Middle Class Crisis

Gary Shilling

The recession and lingering unemployment woes have unveiled the barbell nature of the labor market. Years ago, when it became clear to us that middle income jobs were disappearing fast, we characterized the eventual outcome by two people: the high-paid business traveler and the bellman carrying his bags—with virtually no one in between. Upward income mobility is essential to the American Dream, and what’s being eliminated is the auto worker in Detroit who bridged the gap between his southern sharecropper father and his kids who moved on to the professions.

Earlier, rapid economic growth and financial and housing euphoria papered over this reality, But now, on top of permanent job losses in the aftermath of the financial and housing bubble collapse, American business continues the decade-long cost-cutting needed to complete domestically and globally. Many middle income, middle skilled staffers are nice to have but unessential. They’re gone in areas as diverse as manufacturing, retail trade, networking broadcasting, law offices, and even state governments.

At the same time, monthly job openings have risen 863,000 since their July 2009 low point, but new hires have gained only 71,000. Why this gap? Many employers are waiting for just the right people and can be choosy with so many applicants. Our recent ad on Monster.com for an Associate Economist got 223 resumes.

More important, many of the unemployed lack the required skills and backgrounds. They may have soft people skills but lack the math and dedication to operate a computer-controlled machine on the factory floor—if they’re even willing to work there. Many prefer unemployment benefits that extend 99 weeks over food service and other jobs that pay less to start. Others refuse to accept reality and take any position that pays less than their previous peak. Some can’t sell their underwater houses and move to where jobs are available.

More education is normally proposed to restore the middle class, and the statistics are impressive. In September, the unemployment rate for those over 25 with bachelor’s degrees what 4.4%, but 10.0% for high school graduates with no college. And the former make 64% more than the latter.

But college costs continue to leap. This year, tuition at public institutions is up 7.9% to $7,605 and 150% higher than in 1990, while private schools hiked their tuition 4.5% on average to $27,293 this year. Total costs including room and board average $16,140 at public and $36,993 at private schools. A July poll found 64% of Americans regard college education as a good investment, down from 79% a year earlier.

Those polled have a point. Years ago, the brighter high schoolers were considered college material, but not the rest. Now they all are even if they need extensive remedial studies before starting classes. At my alma mater, Amherst College, the departing president, Tony Marx, deliberately reduced the admission standards for subpar minority applicants.

The dumbing down of American education is nothing new. There are institutions to match any mental ability, as long as the government or someone else will pay for them. For-profit schools that rely heavily on government student loans have been so discredited that Congress wants to see their job placement records, not just their graduation rates. Business leaders complain about the deficiency of many college graduates in basic English and math, and have established remedial programs for new hires.

So it’s not surprising that the income gap between college and high school graduates stopped widening in 2001 after rising sharply for two decades. A college degree is no longer the hallmark of superior ability so recruiters concentrate on the better schools. What students learn in them is not the issue. They are the screeners since, by and large, the better students attend the better institutions.

Education started as training of the mind but now, except for career academics and a few others, is focuses on job preparation. So colleges should look to where the jobs are with more emphasis on math and science, even to the detriment of the popular economics major. Ugh!! And won’t many be better off learning a skilled trade rather than facing bleak job prospects and lifetime student loan repayments after graduating from lesser institutions? Think about what skilled electricians earn.

The story goes that a homeowner calls in a plumber to unclog a toilet. He’s shocked to pay $150 for a half hour of work, and says, “You charge more than the $250 per hour I make as a lawyer.” The plumber replies, ”Yeah, $250 an hour is about what I made when I  was a lawyer.” Who’s in the middle class?

Gary Shilling is President of A. Gary Shilling & Co., Inc. and publisher of INSIGHT.
Copyright 2010, author retains ownership. All Rights Reserved.

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