Can the middle-class revival continue?
Vibrant economy has lifted wages, but analysts expect a new decline
For years, Andrew Gehrt, of Greenville, South Carolina, bounced among several low- and mid-wage jobs in food services, retail and sales until he was laid off from a position as a sales rep for a water filter company.
❚ But after being unemployed for a year, the 29-year-old landed a job in September as business development manager for a tech company, at a salary of about $60,000.
❚ “I felt stuck,” he says. Now, “I have a very hopeful outlook for the next five to eight years.”
In his State of the Union address last week, President Donald Trump vowed the country can make its middle class “bigger and more prosperous than ever before.”
Despite economists’ longstanding laments of a shrinking, “hollowedout” middle class, Trump’s pledge didn’t seem so quixotic, at least judging by recent history. The vibrant economy, juiced further by the Trumpled tax cuts and federal spending increases, has lifted employment and wages for workers at all levels, including the middle class. The manufacturing, construction and oil industries – traditional middle-class bastions – have enjoyed revivals the past couple of years. And the replacement of many middle-wage workers with technology has slowed.
Yet analysts say America’s middle class will soon resume its long-term decline, largely as a result of automation and the continued offshoring of factory jobs, unless policymakers take dramatic steps to alter that course.
“The trend, left to its own devices, is going to get worse,” says Richard Reeves, director of the Future of the Middle Class Initiative at the Brookings Institution. “A growing, prosperous, confident middle class is no longer going to happen automatically.”
Economist Adam Kamins of Moody’s Analytics agrees, adding, “I think it’s a major concern for the U.S. economy.”
Mid-wage jobs, defined as paying $14.18 to $23.59 an hour, are expected to grow by 4.45 percent from 2018 to 2023, compared to about 6.26 percent growth for both low- and high-wage jobs, according to a CareerBuilder study. Fifty-eight percent of jobs lost during that period will be mid-wage, the report says.
Recent advances for middle class
The recent trend has been positive. Median U.S. household income – which includes paychecks as well as Social Security, public assistance and investment income – rose 1.8 percent to an all-time high of $61,372 in 2017, according to the most recent Census Bureau figures. That followed gains of 5.2 percent in 2015 and 3.2 percent in 2016. Yet after adjusting for inflation, that income roughly equaled the level in 2007, before the start of the Great Recession.
“It’s making up for lost ground, but it doesn’t really get people ahead,” says Elise Gould, senior economist at the left-leaning Economic Policy Institute.
From 2010 to 2018, inflation-adjusted pay rose 1.5 percent for the middle
quintile of workers based on earnings, compared with 6.5 percent for the bottom quintile and 2.9 percent for the top, according to figures from Brookings and the Labor Department. That data define mid-wage slightly differently than does CareerBuilder.
Top earners, who overwhelmingly have four-year college degrees, are benefiting from a job market that places a growing premium on higher skills, Reeves says. And low-paid workers have advanced as a result of state minimum wage increases and social safety net programs such as welfare and food stamps, say Reeves and Jay Shambaugh, director of Brookings’ Hamilton Project.
Middle-wage workers are, well, caught in the middle. Their struggles, Shambaugh says, have been compounded by well-known forces: the plunge in manufacturing employment as a result of both offshoring and automation; the sharp decline of unions that used to ensure higher wages for factory and other workers; stagnating teacher pay; and the meager growth of state and local government jobs amid budget cuts and depleted pension funds.
Here’s the good news: The fortunes of the middle class have brightened recently amid a strong economy and labor market. Employers added an average 223,000 jobs a month last year, up from 179,000 in 2017. And unemployment sank to a near 50-year low of 3.7 percent before ticking up recently, leaving businesses struggling to find qualified workers. “We’ve finally got to the point where firms are being forced to bid up for workers, so you’re seeing a little bit more for the middle class,” Shambaugh says. Average U.S. wages climbed 3.3 percent in 2018 after being stuck at 2.5 percent to 2.7 percent for several years.
Trump deserves some credit. His tax cuts and spending increases boosted economic growth by seven-tenths of a percentage point last year, to 3 percent, says economist Greg Daco of Oxford Economics. And Trump slashed hundreds of regulations on businesses, further bolstering corporate confidence along with investment and hiring, says Wells Fargo economist Mark Vitner. While the initiatives also prompted longer-term concerns – such as swelling the budget deficit and dismantling consumer protections – they’ve sparked the labor market in the short term.
Industries that employ middleclass workers in particular are benefiting. Manufacturers have added about 450,000 jobs since Trump took office, the largest two-year total in decades, amid an improving global economy and a rejuvenated oil industry. The number of factory jobs “reshored,” or shifted to the U.S. from overseas, by both American and foreign companies, hit a record 170,000 in 2017 and notched a still-strong 131,000 last year, according to the Reshoring Initiative, which tracks the data. Harry Moser, who heads the group, largely credits Trump’s pro-business policies.
The oil and natural gas drilling sector itself added 11,000 jobs in 2018 while boosting pay nearly 4 percent as a result of a surge in oil prices for most of the year. And construction has added 1.8 million jobs since the housing recovery began in late 2011, with average pay increasing 3.6 percent last year.
Yet Kamins notes the near-term prospects for such middle-class jobs are mixed. Trump’s trade war with China is likely to curtail factory employment gains this year. And while the housing market is forecast to slow this year as a result of higher home prices and borrowing costs, mortgage rates have moderated since the Federal Reserve recently signaled it may not raise its benchmark interest rate in 2019.
Dimmer prospects
The longer-term outlook for the middle class is dimmer. Manufacturers are likely to continue offshoring jobs in large numbers, with reshoring simply limiting the decline, Kamins says. And automation could wipe out up to 73 million jobs by 2030, according to a 2017 McKinsey report.
New policies can change the dynamic, Shambaugh and Reeves say, such as expanding the earned income tax credit to more filers and reversing state funding cuts that have hurt public colleges. But such reforms need to happen soon, Reeves says. “A robust, resilient and happy middle class is one of the things that makes America America,” he says. “If the middle class loses confidence ... it becomes a selffulfilling prophecy.”
“We’ve finally got to the point where firms are being forced to bid up for workers, so you’re seeing a little bit more for the middle class.” Jay Shambaugh Brookings’ Hamilton Project director