When American dreams gather dust

The US still hasn't found a way to extract up to one-third of its workforce from a middle-income trap shaped by poor education and job opportunities.

To walk down parts of Fifth Avenue in New York can be to walk down a street metaphorically paved with gold.

Bergdorf Goodman breathes an air of refinement onto the pavement, Chanel hides itself discretely up a side street, Donald Trump's wealth hovers over the masses from his glittering Towers.

Yet for a staggeringly large number of Americans the streets are taking on a patina of third-world hardship, as they become trapped in low paying, low quality jobs – one third of the workforce by 2020, according a report last year by the left-leaning Economic Policy Institute.

It’s beginning to sound strangely similar to a phenomenom faced by up-and-coming developing nations when they price themselves out of low wage industries but don’t yet have the skilled workforce or capacity to compete in high productivity fields: the middle-income trap.

Economists are threatening China with it, Chile and Malaysia are struggling to escape it and Singapore and Japan are the poster children of a successful transition.

Asia Development Bank economic advisor Jesus Felipe says it’s not possible for the US as a whole to fall backwards into a middle-income trap – it’s simply too rich.

Median household income is around $50,000 and gross national income per capita is only slightly less, so it looks like Americans are doing just fine compared to their middle-income neighbours, defined by the World Bank as those countries with a GNI per capita of $1000-$12,000.

But it’s undeniable that a portion of the population is getting stuck: they don’t have the education to take on highly skilled work, but their wages are still too expensive for the kind of low-paid employment that might tempt manufacturers back to America. Meanwhile they're too poorly paid to take time off to upskill, and tax and health systems take a disproportionate amount of cash from their meagre paychecks.

None of this will send the US so far backwards to put it on par with countries such as China, but will take its toll on American prosperity.

UC-Berkley researchers have found that the bottom 99 per cent of US earners saw their average real income fall 0.4 per cent between 2009 and 2011 (the top 1 per cent of earners saw an 11.2 per cent rise). And labour statistics show 3.8 million Americans were paid the minimum wage of $7.25 or less – about 5.2 per cent of all hourly paid workers – which is a yearly full-time pay check of just over $13,000 before tax. All in all, 16.1 per cent, or almost 50 million people, live in poverty according to Census Bureau data which shows work expenses, federal taxes and medical costs are driving more people under the line.

Local media tales abound of the quarter of all working Americans who were laid off after the financial crisis and have tried everything to get back into the workforce, only to come up against barriers that keep them dependent on government hand outs and food stamps. Furthermore, a ProPublica study of a vocational college in Janesville, Wisconsin indicates just how difficult it is for these people to retrain and move into new fields. Of the 1740 workers laid off from the Janesville General Motors plant who'd retrained, 40 per cent hadn't found paid jobs and for those who had, earnings fell on average by 36 per cent.

All up, the Economic Policy Institute foresees a third of America’s working population as stuck in a salary situation more similar to those of workers in a developing nation than the luminaries of Wall Street.

For the purposes of its report the Institute defines low-earning jobs as those paying a wage at or below the poverty line to support a family of four – $11.06 an hour in 2011. In comparison, minimum wage is $7.25 with President Barack Obama proposing a raise to $9.

The obvious way out of this trap would be to retrain or upskill, but the US education system lags badly behind its OECD peers in terms of performance, a problem laid out in scary detail in the documentary Waiting for Superman (2010) which reveals how the school system in both low and middle class areas is unable to equip students with basic reading and arithmetic skills, while channelling students into educational streams that stonewall their potential.

Moreover, a grim lack of opportunity for the educated is highlighted by the 50 per cent of recent university graduates who are unemployed or underemployed. It spells problems for a country when so many of the smart kids are stuck working in uncertain, unskilled, low wage jobs.

And Rebecca Thiess, author of the Economic Policy Institute's report, says that comparatively, the number of low wage and hence low quality jobs are increasing and the number of highly skilled jobs is stagnating.

However you look at it, the US has a problem. Right now, it's home to five million long-term unemployed, with 7.9 per cent unemployment and 17.1 per cent underemployment. A third of its population is expected by 2020 to be working in in jobs that don’t come close to earning a middle class wage, and in terms of pay are more comparable to workers in developing economies.

The country as a whole may not be at risk of slipping backwards into a middle-income trap, but the most vulnerable sections of its citizenry are. For them, the golden dream of Fifth Avenue luxury is as unattainable as it is for any Malaysian factory worker or Chilean farmer.

Rachel Williamson is a freelance journalist currently based in London. @rwilliamson_