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Why the Hollowing Out of the Middle Class Matters

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david madlandFor the past several decades, the idea that high levels of inequality were good for the economy dominated political and economic thought. Politicians believed the trickle-down theory that enabling “job creators” to get richer would help us all, and economists provided cover for this line of thinking because they thought there was a tradeoff between growth and equity.

But, as inequality has risen to extreme levels in the United States, the foundations of the economy have weakened, and America is now experiencing the kinds of problems that plague less-developed countries. The United States now must confront high levels of societal distrust that make it hard to do business, governmental favors for privileged elites that distort the economy, and fewer opportunities for children of the middle class and the poor to get ahead—wasting vast quantities of human potential.

Fortunately, a new class of economists and policymakers are now challenging the old, flawed, ideas about inequality. Academics have begun to rethink their views about the decline of the middle class, and progressive politicians are finally starting to openly contest the logic underlying supply-side after years of failing to do so. There is a growing realization that a strong middle class is not merely the result of a strong economy—as was previously thought—but rather a source of America’s economic growth.

The new direction on economic policymaking cannot arrive soon enough, because our economy continues to suffer deeply from a financial crash caused in large part by high levels of inequality. Rebuilding the middle class is critical, as a strong middle class performs four vital functions in the US economy.

First, a strong middle class helps society run relatively smoothly, with higher levels of trust among its citizens. People need to be able to trust one another enough to do business with one another. When there is little trust, the cost of doing business shoots up—or, as economists put it, transaction costs increase.

Second, a strong middle class leads to better governance. A thriving economy depends on a well-functioning government that provides critical services, such as roads and schools, with relatively little corruption. As the middle class has weakened and inequality has risen, the wealthy have gained excessive political power and the middle class has become less civic-minded, leading to a host of governmental dysfunctions.

Third, the middle class is a source of stable consumer demand, which enables businesses to invest in new products and hire additional workers—thereby fueling growth. As consumer demand in the years prior to the Great Recession was based heavily on middle-class debt, the economy was unstable. And now that the middle class is so weak—burdened by stagnant incomes, high debt levels, and underwater mortgages—it can’t consume enough to keep the American economy going.

Finally, a strong middle class creates more human capital. In the modern economy, a skilled, healthy, and entrepreneurial workforce is a driver of economic growth—at least as much as the physical capital of factories and machines. As inequality has risen and the middle class has weakened, America has not developed the full human potential of its middle and working classes.

To have strong and sustainable growth, the economy needs to work for everyone. That’s why we need to focus policy on rebuilding our economy from the middle out.


About the Author: The author’s name is David Madland. David Madland is the author of Hollowed Out: Why the Economy Doesn’t Work Without a Strong Middle Class and the Managing Director for Economic Policy at the Center for American Progress. Follow Madland on Twitter: @DavidMadland


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Mixed News for Older Workers

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Older workers are increasingly relying on the labor market—rather than savings—to salvage their retirement prospects. The collapse of the financial sector wiped out an inflation-adjusted $2.8 trillion from 401(k)s and individual retirement accounts, or IRA, between September 2007 and December 2008. But even before that, workers were not saving enough to achieve a secure retirement. Millions of elderly workers have therefore been forced to postpone their retirement plans and depend upon work to provide income in their later years.

But the labor market is a very mixed bag for older workers. Those who currently have a job have been more effective than their younger counterparts at holding onto their positions in the current downturn; the real value of older workers’ median weekly earnings has grown more during the current recession than that of younger workers; and their unemployment rates—despite reaching record highs—are still considerably lower than the national average.

Simon Norwood, a construction worker who hasn't found work in months, poses in a garage apartment belonging to a friend in Little Rock, AK, on August 27, 2009. Workers 55 and older have a higher unemployment rate than anytime since 1948, and those who are unemployed are staying unemployed much longer. SOURCE: AP/Danny Johnston

Yet the news is bleak for older workers without a job. Workers 55 and older have a higher unemployment rate than anytime since 1948, and those who are unemployed are staying unemployed much longer. Given employers’ reluctance to start hiring again, it is likely that older workers will have to continue looking for work for months before finding a job.

Unemployment reaches record levels

Unemployment among older workers has peaked in the current recession. There has been a 134-percent increase in the number of workers over the age of 55 who are looking for work since December 2007, up from 843,000 to 2.0 million last month. In June 2009, the unemployment level of this age demographic peaked at 2.1 million—a number higher than anytime since 1948 when the Bureau of Labor Statistics began tracking that data. And the oldest workers—those over the age of 65—have also seen their unemployment levels rise, up to 447,000 last month from 197,000 in December 2007—a 127 percent increase.

In comparison, prime-aged workers—workers aged 25 to 54—saw their unemployment levels increase by 118 percent over the last 21 months, rising from 4.2 million to 9.1 million in August.

The age-55-and-older unemployment rate climbed to an all-time high in June 2009 of 7.0 percent, 3.9 percentage points higher than at the start of the current recession. This rate inched down to 6.8 percent last month, but that is still extraordinarily high for older workers. Workers 65 and older saw their unemployment rate reach 7.0 percent in July 2009, up 3.7 percentage points since December 2007, and higher than anytime since 1948. Their unemployment rate also inched down in August to 6.8 percent.

Despite the grim unemployment outlook, older workers have lower unemployment rates than younger workers. The unemployment rate for all workers in August was 9.7 percent, nearly 3 percentage points higher than the rates reached by older workers. Prime-aged workers—those aged 25 to 54—had an unemployment rate of 8.7 percent in August, up 4.7 percentage points since December 2007, and nearly 2 percentage points higher than the rates reached by older workers.

Older workers are working longer and in greater numbers

The aging baby boomer generation is reshaping the demographics of the U.S. population, and changing the face of the workforce. People over 55 account for 31 percent of the civilian population today, up from 23 percent in 1948. It is unsurprising then that older workers make up a greater share of the workforce today than any elderly generation of the past. Their employment rate is higher than any time since 1971, and they appear to be holding on to their jobs longer and more effectively than younger workers.

A Pew Research Center nationwide survey released yesterday found that a paycheck was not the only factor compelling older workers to remain in the labor force; respondents also cited psychological and social benefits as the main reasons for their continued employment. Younger workers, on the other hand, were found to be staying in school longer to earn a higher degree or have become discouraged at their job prospects and are dropping out of the labor market.

The inflow and outflow from the labor market in the last 21 months has shifted the composition of the labor force in favor of elderly workers. The number of workers over the age of 55 in the labor force has grown by 2.1 million since December 2007—an increase of 7.6 percent. The number of prime-aged workers in the labor force has declined by 608,000 over that same time period—a decrease of 0.6 percent. Younger workers have seen the sharpest declines, losing 608,000 labor force participants since December 2007—a decrease of 3.1 percent.

Workers 55 and older account for 18.8 percent of the labor force today—up from 17.6 percent at the start of the current economic recession—and higher than anytime since 1948. Their share of the workforce has increased by 7.1 percent over the last 21 months. In comparison, the share of prime-age workers in the workforce has declined 1.1 percent since the start of the Great Recession. Prime-age workers currently account for 67.3 percent of the workforce, down from 68.0 percent 21 months ago. Younger workers aged 16 to 24—whose share of the workforce has declined by 3.6 percent since December 2007—make up 13.9 percent of the workforce, down 0.5 percentage points from December 2007.

Elderly workers have experienced net gains in employment in recent months, especially when compared to younger workers. Workers 55 and older have gained 938,000 jobs since the start of the Great Recession, while workers between the age of 25 and 54 have lost a total of 5.5 million jobs.

Employment rates for older workers have also reached record levels. The employed share of workers over 55 climbed to 38.0 percent in the current recession, most recently in August 2008. This is a high not seen since 1970. The employment rate for this segment of the population was 37.3 percent last month, only marginally lower. The employed share of workers over 65 climbed to a record 16.5 percent in the current recession, most recently in October 2008. This is also a record not seen since 1970. And the employment rate for workers over 65 was 16.1 percent last month—down 0.4 percentage points from the current recession’s peak.

Older workers have also been relatively effective at holding onto their jobs in the current downturn. The employed share of workers over 55 has only declined 0.4 percentage points since December 2007, compared to a decline of 5.5 percentage points for workers between the ages of 16 and 24, and a decline of 4.2 percentage points for workers between the ages of 25 and 54.

Growth in real earnings

Older workers have experienced greater gains in real earnings value than younger workers in the current downturn, providing them with an additional cushion to endure the crisis. The real median weekly earnings for workers 55 and older have increased by 10.3 percent since 2007, and by 5.2 percent since 2008. Workers 65 and older have seen a 23.7 percent increase in real median weekly earnings since 2007, and an 11.2 percent increase since 2008.

In contrast, workers aged 16 to 24 have seen their real weekly earnings decline in real value by 2.8 percent since 2007, and by 0.9 percent since 2008. Real weekly earnings of prime-aged workers have increased by a modest 1.7 percent since 2007, and by 2.5 percent since 2008.

The Great Recession has decimated the retirement savings of older Americans and placed them in a very precarious position. Working later in life has traditionally been the fall back for those with inadequate retirement savings, but the labor market during the Great Recession isn’t all that great, which makes it a more difficult prospect. Older workers with a job may be doing better than their younger counterparts, but older workers without a job face an unprecedented challenge. Real solutions to this retirement crisis will require getting the labor market back on track and addressing the glaring inadequacies of our current retirement system.

See also:

David Madland is Director of the American Work Project at the Center for American Progress and Nayla Kazzi is Research Assistant at the Center for American Progress. For more on this topic, please visit our Economy page.

This article originally appeared in Center for American Progress on September 4, 2009. Re-printed with permission by the author.

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Take Back Labor Day: Week 2 Roundup

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For this week’s installment of our Take Back Labor Day project, we had ten new posts representing the incredible quality and diversity that exists among those who think and write about workplace issues. With a wide variety of topics, including domestic workers, CEO pay, and workplace flexibility, and the representation of powerhouse organizations such as the Center for American Progress, the new Health Care for America Now coalition, and Women Employed, Week 2 was another stellar week.

Kicking off the week, on Monday, September 8, were Dr. David Madland and Karla Walter of the Center for American Progress (CAP) and Mark Harbeke of Winning Workplaces.

Madland and Walter, of the Center for American Progress‘s American Worker Project, point out the abysmal record of the current administration when it comes to having the Department of Labor simply do its job of protecting workers.  What’s the solution (besides voting, of course)?  Passing the Employee Free Choice Act, which the next administration should have the opportunity to do.

Winning Workplaces helps small and midsize organizations create great workplaces, and often it’s Mark Harbeke bringing some of the very best workplace practices and hottest workplace trends to our attention.  This post was no exception, as Mark found three different studies that all make it crystal clear that employers have to engage their employees, if they want them to be productive and satisfied with their work.  If you’re too busy to read the handwriting on the wall, just read Mark on a regular basis at the Winning Workplace blog.

Continuing on Tuesday, September 8, were workplace columnist Bob Rosner and Anne Ladky of Women Employed, respectively tackling the hot topics of CEO pay and paid sick leave.

In a bit of workplace Freakonomics, who figured out that CEO performance has an inverse relationship with their house size? No, it wasn’t Bob Rosner, but he tells us about the study that figured out that the larger the CEO’s house, the more likely that shareholders will pay for the CEO’s poor performance. Pay close attention to Bob — you’ll be seeing a lot more of him soon around these parts!

Anne Ladky of Women Employed provides us a great way to track our progress between this Labor Day and next:  have we passed a federal paid sick leave bill?  If not, we’re not done ensuring fairness in the workplace, while a benefit considered standard by most professionals—paid sick time—is unavailable to millions of lower-paid workers, including 22 million women.

Wednesday, September 10 featured two titans among lawyers who represent workers:  Paul Tobias and Ellen Simon.

Paul Tobias, who can count founding Workplace Fairness and the National Employment Lawyers Association among his myriad of career accomplishments, uses Labor Day to identify a number of necessary changes we need to our employment laws for workers to get a fair shake.  As he remarks, we all hope that the presidential candidates will take note of these needed changes and actually fix them during the next administration.

Ellen Simon, one of the foremost employment and civil rights lawyers in the United States, tells us about a recent surprisingly positive Supreme Court decision (Sprint v. Mendelsohn), which gives us a slight bit of hope that the Court — not especially known for its friendliness to workers — will actually enforce the long-standing rules of evidence, even when to do so might benefit workers.

Thursday, September 11, was a somber day of remembrance for many of us.  Blogger Jason Gooljar looked back to the very origins of the Labor Day holiday, while Chai Feldblum and Katie Corrigan looked to the not-too-distant future of the flexible workplace.

Jason Gooljar, blogger Working Families Party Man, points out what even the most worker-friendly among us might not know about Labor Day: that it was proposed as a September holiday to prevent the celebration of what was considered a much more radical observance:  May Day.  While we may now observe a watered-down holiday, we don’t have to have a watered-down global labor movement, and Jason tells us why that’s important.

Chai Feldblum and Katie Corrigan, who co-direct the Workplace Flexibility 2010 campaign at Georgetown Law, talk about how many workers have extreme difficulty juggling the competing demands of work, family, and community involvement.  Workplace flexibility (including telecommuting, phased retirement, and flexible work arrangements) is a solution which can ultimately bring about more effective business, a stronger workforce, and healthier families — if enough businesses choose to embrace flexibility principles and practices.

Week 2 wrapped up on Friday, September 12, but we didn’t slack off at the end of the week, with Melvina Ford and Jason Rosenbaum tackling two urgent workplace problems:  the lack of sufficient legal protections for domestic workers, and the lack of adequate health care for many, if not most, American workers.

Melvina Ford, Executive Director of the DC Employment Justice Center, identifies a problem hardly confined to the DC metro area:  the exploitation of domestic workers who cook, clean, and take care of children and seniors at home.  She correctly notes that many current laws weren’t written with domestic workers in mind, and either exempt them entirely or do not adequately protect them.  Some recently enacted laws show promise in educating oft-exploited workers about their rights, but we need to do even more to ensure that domestic workers are fairly compensated for their often back-breaking work.

Jason Rosenbaum, writing for the recently formed Health Care for America Now! coalition, makes a relatively obvious but incredibly overlooked connection:  a healthy worker is a better, more productive worker, and sick workers who lack adequate insurance sap productivity.  Yet both businesses and employees face skyrocketing health care costs as a result of insurance company intervention.  Yes, health care is an economic issue — and a vitally important one that we are forced to address in the days ahead.

Whew:  health care, CEO pay, domestic pay, the Supreme Court, the Department of Labor:  you name it, we covered it in week 2, if it’s important in today’s workplace.  And next week continues the fine tradition we’ve established this month:  with at least five guest bloggers continuing the quality posts you’ve seen all month.  Stay tuned!

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Bush Shirks Role as Top Labor Cop

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Every year nearly 6,000 American workers are killed on the job and many more are bilked out of an estimated $19 billion in wages by their employers. Unfortunately, workers do not have the protections they need and deserve because President Bush’s Department of Labor has failed to effectively police low-road employers, and unions—which give workers a voice on the job and help to ensure laws are followed—have been under attack and therefore shrinking in size.

Laws exist to protect workers from unsafe working conditions and employer wage theft. Unions lobbied hard and won comprehensive wage-protection laws passed during the FDR administration and occupational safety laws enacted during the early 1970s. Minimum wage and overtime rules, anti-discrimination laws, and workplace safety standards create a guaranteed floor for all American jobs. They also require the Department of Labor to police American workplaces and penalize scofflaw employers.

However, negligent firms often ignore these rules, and Bush’s Department of Labor has shirked its role as top labor cop. Irresponsible employers know that they will be rarely penalized for workplace abuses, and when they are, penalties will likely be so low they will not hurt the firm’s bottom line. In recent years, wage theft investigators assessed fines on only 6 percent of known lawbreakers. Moreover, in 2006 the average workplace safety penalty for serious violations that “pose a substantial probability of death or serious physical harm” was only $881.

The risk of employer abuse is especially high for workers in traditionally low-wage and potentially dangerous industries. According to recent reports, at least 50 percent of garment, nursing home, and poultry employers are in violation of the basic minimum wage and overtime protections. At least one in ten meatpacking workers are injured on the job every year, but safety inspectors are only able to inspect about 75 of the more than 5,000 meatpacking plants each year.

And it’s not only workers who get cheated. Employers who play by the rules and treat their workers with respect can’t compete with irresponsible firms who cut corners with employee safety and wages.

Although Bush’s Labor Department is leaving workers to fend for themselves, unions can give workers an important voice in standing up to employers who flout the law. Labor unions empower workers to speak out against employer abuses and can defend whistleblowers from employer retaliation. Moreover, as on-the-ground experts, unions can provide important targeting information to worker-protection agencies. Indeed, the workers that are the most abused by their employers are frequently low-wage, non-union labor. These disempowered workers are also the least likely to report workplace abuse.

Unfortunately, these days it is rare for any American worker to be unionized—only 8 percent of the American workforce belongs to a labor union compared to one-third of private-sector workers in the decades after World War II. The reason: Existing laws make joining a union a Herculean task that few are able to undertake. Employers legally can force workers to attend anti-union meetings, including “one-on-one conversations” with supervisors, and often pressure workers to reveal their private preferences for the union. When employers who oppose unionization break the law, penalties are weak and insufficient. Workers are illegally fired in about one-quarter of union organizing campaigns, but they can at best hope to recover their lost wages and get reinstated in their jobs, often after years of legal battles. And if workers prevail against these odds, employers often refuse to negotiate with the union.

An important step toward improving workplace safety and wage standards is to give workers a stronger voice through increased unionization. Congress can reduce the barriers to joining a union by passing the Employee Free Choice Act. The bill would allow an employee to choose to join a union by signing a membership card—a system that works well at the small number of workplaces that choose to permit it—and also promotes good-faith bargaining so that employees can negotiate a first contract. The act does not deny workers their right to vote in a union election, as some conservatives maintain, but rather allows workers to choose between signing a membership card and having an election.

The House of Representatives has already passed this important legislation, and although a majority of senators support it, opposition from a few conservatives has prevented the bill’s passage. The next president must prioritize the protection of workers’ rights both through better enforcement of existing wage theft and worker safety law, and through inducing the Senate to pass the Employee Free Choice Act.

About the Authors: Dr. David Madland is the Director of the American Worker Project at American Progress. He has written academic articles and books as well as op-eds and commentaries on a range of economic issues, including retirement, economic insecurity, health care, campaign finance, taxes, and public opinion. He has a Ph.D. in Government from Georgetown University and received his B.S. from the University of California at Berkeley. Madland’s dissertation was about the political reaction to the decline of the defined benefit retirement system.

Karla Walter is a Policy Analyst with the American Worker Project at American Progress. Karla focuses primarily on the improving the economic security of American workers by increasing workers’ wages and benefits, promoting workplace protections, and advancing workers’ rights at work. Prior to joining American Progress, Karla was a Research Analyst at Good Jobs First, providing support to officials, policy research organizations, and grassroots advocacy groups striving to make state and local economic development subsidies more accountable and effective. Karla earned a master’s degree in Urban Planning and Policy from the University of Illinois at Chicago.

Cross-posted at the Center for American Progress website.

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