The middle class decline, at times, seems to be more anecdotal then real. It may be human nature that if two or more friends or neighbors lose a job?or if you lose yours?that we exaggerate the cause into something more dramatic. It could be a classic case of proclaiming that ?the sky is falling? based mainly on events taking place very close to our own lives.
Or maybe it?s more real than we even care to admit. If so, the implications are far reaching. It could change life as it?s been known for at least the past 100 years.
A few years ago the implication of some sort of structural middle class decline was seen mostly as a doomsday scenario. More recently however, the evidence is piling up that the decline is in fact quite real
In The Middle Class Is Worse Off Than You Think (Yahoo! Finance, November 5, 2012) Michael Greenstone paints a picture that the decline is at least as bad as some of us think. He maintains that middle class wages, thought to have stagnated since the early 1970?s, have actually declined substantially.
According to Greenstone, a lot of men have either left the workforce or are working part-time, and if you add them back to the labor force, real middle class wages have declined on the order of 20%. That?s a number too large to ignore.
I think that Greenstone?s claim has merit. Nearly every month since the Great Recession began, we?ve been hearing that the unemployment figure has been skewed because of a decline in the number of people looking for work.
Structural under-employment – the root cause of the middle class decline
Job losses aren?t unusual; they happen with each recession. What?s different this time around is that people are losing jobs and not being able to replace them.
More specifically, people are losing full-time, benefited jobs that pay living wages, and left to work in part-time, contract, temporary or seasonal jobs. Many are also moving into some form of self-employment. Not the kind of self-employment that life-long dreams are made of mind you, but rather something designed to keep some money flowing in.
Some people are working in a combination of arrangements that might include a mix of self-employment with part-time or contract work. A close friend of mine has a business and a part-time job. Another is supporting his family with three part-time jobs, the combination of which doesn?t come close to his former position in Corporate America. Both men are college educated!
These situations have become fairly common. The days of thousands of factories or IT companies soaking up millions of unemployed workers in an economic recovery no longer exists. Employers can survive and even grow with fewer employees. Technology is making it possible.
The unemployment number may be gradually improving, but it doesn?t tell the real story. The under-employment number may be a much more accurate reading for the 21st Century. That number currently stands at 14.7%. That?s the official number that includes people working part-time who?d like to work full time. And if I had to guess, I?d say it?s probably an optimistic number at that.
Dealing with the new reality
If the middle class decline is real then every financial aspect of life is likely to change.
Jobs. Tens of millions of people continue to hold full-time, living wage jobs with full benefits, but most are at least vaguely aware that an equivalent replacement position will be somewhere between difficult and impossible to find. A good job therefore should not be taken for granted. It should be seen as a as an opportunity to improve your financial situation. Be better at your job than you?ve ever been and get what ever training you need to increase your employment value.
Self-employment. For many people, even those with well established careers, self-employment is fast becoming the preferred route following a job loss. If you have a job, start investigating potential business ventures. When you find one that will work for you, start it as a side business. Not only will that give you an established business in the event you lose your job, but it will also be an additional income source if you don?t. In the unstable employment picture we?re in, having multiple income sources can be the best financial security.
Savings. After the Great Depression no one had to tell Americans to save money. They did it automatically because they knew their survival rested on a well stocked bank account. What?s old is new, and saving is back to being the survival strategy that it had been for thousands of years. No matter how well you?re doing right now, make sure you?re saving for a rainy day. That day may be closer than ever.
Debt. The post World War II economy was the foundation of the debt explosion that accompanied it. The decades after the war saw steady economic growth along with reliable employment. Now that the employment situation is far less dependable, we need to be more reluctant to take on debt. Any debt you do take on should be something you?ll be able to afford to pay at a much lower income level. Better yet, pay cash.
Housing. There are two parts to the housing equation. The first is that you shouldn?t assume that the income you?re earning now will continue for the length of your mortgage. That should make a strong argument in favor of buying less house than you can afford. The second part is mobility. If you lose your current job, will you be able to replace the income locally, or will an out of area move be needed? If a move will be required, you may want to consider buying an even less expensive home, or perhaps renting instead.
The prospect of a prolonged period of unemployment, or of a semi-permanent under-employment changes the rules for the middle class. We could take the optimists view, and believe that the middle class decline is only temporary and better days are coming. Or we can look at the reality of what?s happening all around us.
Just understand that reality has a nasty way of winning, and adjust your employment and financial strategies accordingly.
Do you see signs that the middle class decline is really happening, either in economic statistics or in the people around you? Or do you think it?s overblown?