Shifting US Economy Pinches the Middle Class

Growth in the service sector, lagging productivity, and energy shocks key, analysts say

AMERICA'S huge middle class, the envy of the world, faces its most serious, long-term economic squeeze since the Great Depression. Millions of Americans, especially those without higher education, are finding it harder to buy homes, support their families, and send their children to college.

One reason: Many middle-class workers lost high-paying factory jobs in the 1980s and early '90s and were forced into low-wage positions in service industries such as restaurants.

John Burke, a professor of economics at Cleveland State University, says: ``Twenty-five years ago, about 40 percent of the employment in Cleveland was in the manufacturing area. Now it has withered away.''

Economist Gary Burtless of the Brookings Institution paints a similar picture. In a book he edited, ``A Future of Lousy Jobs?'', Mr. Burtless notes: ``Instead of making steel or cars, the typical new worker now flips burgers or sweeps the office floor, producing too little to justify a middle-class wage.''

The social and economic implications of this middle-class pinch could be enormous - and politically explosive. Democrats are listening to the cries of their middle-class constituents, and they say the economic crisis could become a pivotal issue in the 1990s.

``Our economy isn't growing. It's shrinking,'' complains Senate majority leader George Mitchell (D) of Maine.

Last week, the US Census Bureau showed what that can mean. For the first time in 50 years, the bureau reported that the rate of home ownership in the nation is falling.

The decline was small: just 0.2 percent during the 1980s. But the consequences are potentially significant, because home ownership improves family stability, encourages civic responsibility, and increases wealth.

Why is all this happening?

Paul Ryscavage, a senior labor economist with the Census Bureau, says the trend began in the 1970s with the onset of two trends.

First, the median income of US families peaked in 1973 at $34,000 (expressed in 1989 dollars). Since that time, median income has gone mostly sideways, moving up and down slightly from a low of $30,000 in 1981 to about $34,000 in 1989.

The poor performance in recent years was in sharp contrast to the years after World War II (1947-73) when real income doubled from $17,000 to nearly $34,000.

Meanwhile, a second trend has been detected. From 1969 to 1989, according to Census studies, income inequality grew significantly. The rich got richer; almost everyone else got poorer.

Mr. Ryscavage observes: ``It was when total incomes started to stagnate [after 1973] that inequalities started to rise.''

The decline among the middle class wasn't large. In 1969, the middle 60 percent of all Americans earned 53 percent of all the nation's income. By 1989, the middle group's earnings dropped to 49 percent of all income. That seemingly small four-point change, however, masked significant upheavals in the labor market.

Middle-class women poured into the work force during this time; yet even with their additional earnings, many families were unable to keep up.

Meanwhile, men who lacked special skills found that good-paying jobs were drying up.

Professor Burke observes that 30 years ago, it was possible for a high school dropout to get a factory job that provided a nice wage, good fringe benefits, and a healthy pension after 30 years.

``That has gone,'' Burke says. Today, factory managers demand a high school diploma and more.

Experts are groping for causes - and solutions. They point to several:

1. A changing economy. As the US shifts from a manufacturing to a service economy, wages drop. Retail trades, for example, pay just 63 percent as much as factory jobs. One solution: education to help people get better service jobs, such as computer programming.

2. Lagging productivity. Critics blame top management for failing to invest in new, efficient equipment. Without it, wages cannot rise.

3. Working wives. Ironically, working wives have created greater income inequality because wives in the upper income households ($90,000 and above) often hold better-paying jobs, creating even greater inequality between families.

4. International trade. Competition from abroad puts a premium on well-educated Americans, such as engineers and designers, who can match the skills of the Japanese, Germans, and others. But poorly trained US workers are left in the cold.

5. Energy shocks. The American Petroleum Institute estimates that rising energy prices cut growth of the US economy by 1.5 percent a year from 1973 to 1986 and cost the average family of four a total of $65,000.

Burke warns young Americans they must get a good education, or else they ``could be ... permanently relegated to unemployment, part-time work, and welfare.''