A Multiethnic Middle Class Is Growing in California

The economic growth pangs Joseph Schumpeter described as “creative destruction” are becoming a way of life in Southern California. Some industries have been virtually de molished, while others reduced to shadows of their previous glory. Hundreds of thousands of Californians have lost their jobs. The once supreme self-confidence of the state’s middle class is all but shattered.

Yet, our near obsession with the destructive side of Schumpeter’s dialectic has distracted us from the surge of creation going on in such sectors as medical instruments, entertainment and international trade. As the established economic and social order unravels, dashing much of the optimism of the existing middle class, other developments are giving birth to a new and more diverse class of upwardly mobile Californians.

The faces of the rising middle class can be discerned in some of the 10 most frequent last names of recent home buyers: Lee, Nguyen, Garcia, Rodriguez, Martinez and Wong. In Orange County, nearly 40% of Latinos own their homes, and Nguyens outnumber Smiths among recent home buyers by more than 2 to 1.

To the overwhelmingly white pool of current homeowners, declining housing valuations are understandably depressing. But the lower price tags, coupled with record-low interest rates, are a godsend for the new middle class who see, often for the first time, the doors of ownership opening with an ease not seen since the early 1980s. In many cases, these are often the people--younger whites as well as immigrants--best positioned to take advantage of the benefits of economic growth in those sectors where California’s competitiveness continues to stand second to none.

This growth, however, has been largely obscured by the devastating effects of the winding down of the defense and aerospace industries. By itself, defense downsizing, according to the most recent analysis by the non-partisan California Research Bureau, has accounted for about 36% of the roughly half-million job losses in the state over the past three years.

The demilitarization of the state’s economy has demoralized a large slice of California’s middle class. Nearly 80% of the estimated 121,000 workers laid off made $15 to $18 an hour. The permanent loss of so many good-paying middle-class jobs has dominated the economic policy debate in California. Indeed, even as its economic relevancy fades, California politicians seem almost obsessed with finding a way to resuscitate the defense/aerospace core.

This approach, however, may not serve the state’s long-term interests. Efforts to steer federal “conversion” dollars to existing defense behemoths may keep some middle managers in their jobs for a few more years, but most studies, including one by the A.T. Kearney consulting firm, reveal that large defense companies intend to convert no more than 10% of their production to commercial endeavors. Coddling such companies in the name of saving middle-class defense jobs will do little to create and sustain industries, like electric vehicles, with a better chance to grow and produce equivalent jobs.

Similarly, many defense workers, particularly older ones, are not the best bets to staff these new companies. Outplacement firms such as Careermotion report that many laid-off defense workers, brought up within an essentially socialized industry, are too overspecialized and lack too many “real world” skills to find comparable employment in the increasingly competitive and diverse California economy. Bankers who lost their jobs in California’s many bank restructurings have a much easier time finding a new job than former defense workers.

So, rather than bail out defense workers and their firms, policy-makers should target those industries and companies more likely to spur opportunities for the emergent middle class. Burgeoning regional sectors such as medical instruments, which boasts more than 1,000 firms, half of them in Los Angeles County, and annual sales of $17 billion, should be singled out for special attention. With roughly 200,000 employees, the medical-instruments industry has been expanding at a rate of 10% to 15% a year. Most of the sector’s new jobs pay from $10 to $15 an hour.

Any policy that incorporates such an emphasis should be candid about its capacity to rescue laid-off workers from the defense industry: The bulk of the jobs created in fields like medical instruments will likely go to a younger, largely immigrant generation of workers. Much the same can be said of the upper management and ownership of these new companies.

A similar economic and demographic dynamic can be seen in California’s other growing industries. Within the resurgent electronics and software business, in the Silicon Valley and elsewhere, the post-defense companies tend to be run and operated by new Californians. In Southern California alone, there are an estimated 1,000 Chinese-owned electronics manufacturing and service companies doing non-defense work. Their combined sales: $10 billion.

This pattern is more or less repeated in the textile, fashion and garment industries. True, these companies heavily rely on low-wage minority employment--nearly half of all California factory workers are now immigrants. But research shows that they have also given rise to a new middle class of Latino, Asian and Middle Eastern entrepreneurs, managers, designers and skilled workers.

These new Californians are prominent in the current resurgence of start-up activity, the essence of the creative-destruction process. In Los Angeles County, where roughly one-third of the population is now foreign-born, the number of Latino- and Asian-owned companies has virtually doubled since 1987. Sales of Latino-owned companies have grown from $3.3 billion to $6.6 billion.

Fueled by these ethnic entrepreneurs, as well as by suddenly reasonable rents and the continuing fragmentation of markets, California’s start-up economy, which was in danger of pricing itself out of existence, is also showing signs of life, rising 6% in the first half of 1993 compared with a year ago.

Perhaps most important, emerging from among these companies are a considerable number of “gazelles,” the relative handful of small, fast-growing firms that create the preponderance of new jobs. Over the past four years, according to a new study by Cognetics, based in Cambridge, Mass., California ranked, on a per capita basis, highest among the leading industrial states as an incubator of such companies. Among the nation’s 50 largest metropolitan areas, San Diego and Los Angeles ranked 12th and 13th, respectively, with San Francisco, 16th.

Much of the new economic activity reflects California’s demographic strengths. Despite the hysteria about a “mass migration” out of California, the state, largely due to immigration, continues to enjoy a net in-migration, mostly of working-age, younger Americans and immigrants. Within the United States, the Northeast, particularly Massachusetts and the New York City area, are the largest net senders of people to California.

Whether they hail from Bombay or Boston, these newcomers will, by the end of the decade, become the bulwark of the new, post-Cold War California middle class. That it may not include many from the defense era reflects the tragic side of the creative-destruction process; but like every new generation in this ever mutating state, it will be up to them to define the next act of the California dream.