, commuting, energy, and other cost-of-living factors.
Within these categories, the report presents a series of factors that fall within three general categories:
Technical Factors, primarily consisting of the different poverty measures and how these vary for California and its regions as an appropriate benchmark for defining poverty, the working poor, and middle and upper income groupings. Where applicable, data contained in this report is presented by income group defined by the ratio of income to poverty (official poverty threshold): 1-99% of poverty, 100-199%, 200-299%, 300-399%, 400-499%, and 500% and over.
Individual Factors describing the populations within each of the income groups.
Structural Factors identifying shifts in California’s economy affecting the significance of the individual factors in the changing distribution across the income groups.
Higher Cost of Living Determines California’s Effective Poverty Rates
As measured by the official poverty measure (OPM), California’s poverty rate has differed from the US average but not by overly large margins in recent years. From 1995 to 2003, the California rate averaged 1.9 percentage points above the US rate, dropping to 0.2 percentage points below from 2005 to 2009. During the recent recovery period from 2010 to 2016, California’s rate was 0.8 percentage points higher on average.
The OPM measure, however, is a national average and does not take into account California’s broader social safety network and much higher costs of living. Adjusting for noncash assistance payments and differences in specified expenses (primarily housing costs) under the supplemental poverty measure (SPM), California has had the highest poverty rate among the states since the SPM was introduced in 2011. In the most recent data (2014-2016), California’s SPM rate was 20.4% vs. the state’s 2016 OPM rate of 14.4% and the US SPM rate of 14.7%.
Poverty rates vary widely across the state. In 2016, the OPM varied from 9.4% in the Bay Area to 20.6% in the Central Valley. As recently as 2013, a quarter of the Central Valley’s population lived in poverty as defined by the OPM.
Costs of living also vary widely, affecting which income groups can be considered as “working poor,” “middle class,” and “upper income.” As measured by the 2015 regional price parity (RPP), costs of living vary from below the US average (100.0) in the interior regions (89.6 in Imperial County and 92.7 in Kings County), to 124.1 in San Jose-Sunnyvale-Santa Clara MSA and 122.0 in Santa Cruz-Watsonville MSA. Under the RPP, a basket of goods and services costing $100 at the US average would cost only $89.60 in Imperial, but $124.10 in San Jose. The defining component, as with most other cost and income delineations, is the significantly higher housing costs in the Bay Area and coastal counties.
Middle Class Incomes Have Narrowed
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.
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. The middle income tranche has become increasingly a gap separating the extremes rather than the path for generational economic progress, especially when taking into consideration the high and growing costs for housing, energy, commuting, and other basic costs of living. With neither the assistance available at the lower income levels nor the household resources at the highest, the middle income levels now come with growing barriers from living costs that divert available household time and income resources from savings, asset acquisition, and education, and thereby restrict the upward mobility opportunities that once defined this state.
Educational Attainment and Income
Education continues to show a strong relationship to income level. Possession of any college degree—beginning with an AA and moving up—results in the income distribution sharply shifting towards the higher income groups.
At the other extreme, California continues to have the highest share among the states of adults with less than a high school education, at 17.6% of persons age 25 and older in 2016. While in prior years, persons at this educational attainment level still had opportunities for higher wage jobs in traditional industries such as manufacturing and construction, these jobs have declined, require increasingly higher skills levels, or now face increasing regulatory barriers to entry. However, no meaningful progress on poverty and income mobility in the state can be achieved without addressing this component of the population through skills upgrading, policies more conducive to expansion of higher wage/higher hour jobs at this level, or other means. This point becomes all that more important when considering that this group also has historically low and now declining rates of labor force participation and consequently lower likelihood of being a source of earned income within their households.
Changing Jobs Structure and Income
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.
Combined, the Middle Class, Blue Collar and Lower Wage jobs open to lower skills/education levels went from 56.9% of the jobs mix in 2007, to 54.8% in the trough year of 2010, and going to 56.1% in 2016. However, the mix between these very different wage level jobs changed, with Lower Wage jobs expanding to replace the declining Middle Class, Blue Collar. As a result, 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.
The nature of the jobs shift intensifies this effect. Looking at the structural shift by comparing the changes between 2007 and 2016, the jobs now available to lower skills provide significantly lower hours than the higher wage jobs they replaced in manufacturing and construction. While employment in more than one job is a potential coping response, this response is less likely at the lower incomes—41.0% of employed persons below poverty usually worked less than 30 hours a week in 2016—than in the higher incomes.
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 (Information, Management of Companies & Enterprises, and Professional, Scientific & Technical Services) and 31% of the net jobs growth in the Middle Class, White Collar industries (Arts, Entertainment & Recreation and Educational Services). 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.
Potential Effects of Automation
Increasing potential for technology applications, in particular artificial intelligence, has raised concerns over the number and types of jobs that will be created in the future. On one more dystopian extreme, some analysts foresee the pace of technology overwhelming the ability of the economy to adapt, and have proposed measures such as Universal Income to compensate for what they project as a lack of jobs and work and eventual creation of a permanent underclass. Others, looking at the history of technology absorption that has replaced but also created new jobs, view the current prospects—although accelerated—still capable of repeating instead the cycle of increased productivity and lower prices that historically have led to higher real incomes and creation of new job opportunities including within entirely new industries. Still others see technology adaptation as essential, enabling the developed economies to adjust to aging populations and static or declining labor forces through rapid advances in productivity.
Regardless of the net outcome, one thing is for certain—the nature of work within many occupations is likely to change as new technology is introduced. As in past cycles, these changes in turn will require workers to acquire different skill sets. Not all will require a college degree, but many will require proficiencies above what is currently provided through the K-12 and jobs training systems.
As importantly, technology will also change the nature of the employers providing these jobs, and the competitive ability of a state like California to retain and expand future jobs will shift as well. For example, the higher wage technology and information industries have concentrated in the Bay Area to an extraordinary degree, but instead of locating their expansions and ancillary operations in other regions of the state as in past economic development patterns, have instead chosen to locate in other states and other countries with the required labor force skills and more amenable living and operating costs. To a large extent, the effects of technology on jobs in California will depend on how competitive the state remains for the jobs that will emerge as the economy evolves.
Changing Labor Force and Income
California along with the rest of the US has experienced significant declines in labor force participation rates, a trend that began before but intensified with the recent recession. California’s rate also dropped below the national average beginning in 2010, even though: (1) the state’s population although aging is relatively younger than the US as whole and (2) California’s fastest growing demographic group—Latinos—is younger still and has maintained much higher participation rates than the state overall.
While people are working longer beyond age 65, the labor force increase has not been sufficient to compensate for declines among youth (16-19) and young adults (20-24) and comparatively lower rates for age 55-64. From 2001 to 2017, total civilian population age 16 and older in California grew by 5.2 million, with 4.1 million (79%) of this amount age 55 or older. Combining reduced participation at the younger ages with marginal reductions as the working adult population has aged has produced a decline in the potential number of working members per household. And in a state where more than one income is generally needed to afford growing housing costs, having only one has increasingly become a barrier to upward movement.
Having the potential for more than one income in a household continues to be associated with higher income levels. While the percentage of persons in families with married parents (both parents present or one not present) declined in the highest income group in the years following the recent recession, the relative share has remained stable and the percentage itself gained in 2016. Single mothers have significantly higher presence in incomes below poverty and the next higher income group, while single fathers show a higher relative share in the next four income levels above. The relative share for single mothers below poverty, however, has declined from more than twice as high in the beginning years of the 2000s, to 60 percent above in 2016.
Employment also translates into more sustainable income levels. While the upper income groups experienced some degree of higher unemployment during the recession (400-499% unemployment rate at 7.2% and 500%+ at 4.4% in 2012), the brunt of the recession fell on the lowest income levels (100-199% at 15.5% and below poverty at 33.3%).
Race/Ethnicity and Income
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.
On a relative share basis, the race/ethnicity distribution has been relatively 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.
Incomes, however, reflect the differing effects of the recession on each of these groups. Unemployment rates for Latinos and non-Latino Blacks peaked much higher, 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.
As indicated above, 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), significant gaps remain in educational outcomes by demographic and region. While year-to-year comparisons are difficult to make directly on test score results due to the changes the schools have made over the years, the general comparison shows a large and continuing gap in the proficiency levels reached 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.
The effects of the schools’ performance on incomes becomes even more evident when measured by the percentage of high graduates completing the A-G courses required for application to University of California and California State University. White and Asian-PI (all race designations for non-Latinos) students are being prepared for college at levels significantly above Latino and Black students. Males, especially Latino and Black Males, show completion rates that are 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 most 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 results shown in the charts suggest that 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.
Youth employment in prior years served as an option to at least partially compensate for this situation. Most research shows long term positive effects on life-time earnings from early employment and development of both workplace skills and experience that adds significantly to future employability. Youth employment in California, however, has crashed. Unemployment remains well above all other age groups, while participation rates have sunk some 60%. Employment for age 16-19 in 2016 was less than 2/3 of the previous 2001 level. While higher income levels have relatively greater opportunities to compensate for lower youth employment opportunities through internships and similar situations, this path is not as available to all income levels.
Costs of Living
Since the 1980s, California has failed to produce sufficient new housing to keep up with the state’s population growth, a shortfall that accelerated beginning in the year prior to the recent recession. Cumulative new housing under permit has failed to keep up with the required cumulative increase in new units, as taken from the Department of Housing & Community Development’s state housing plans. Not even taking into account the previous deficit accumulated during the 1990s, new housing construction from 2000 to 2016 fell short of meeting supply needs by an estimated 1.4 million units.
As prices have risen in response to supply constraints, 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 issue, rising costs increasingly represent a barrier, by otherwise absorbing available household income, to movement through the middle income ranks.
Californians have also seen rapid escalation in utility costs, the other cost component related to housing used in the cost burden calculations. Between 2010 and 2016, US Energy Information Administration data indicates the average California utility bill rose $150 a year, while dropping $5 in the rest of the US. The average, however, does not apply across all of California. While the higher income coastal regions generally benefit from the state’s mild climate through low utility bills, the lower income interior regions with more variable weather rely on electricity usage well above the state average, with estimated average household consumption as much as 81% higher in the interior regions than in the lowest consumption coastal region.
Other basic costs of living have risen as well, often in response to the same rent and energy cost increases faced by employers, along with other higher California operating costs due to taxes and regulations. The cost of food, specifically prepared food, has grown more rapidly that the general rate of cost increases in California. Food prepared at home, however, shows much slower upward cost pressure, with two deflationary periods in 2009-10 and 2016.