Businessweek Archives

What Happened To The American Dream?

Cover Story


When Troy Marshall finished high school four years ago, he saw no point in trying to follow in the footsteps of his father, a lineman at a Cleveland electric utility. After all, such well-paid union work has become scarce in the past decade. Marshall worked as a travel agent before deciding, at age 22, that sales might be his ticket to the middle class.

With that move, Marshall, like much of his generation, has begun a desperately long climb toward the $40,000-a-year lifestyle of his 44-year-old father. By day, Troy sells office supplies to small companies. By night, he cares for Cory, 3, and Cameron, 2, while his wife, Linda, 23, fills orders at a Cleveland Taco Bell. Together, the couple makes about $20,000 a year--44% less, adjusted for inflation, than Troy's father alone earned at the same age. The elder Marshall owned a home by the age of 21, and his wife didn't work. The younger Marshalls, by comparison, lived with Troy's grandmother until recently and have no savings, much less the $10,000 downpayment for a modest house in suburban Cleveland. "My wife's parents keep telling us they had to struggle when they started out," says Troy. "They tell us things will get better. My goal is to catch up to the level of affluence my parents have. But it definitely won't happen overnight."

It may not happen at all. Since 1973, America's basic engine of prosperity--productivity, or output per worker--has grown at one-third the rate of the previous 25 years. When productivity lags, employers struggle to keep their costs in line, and in doing so hold down pay. This has happened especially in the part of the economy that has created most of America's new jobs over the past two decades--the service industries. In manufacturing, meanwhile, the traditional high-wage fortress of America, foreign competition erased millions of jobs in the 1980s, and employers clamped down on pay for the ones they kept. Older workers have been somewhat insulated, since their incomes reached comfortable levels before the malaise set in, or were high enough to let them borrow extravagantly. But the bucks have stopped at the group known as the "baby bust" generation--some 75 million people aged 10 to 30.

Obviously, not everyone in this group is suffering: doctors, programmers, even a few investment bankers, continue to beat the averages. But the averages look just plain bad. Measured in inflation-adjusted dollars, the median income of families headed by someone under 30 is now 13% lower than such families earned in 1973, according to an analysis of Census Bureau statistics by Northeastern University's Center for Labor Market Studies. The best-off segment of this group, the 14% of families headed by a college grad, would show a slight loss in real income, not a 16% gain, were it not for working wives. And from there on down, the news is devastating. The real incomes of under-30 families headed by high school graduates have fallen 16%. For dropouts the decline has been a dizzying one-third, for blacks, the same, and for whites, 5%.

LOST OPPORTUNITIES. "Young families are in an economic free-fall despite the longest boom since World War II," declares Clifford M. Johnson, director of family support at the Children's Defense Fund in Washington. In fact, says Frank Levy, an economics professor at the University of Maryland, the baby busters may never match their parents' living standards. And that, says Jeffrey G. Williamson, an economic historian at Harvard University, would make them the first U. S. generation ever not to do so, since the Great Depression didn't affect an entire generation.

With more than 30 years of earnings still ahead for these people, it's too early to write them off. After the recession, the labor shortages of the 1980s may reappear, forcing pay up. And the share of young families headed by college grads will increase, to 22%, once all the baby busters finish school. Still, even if the twentysomething generation ultimately does as well as its parents, it will do so at a much later age, predicts Andrew Sum, who heads the Northeastern labor center. The lag will be measured in opportunities lost: a longer wait for a house, more parents who must work instead of care for their children, and a widening gap between rich and poor.

The fallout will touch more than just the young. Experts have long predicted that the baby bust's smaller numbers would give them better opportunities when they joined the work force than the overcrowded baby boom enjoyed. If the opposite continues to happen, generational conflict may occur. "Asking young people to lower their expectations is like telling someone to change the color of their eyes," says Douglas Coupland, 29, author of Generation X, a new novel that chronicles the cynicism of his age group. Champions of children already argue that a disproportionately small share of federal spending goes to the young (page 85).

Indeed, if busters must struggle to support their families, social programs may grow faster than the generation's thinner ranks suggest they should. Some busters may end up as depressed as their incomes, spawning a higher incidence of psychological and medical problems. Hardest hit may be children, whose poverty rate is up a third since 1973. "You're more likely to have chronic health problems if you grow up poor," says Marilyn Moon, health care expert at the Urban Institute. "And children with young parents tend to be poorest, " she adds.

Beyond all this, every generation will be hurt if busters put fewer dollars into circulation. For instance, homeownership among the youngest members of the baby boom--those aged 30 to 34--fell by more than seven points, to 54%, from 1980 to 1990. If busters enter their 30s and 40s with reduced real incomes, they'll buy less, too: fewer houses, cars, and luxury goods of every variety.

That would end what for most Americans has been 50 years of pretty good times. The generation that started work after World War II was "the lucky one," Levy says, since it reaped the benefits of fat productivity gains--3% a year--in the 1950s and 1960s. Real wages rose so fast that male breadwinners could buy 30% more than their predecessors had a decade before. Even blue-collar workers could afford bigger houses, second cars, and college for their kids.

That generation has surpassed in income gains and net wealth every generation that preceded it--and, so far, all that have come after. In fact, it may represent the high point for U. S. living standards, considering that baby-boom families may surpass it only by having two wage earners. Because more than 75% of new jobs are in services, where productivity has barely budged in 30 years, few economists expect a quick return to the robust productivity and real wage growth of the `50s and `60s. That period "was unprecedented and may never be duplicated," says Levy, the co-author of a new book called The Economic Future of American Families.

'McJOBS.' The most obvious cause of the baby busters' plight is that male wage earners are landing worse-paying jobs. On average, young men today earn 17% less, in inflation-adjusted terms, than they did in 1973. For the most part, adding women to the work force hasn't offset the decline. Single mothers, who head 24% of young families, drag down the average income of young families. And in any case, working women make only about 65% of what men do. "Young families are working harder for less pay," says Heidi Hartmann, director of the Institute for Women's Policy Research in Washington. "And that doesn't count the costs of having a second worker, like commuting expenses, work clothes, and child care."

The shakeout in manufacturing has dealt one of the biggest blows. From 1973 to 1989, the proportion of 30- to 62-year-old men in the work force who toiled in factories fell to 25% from 30%. Because the last hired are usually the first fired, the share of men under 30 dropped twice as fast, to 19% from 28%. And pay has fallen for the few factory jobs that open up. Union concessions played a part, starting a decade ago. For instance, the rapid spread of two-tier wage scales, which pay new employees at a lower rate for the same job, has hurt young workers most. Beyond that, as companies such as American Telephone & Telegraph Co. and the Big Three auto companies have cut hundreds of thousands of hourly jobs, much of the remaining work has migrated toward smaller, nonunion shops that pay less and subcontract for the large companies. Overall, young men in manufacturing today earn 8% less in real terms than their counterparts did in 1973.

Faced with less opportunity in factories, the Troy Marshalls of the country have moved into industries that traditionally have hired women: services and retail sales. But these jobs pay 15% to 33% less than men under 30 make in factories. And they pay even less than they used to, adjusted for inflation.

This also reflects subcontracting and two-tier pay scales. But another factor is a rapid increase in the number of part-time and temporary jobs in retail trade and services. These pay 40% less per hour, on average, than full-time work. And the number of them has jumped nearly 20% since 1973, to a healthy--or unhealthy, depending on your view--25% of the total. Until recently, moreover, Congress hasn't done any favors for minimum-wage earners, 80% of whom work in service jobs. Although the minimum wage was recently boost-ed to $4.25 an hour,it languished at $3.35for nearly 10 years. There's a debate over whether a higher minimum prompts employers to eliminate low-wage jobs--and is counterproductive. But there's no argument that in real terms, the current floor is 20% below 1979's. The bottom line is that young men in service jobs earn 11% less in real terms than 20 years ago. And retail sales jobs pay 23% less.

The people who end up in these "McJobs," as Coupland calls them, also wait longer to land full-time positions. In 1973, a majority of high school dropouts had found steady work by age 22, according to Census Bureau data. Today, it takes until about age 26. While they're looking, young men go through more and longer unemployment spells than their counterparts 20 years ago. In any given year, 1 in 10 males aged 18 to 29 earns nothing--up 40% since 1973. Many are thus stuck at home until well into their twenties.

SPORADIC WORK. A case in point is Curtis L. Smith Jr., 24, an 11th-grade dropout from Flint, Mich. He grew up planning to be a unionized auto worker like his father, mother, and grandfather before him. But as the industry shrank, the car companies stopped hiring, even in flush times. So Smith gave up his hopes of an assembly-line future. Instead, he has worked as a fast-food cook, a dishwasher, and in hotel maintenance. Two years ago, he signed on with a temporary agency that does contract work for nonunion auto-parts makers. The last job he had as a temp, stamping parts for a small metal-working company, paid $4.25 an hour and lasted a few months. After that, he gave up on temporary work and became an asbestos remover. Because that's hazardous, it pays $9.26 an hour. But the work is sporadic: Smith works a maximum 20 hours a week, and some weeks hardly at all.

On an income of some $9,000 a year, Smith can't support his girlfriend of five years, Lawanda Walker, and their two children, LaQuan, 4, and Brandy, 2. So he lives at home, while Walker and the kids collect welfare and live with her mother a mile away. Smith dreams of getting his own place but feels that the risk is just too great right now. He wonders whether he will ever match his parents' lifestyle. "More people ain't coming to that level," he says. "It worries me, because I have two kids myself."

In fact, the proportion of children living in poor households has jumped more than five points since 1973, to nearly 20%, vs. the nation's 13% overall poverty rate. This translates into nearly 13 million poor kids under 18, whose growing ranks have halted progress on improving child health. One barometer, the U. S. infant-mortality rate, dropped dramatically in every decade from the 1940s through the 1970s. But in the 1980s, it barely budged. The U. S. is now in 19th place in the world on this score, behind countries such as Singapore, Spain, and the former East Germany. The U. S. is No. 17 in the share of 1-year-olds who are immunized against polio and No. 28 in children who are born at the proper weight.

DOUBLE WHAMMY. Pick any of these problems, and under-30 minorities are the worst off. In part, this reflects the higher share of young black families headed by single mothers--58%, vs. 16% for whites. In part, it's because both blacks and Hispanics are less educated than whites and because they still face not-so-subtle job-market discrimination. In fact, the double whammy of more single mothers and lower male earnings has hit young black families as hard as the Depression hit nearly everyone in the 1930s. Their real median income is down an incredible 33% since 1973, to $12,000 a year, according to Northeastern University's figures. Incomes of young Hispanic families, who have fewer single mothers, are down 13%.

Stanley and Olivia Glass are among the more fortunate young black couples. Stanley, 23, has had his share of modest jobs since he began working at 14: busboy, janitor, delivery-truck driver, and cook--the $9,500-a-year job he currently holds with the Atlanta public schools. He is taking night classes at a community college, hoping to improve his earning power. And Olivia, 22, earns $13,000 a year as a nursing aide.

But even on nearly $23,000, the family feels pinched. With two kids, Crystal, 2, and newborn Stanley Jr., the Glasses rarely eat out and don't take vacations. Instead, they concentrate on the monthly bills: $375 to rent a two-bedroom apartment, $193 for car payments, $182 for health insurance co-payments, $232 for child care. A house of their own is a distant dream, and Olivia, whose father drove a city bus, longingly recalls life with her parents, who owned a ranch-style home, ate out often, and vacationed every year. "We weren't rich, but we weren't poor," she says. "We lived comfortably." By contrast, says Stanley, "things are very hard" for his family. As baby busters of all races fall behind, two mainstays of middle-class life--homeownership and retirement security--are increasingly elusive. In the 1980s, rising prices and high real interest rates squeezed nearly everyone who didn't already own a home. But because busters came into the market later and earn less, more of them were priced out of the market. Recent price declines may help, but homeownership among households headed by people under 25 dropped from 23% in 1973 to under 18% last year, according to a recent study by Harvard University's Joint Center for Housing Studies. Among 25- to 29-year-olds, homeownership has fallen from 44% to 35%. Renting isn't a solution. With incomes down and rents up, rent as a share of the median income of young Americans has jumped by 50% since the early 1970s, according to the Harvard study. Today, under-25 households fork out 36% of their gross income on rent.

LESS PAIN. When busters start to contemplate old age, they fear that "the worst is yet to come," says Kathryn A. Lowell, 26, a congressional aide in Washington. Service industries and nonunion companies typically offer fewer pension plans than the stalwarts of Industrial America. As the best factory jobs have disappeared, the share of men under 35 enrolled in company-financed pension plans has dropped from 46% in 1979 to 37% in 1988, according to the Social Security Administration. Adds Lowell: "When we get older, and the boomers have obliterated the Social Security funds, that's when we'll feel the real effect" of these trends.

The best protection from this may be a college degree, though, surprisingly, college-educated young men earn 2% less, in real terms, than in 1973. Working wives have offset the drop, accounting for the fat 16% income gain of such couples, adjusted for inflation.

The Hunters are a good example. Letia, 28, is a salesperson for Bell & Howell Co. Her husband, Craig, who just turned 30, works as an accountant at Dataquest Inc., a high-tech market research firm in San Jose, Calif. The couple, who both have BAs from California State University at Stanislaus, will pull in about $67,000 in 1991. Married just a year, the Hunters don't plan children for another two or three. That's why they could swing the $235,000, three-bedroom bungalow they bought last December near downtown San Jose.

Still, the Hunters are behind in relative terms. "My parents were a single-income family with a new home, savings, and vacations," says Craig. He and Letia forgo savings and vacations to pay their mortgage. "We have two incomes and a 40-year-old home, and we're making it. But not as well as my parents did on one income," Craig adds.

The recession has made things worse for busters of all educational levels. The economy shed 1.45 million jobs in the 12 months ending in March, and 16- to 24-year-olds accounted for nearly 65% of the decline, according to Northeastern University's Andrew Sum. Since this group constitutes only 17% of all workers, it has suffered roughly four times the pain of other age groups.

As usual, blacks and dropouts have been hardest hit. The employment-to-population ratio of 16- to 24-year-old dropouts fell by 2.7 percentage points over the past year, vs. a 1-point decline for people 25 and over, says Sum. The ratio for young blacks fell by five points. "Young blacks and dropouts made important gains in the last half of the 1980s, primarily because of labor shortages," says Sum. "Now, they've lost it all because of the recession."

The longer-term outlook for young Americans may not be entirely bleak. One potential bright spot is housing. Some experts say the big price jumps are over for a while, which eventually should let more busters buy homes. Then, too, the current pay premium for college degrees is a sharp reversal from the 1960s, when a glut of educated employees drove salaries down. Some labor economists believe the trend may flip-flop again. Until the recession arrived, Sum notes, the real incomes of black men and dropouts rose, even though their hourly pay lagged inflation, since more hours of work were available.

Some analysts expect labor shortages to return after the recession and to last through much of the 1990s. If this happens, pay prospects may improve again for all busters, and especially for the 60% of young workers who don't at least start college. And, seeing the premium a degree commands, busters may stay in school longer, further worsening any shortage of less-skilled workers. "The education gap--between workers with college degrees and those without--is unusually large now," says Marvin H. Kosters, an economist at the American Enterprise Institute. "The question is how much impact the countertrends will have" in closingthe gap.

Still, many economists argue that productivity holds the key to future earnings. And here, the prognosis may not be good. In his book, Levy projects incomes for men who were 30 in 1986 against earnings of their fathers, who he assumed were 55 that year. Levy chose two scenarios, both involving unemployment of 5% and no trade deficit by 1992.

In the optimistic case, U. S. productivity grows at the historic norm of 1.9% a year. By 2006, a high school graduate would earn about $30,000 a year in 1987 dollars--about what his similarly educated father made in 1986. But if productivity grows at 1.25% a year, as it did in the 1980s, the son's income will fall 20% below his father's in his peak earning years. Because of labor shortages, "the baby bust might do better than other cohorts in the next 5 or 10 years," says Levy. "But that will be more than offset if productivity grows slowly."

Unfortunately, even brisk productivity growth no longer guarantees rising wages. Factory efficiency rose 40% in the `80s. But part of the gain came from the very trends that hurt young workers, such as part-time and subcontracted work. These may not diminish. A recent General Accounting Office report concludes that such "nontraditional employment should maintain or expand its share of the work force in the 1990s."

If the earnings of men don't rise, there is only one way young families will do better: Wives must work more. That may happen. But there's a limit. Already, couples under 30 have 1.79 earners on average, up from 1.67 in 1973, according to Sum. Young families put in 3,340 hours of work a year. Since a full-time job usually involves about 2,000 annual hours of work, these families could, in theory, work 20% more. However, women still might not make enough to overcome the decline in real incomes if the wages of men slide further. "As wives get older, they should earn more,"says Sum. "The question is whether this will be enough to make up the 13% drop in young families' incomes."It is no doubt premature to condemn the baby-bust generation to permanently lower living standards. But it seems increasingly likely that America's young people are going to mature in a less affluent world. And that spells trouble for all Americans, young and old alike.Aaron Bernstein in New York, with David Woodruff in Detroit, Barbara Buell in San Jose, Nancy Peacock in Cleveland, and Karen Thurston in Atlanta

Best LBO Ever
blog comments powered by Disqus