The Money in the Middle: Step right up to the roaring 2000s.

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The economy is cruising along. Consumers are plunking down cash and credit on sales counters from coast to coast.

And during the past six years, 4.4 percent of American households have transitioned up and out of middle-class status and into the top stratas of income in the United States, according to Gregory Acs, a senior research associate at the Urban Institute in Washington, D.C.

Today, more than 20 percent of households earn more than $75,000, versus 16 percent in 1992. Who's been taking their place?

Thirty years ago, more than half of all middle-class households were headed by non-Hispanic whites. But as the population as a whole has become more diverse, so, too, has the middle class. Today, the percentage of middle-income households headed by non-Hispanic whites has dropped to 49 percent. And the middle-class diversity trend only accelerated during the 1990s. In 1992, 38 percent of black households had middle-class incomes. Six years later, that number had grown to 41 percent. Hispanic households saw a similar increase during that same time period: from 44 percent to 46 percent. At the same time, the percentage of non-Hispanic white households in the middle decreased by 1 percentage point, and the percentage of Asian households remained flat.

Certainly, the rising tide of the economy has played an important role in the changing make-up of the middle - especially for Americans born in the United States. But immigration has been a key factor as well. Over the past 30 years, there's been an important shift in the demographics of immigrants: They're getting younger. Forty-four percent were aged 25 to 44 in 1997 - up from just 19 percent in 1960, when one-third of immigrants were over the age of 65, compared to just 11 percent in 1997. This has been central to the diversification of the middle class, since younger immigrants have a better chance of improving their financial situation over time. And they are bringing a different mentality and a different set of expectations to the middle-class marketplace.

Of course, identifying what we mean by middle class is a tricky endeavor - not even the U.S. Census Bureau has an official definition. Part of the problem is that the true "middle" is a shifting target. Between 1997 and 1998, for example, the real median income of households in the United States grew by 3.5 percent.

Nevertheless, to some it's simply a matter of income quintiles, and the middle three - or 60 percent of U.S. household income distribution - create the boundaries of the middle. In 1998, the middle three quintiles accounted for an estimated 165 million households. But by that definition, households with incomes as low as $16,117 and as high as $75,000 would each be considered middle class. And the poverty threshold for a family of four in 1998, according to the U.S. Office of Management and Budget, was $16,660.

Acs suggests that the income range of the middle 40 percent of the population is a better way to define middle class. "Middle class is a feeling," he says, as much as it is a numerical paradigm. Using Acs' range, a middle-class income today is roughly between $30,000 to $75,000 - a level that spans the third and fourth quintiles. The absolute lowest limit to be considered middle class may actually be a bit lower, cautions Acs, around $25,000; it depends on the number of people in the household. It also depends on where in the country the household is located, since there are geographic variations in the cost of living.

Coming to America

What does it take for a low-income household to cross that $25,000 threshold into middle class? It helps to have two earners in the household, says Acs. And that is a fundamental difference between middle-class hopefuls today and those of years past, points out Toni Horst, an economist with Dismal Scientist and RFA, an economic data analysis company based in West Chester, Pennsylvania. Between 1987 and 1997, households with two earners saw their income increase by 5 percent, according to American Incomes: Demographics of Who Has Money (New Strategist). At the same time, households with one earner saw their income decrease by 2.3 percent. Today, having two earners is a requirement to keep up, says Horst.

Which is one reason why much of the growth in the middle class today has been fueled by immigration. At 3.32 people per foreign-born household, immigrant families are considerably larger than the 2.56-person average size of native-born households. And these larger households have more earners: 1.6 versus 1.39.

But large household size doesn't tell the whole story. Mexican-born households, the worst off financially of all immigrant groups, also have the largest household size (over four people per household). At the same time, they have low levels of educational attainment. "Education is the biggest ticket to the middle class," says Horst. "Not much happens without it."

There's a sharp difference in income between people who are educated and people who aren't, agrees Frank Stafford, a professor at the University of Michigan and the principal investigator of the Panel Study of Income Dynamics. For example, between 1976 and 1996, the earnings of men with advanced degrees increased by more than a third for non-Hispanic whites and blacks, and by 20 percent for Hispanics. In contrast, earnings for men who did not finish high school fell by 12 percent for blacks and by 20 percent for whites and Hispanics.

And nearly a quarter of all foreign-born residents have their bachelor's degrees, essentially the same proportion as native-born Americans. Even when you control for age (college education is less common among all older people), the difference in college education between natives and immigrants is insignificant.

Of course, the foreign-born population is far from homogenous, and there are important differences by country of origin, including the number of immigrants arriving annually from each nation. In 1998, the largest share of new arrivals by far was from Mexico, according to the Immigration and Naturalization Service, accounting for nearly 20 percent of the 660,000 immigrants legally admitted to the country that year. The next-largest group was from China, at about 6 percent, with another 5.5 percent coming from India. European countries combined contributed about 14 percent of new arrivals in 1998.

The share of America's foreign-born population who are European has dropped sharply over the decades, according to the Census Bureau. In 1970, 62 percent of foreign-born residents were from Europe. By 1997, that number had dropped to 17 percent, while 51 percent were from Latin America, and 27 percent were from Asia.

There are also two distinct groups of immigrants: those who are educated and are already middle class, and those who are struggling to break in with other low-income and less-educated U.S. citizens, points out George Vernez, the director of immigration studies for RAND in California. In 1997, 49 percent of African-born residents had their bachelor's degrees, for example, followed by 45 percent of Asians, and 29 percent of Europeans. That's compared with 10 percent of all immigrants from Latin America, and 4.6 percent of Mexicans. But 43 percent of foreign-born households have incomes below $25,000, and many of them (35 percent) lack even a high-school diploma. This, experts say, will make any transition into middle class an upward struggle at best.

"For those who come from a low level of education, they are unlikely to make it during their lifetime here," says Vernez. "If they have less than a high-school level of education, they don't have much mobility at all." Nor will many of their children, he adds. "They will acquire more education than their parents, and most of them will eventually graduate with a high-school degree or equivalent, but a smaller share of them are expected to go to college," he says. "They will lag behind other groups, at least in the first and second generations."

The New Immigrant Marketplace

Still, nearly half of all foreign-born residents (42 percent of men and 37 percent of women) have middle-class incomes, and 29 percent have incomes over $50,000, according to the Census Bureau. And we're not just talking about those who came here 20 or 30 years ago: A significant portion of even the newest immigrants - those who have been here ten years or less - enjoy middle-class status: 31 percent of men and 25 percent of women. This is the new immigrant contingent of the new middle class.

Asian immigrants lead the pack in terms of median income - $42,900 in 1996, well above the median for native householders. One reason for the Asian earning power is that 36 percent work in a managerial or professional role, a proportion that's topped by Canadian immigrants (46.5 percent) and European-born immigrants (37.8 percent), according to the Census Bureau. Another reason is that there are fewer Asian households aged 65 and over. (Older households tend to have lower incomes.)

Asians aren't the only group of immigrants who are doing well: Median incomes of immigrant households from Europe, Africa, South America, and North America (Canada) are all over $30,000.

But no matter where they are born, these new American consumers share important characteristics, says Felipe Korzenny, co-founder of Cheskin Research, a Belmont, California-based market research firm that focuses on Hispanic and Asian consumers. Regardless of educational attainment, these consumers lack a clear understanding of the consumer culture that defines the United States, he says. On a very basic level, whole product categories could be unfamiliar, and Korzenny cites insurance as an example. Both Asians and Hispanics have strong traditions of younger people caring for the old, for example, so for many, it doesn't make a lot of sense to take out an insurance policy that would protect an adult child. There's also a sense of taboo around thinking about death, adds Korzenny.

For other product marketers, there's a historical experience gap that makes the consumer marketplace bewildering. Growing up with a certain brand of toothpaste or cereal provides an emotional context for choosing a product that these consumers lack. "Marketers that are able to claim a niche tend to stay with these communities for a relatively long time," says Korzenny.

And these new middle-class consumers lack marketing savvy, says Korzenny. "In many ways, the Hispanic and Asian middle class today is almost equivalent to where the mainstream market was in the 1950s, in terms of advertising. They are looking at advertising for advice and guidance. These are consumers who are very educated, have nice incomes, and really do not understand why they should pick one product instead of another."

There's another very important piece of the puzzle to understand when targeting new middle-class immigrants, says Korzenny. Unlike the ideal of a melting pot that was so prevalent at the beginning of the 20th century, today's immigrants are more anxious to preserve their own culture, even as they embrace their American lives. "You don't have to be Anglo to be okay," he says. Korzenny believes that this will continue and be strengthened by Internet penetration in the middle class.

And computer penetration is on the rise: Among Hispanic households with incomes of $35,000 to $74,999, for example, 49 percent had a computer at home in 1998, a 19-point leap from 1994; and 27 percent used the Internet, according to "Falling Through The Net," a study conducted by the National Technology Information Administration. The study also found that nearly 40 percent of middle class "non-Hispanic others," mostly Asians, had Internet access.

Online access has enabled these new residents to customize their acculturation process, says Korzenny. For Hispanics, "It enables them to be connected to the Latin world. You can read newspapers in Latin America, converse with your cousins and grandparents who are still in Mexico City or Guatemala." Within the next five years, to a much greater extent as Internet penetration grows, immigrants of all nationalities will be ordering food from their native countries, downloading movies in their own language, and listening to radio stations from home. "The marketers that are going to be the most successful are the ones that are customizing your culture the best," says Korzenny.

Native Transitions

But not all additions to the middle class were born in foreign lands. Among native-born Americans transferring into the middle class, many are African American.

There are several reasons why African Americans are transitioning into the middle class, says Roderick Harrison, director of Databank, the data analysis component of the Joint Center for Political and Economic Studies, in Washington, D.C. Harrison says that many of the gains in income and educational attainment that set the stage for a middle-class transition were made during the 1970s, the era immediately following the Civil Rights movement. During the 1980s, progress slowed for many black households, but in the 1990s, black households began experiencing increases that were greater than that of the general population.

In fact, the percentage of blacks with middle-class incomes has been on the rise over the past three decades. In 1998, 41 percent of black householders had middle-class incomes of $25,000 to $75,000, compared to 35 percent in 1967. In comparison, during roughly the same time period, the percentage of non-Hispanic whites who were middle class declined by nearly 7 percentage points, mostly due to a positive income shift overall. The share of Hispanics with middle-class incomes also decreased, due to an increase in both poor and wealthy Hispanic households.

The economic boom of the 1990s has been an extra bonus for black households, says Harrison, because many are concentrated in the Southern region of the country, which boomed the loudest. In the Rust Belt region, where blacks were disproportionately hit when the nation's manufacturing base left the country, a recovery has also begun, and blacks have enjoyed the gains there as well.

Positive education trends for blacks have also helped the transition to middle class. In 1960, only four in ten blacks completed high school. By 1997, 87 percent did. During the same period, white high-school completion rates rose from about 60 percent to more than 90 percent. Today, 14 percent of blacks have a bachelor's degree or higher, as do 26 percent of whites and 9 percent of Hispanics, according to the National Center for Education Statistics.

Although those education statistics reflect a broader positive trend, it's important to note that black education levels hardly match those of whites, one powerful reason why more black households haven't been able to take full advantage of the economic boom. After all, 49 percent of black households have incomes that are below the middle-class line drawn by the Urban Institute's Acs, compared with 44 percent of Hispanic households and 28 percent of white households.

There's another reason why many blacks have yet to transition into the middle class: It takes money to make it. Or more specifically, it takes wealth, points out University of Michigan's Stafford. The Panel Study of Income Dynamics found that, for every dollar in financial wealth held by the average white household in 1999, the average black household held barely 9 cents. Lower overall home values of black householders and fewer stock holdings account for part of the problem. But the largest stumbling block for many black households is generational wealth. A primary source of wealth for white households is intergenerational transfers in the form of inheritance and gifts.

And unlike new immigrants, African Americans do not have the advantage of household formation on their side. In fact, Harrison says the biggest barrier for transitioning to the middle class for blacks in the United States is the prevalence of African-American single-parent households. "To be comfortably middle class or higher, you need to have a fairly high-paying job, or you need two earners," notes Acs. That is simply not happening among the majority of African-American families: 62 percent of all African-American families are headed by a single parent.

This proportion is twice as large as it is for white families and 75 percent greater than Hispanics. For more blacks to transition into middle-class status, progress on the educational front must continue, and the household formation situation must be resolved.

Of course, there are no easy solutions for lower-income Americans who hope to transition into the ranks of the middle class. Certainly access to education and to technology are key. But one thing is clear: The demographic make-up of the middle class has changed. Forever.

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