New Rules for a Darwinian Economy

Old assumptions about middle-class success no longer apply.


Scott Cohen spent 28 profitable years in the mortgage business, eventually starting his own firm just as the Southern California housing bubble was beginning to inflate in 2001. By 2007, the small company employed 15 people and provided enough income for Cohen, his wife, Merced, and their two kids to enjoy an affluent life in a tony Los Angeles suburb. But when the housing bubble burst, Cohen sold his business at a fire-sale price and watched in panic as the only industry he had ever worked in collapsed. His wife worked at the firm, too, and her job disappeared. As the family income plummeted, the Cohens traded in their two cars for cheaper ones, cut all the expenses they could, and ran up their credit cards. Finally, they had no choice but to sell their home for a loss. For the first time in 19 years, the former real estate executive became a renter. 

Many of Cohen's former colleagues took jobs at banks or retail outlets, went into teaching, or just dropped out of sight. Cohen spent a few months researching new fields and decided to start a financial-services firm focusing on seniors needing help paying for assisted living. For 18 months, he built contacts at hospitals and nursing homes, took courses, studied state regulations, and prospected for clients. Income was scarce. Clients often got cold feet after weeks of meetings. During one low moment, the 50-year-old businessman started looking for a conventional sales job—hitting nothing but dead ends. Finally, his new firm, Senior Advisory Services, began to build a roster of clients and produce enough income to stabilize the family's finances. "For a while, my optimism was challenged," Cohen says. "But I think it was good for us. It shook us up and helped us go in a different direction." 

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Many Americans feel they're going in a different direction these days—but too often, it's reverse. As the Great Recession of 2007–2009 finally winds down, millions of Americans face diminished lifestyles, with no obvious way to regain the wealth and prospects they enjoyed just a few years ago. It's natural to hope for a return to the familiar trappings of middle-class life: plentiful jobs, regular raises, predictable careers, and a steady improvement in living standards. Some may still find that. But a large number of Americans face lasting dislocations, even as the economy recovers. 

Many of the nearly 8 million jobs lost during the recession may be gone for good, with high unemployment likely to persist for several years. Consumer spending may decline permanently, depressing huge economic sectors like housing and retail. Scarce credit and other problems, meanwhile, are stunting the growth of new businesses and inhibiting the "creative" part of "creative destruction." "This is not just a recession," says futurist Edie Weiner, president of consulting firm Weiner, Edrich, Brown. "This is a transformation." 

If so, Americans may need to reconsider the unwritten rules that have governed upward mobility since the end of World War II. From 1945 to 2000, the American middle class was a kind of perpetual prosperity machine that created vast amounts of wealth—which mostly stayed in the United States. There were disruptions, like the recessions of the mid-1970s and early 1980s, but the wealth compounded and progress always resumed its upward trajectory. Various assumptions formed the pillars of this phenomenal era: A good education leads to a decent job and a satisfying lifestyle. Working hard means your income will keep going up. Devotion to your career will produce a comfortable retirement. And each generation will be better off than the one that came before. 

Now, banking on those assumptions may constitute dangerous living. As Americans are ruefully discovering, a bachelor's or master's degree doesn't guarantee a job these days. Hard work might bring a paycheck, but not necessarily job security or a reliable nest egg. Devotion to your company or career won't inoculate you from getting kicked to the curb. More Americans are working harder just to stay even and asking themselves a troubling question: If I did all the right things, why does it feel as if I'm falling behind? 

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The answer may be that "all the right things" no longer are. As the economy recovers and jobs slowly return, some of the pain will surely diminish. But disturbing trends that were already underway before the recession are likely to continue, and they could intensify. For about the past decade, for instance, median household income has been stagnant after four decades of nearly uninterrupted growth. Once data from the recession are tallied, they will probably show that incomes fell between 2007 and 2009, perhaps sharply. Pay usually rebounds after a recession as the job market improves, but that pattern may not hold this time around. Many firms can now substitute technology or cheaper overseas labor for U.S. workers, one reason economists expect a "jobless recovery" to persist. A slack job market, combined with sharp cutbacks in credit, means consumers will have less money to spend, depressing growth and hiring even further. The housing bust, meanwhile, has shrunk the biggest source of wealth for many Americans, limiting their financial freedom and their ability to move where the jobs are. 

But there is consolation. Other nations face the same problems, and compared with most of them, the United States still has a dynamic economy, with great universities, a strong entrepreneurial backbone, and a financial system that works smoothly—when it's healthy. Forced cutbacks over the past few years may even produce a lean, mean economic machine that comes roaring back stronger than expected. But counting on that would be foolish, and the Americans with the best shot at getting ahead will approach their future the way Scott Cohen did: They'll find new ways to exploit the skills they have, gain an advantage by reacting before others, develop new skills continually, and rebound from setbacks without becoming paralyzed. 

Thriving in a more Darwinian environment will require new attitudes, but it starts with the skills required to navigate an economy that's likely to be more turbulent, unpredictable, and complex than in the past. And many Americans aren't prepared for that. A study last year by consulting firm McKinsey, for instance, found that 71 percent of Americans work in jobs for which there is low demand from employers or an oversupply of labor, or both. That helps explain why incomes have flat-lined: In many industries, blue- and white-collar alike, there's simply a glut of qualified workers, which drives down pay. 

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It's obvious that unskilled manual laborers have little leverage to improve their income, especially in a stalled economy. But the same dynamic is spreading to other fields that used to be more rewarding. Manufacturing and agriculture, for example, are shrinking faster than the pool of workers, which puts downward pressure on wages. Other fields like healthcare, government, and various types of services are growing, but they're also attracting vast numbers of workers with similar skills. Many people deliberately choose fields such as these because the jobs can't be done easily overseas. But the quest for job security also drives up the applicant pool, leading to lower incomes for those huddled in the pack. Even some fields that often require advanced degrees—such as law, teaching, library science, and some medical-technology specialties—have relatively low income growth, because lots of people choose them, and once you have the credentials, the work is fairly standardized. 

The real payoff goes to people with an ever expanding set of skills who work in growing and complex fields. There's still a strong correlation between educational attainment and income, but the highest earners also have strong "tacit" and "cognitive" skills that are difficult to teach in a classroom: informed intuition, judgment under pressure, the ability to solve problems that don't have an obvious solution. Those tend to come with experience, but top earners also go to the trouble to keep up with the latest technology—no matter how exhausting—and use it to solve problems that bedevil others. "There's an increasing demand for tasks that require human skills complemented by technology," according to the McKinsey study. "Mastery of cognitive skills—the mental abilities people use to think, study, and learn—is an even more important determinant of income growth than levels of educational attainment." 

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Big international companies tend to present the most complex challenges in the modern economy and offer the richest rewards to those who overcome them. But you don't need to jet off to Shanghai or Dubai every other week to juice your career or find fresh opportunities. Many workers can get ahead—or climb out of a hole—by taking courses to freshen their knowledge and maintaining the financial flexibility to change careers, take a lower-paying job if it seems more satisfying, or move on fairly short notice to take advantage of an opportunity. 

After getting laid off last June, for instance, Florida software salesman Phil Landry ran the numbers and figured that if he couldn't get another job quickly, he had about six months until he'd have trouble paying his mortgage. After narrowly missing out on several jobs, he and his wife made a quick decision: The comfortable, five-bedroom home where their three kids had grown up had to go. "We lived in this house for 16 years," he says. "It was our home, but now it's just a piece of collateral I have to sell." Moving to a smaller town home made life "simpler and more focused" and bought the 55-year-old Landry time to recalibrate his career. He took a position with a technology start-up that paid commission only, with no upfront pay. And he realized he may have to work two or three jobs while adapting to the new job market. "I have to think about how to make myself valuable," he says. "Educate myself. Increase my knowledge. Learn new things." 

Recessions usually produce a surge in entrepreneurship and small businesses, since ambitious people who lose their jobs often start their own firms. That helps a dynamic economy regenerate itself. But once again, things seem different this time, mainly because stingy banks aren't lending the money usually needed to fuel start-ups, and other sources of capital—such as home equity, retirement plans, and credit card accounts—have plunged in value or are far less available. Yet that very same economic fragility makes it more important than ever for Americans to develop an entrepreneurial mind-set, take bigger risks, and rely more on their own resources. Carl Schramm, CEO of the Kauffman Foundation, a nonprofit group that promotes entrepreneurship, argues that people need a start-up mentality even if they have no plans to form a business. "Get out and meet people and network," he says. "Get the relevant education you'll need. It doesn't need to be a new degree. It could be computer skills. If you're out of a job and you're computer-illiterate, how can you look for a job these days?" 

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By 20th-century standards, sudden unemployment, forced downsizing, or an unplanned career restart may seem like forms of failure. But some resourceful Americans are already turning such adversity to their advantage and discovering that their second or third career is more rewarding than their first. After 37-year-old Cathy Goerz got laid off from her job as a video producer for a San Francisco communications company in 2008, she decided to cut her spending as drastically as possible and start a project that had long been on her to-do list: filming a documentary. She decided to explore creative ways people were toughing out the recession, and the film won a small grant that helped her fund a longer version, called RE: Invention, which she hopes might open the door to a paying career in film. And if it doesn't, she plans to return to the corporate world feeling more freedom to do what she wants and less dependence on a big paycheck. Cutting back on jewelry, clothes, makeup, handbags, movie rentals, music downloads, vacations, and routine conveniences has forced Goerz to make lifestyle concessions, but she has also discovered that it earns her flexibility that in a way is more valuable. "My quality of life has not changed at all," she says. "I think it's improved. I'm not tied down by location, and I don't have to be under somebody's gaze eight hours a day." 

For working parents or others with major financial obligations, a yearlong break or an experiment with an alternative career may seem like an unimaginable luxury. But the recession could turn out to be a pivot point that changes the way Americans approach their careers, beginning with their first day in the labor force. The traditional approach, of course, is to start building wealth as a young worker, climb the ladder, pursue passions once you feel financially comfortable, then retire to a more leisurely life around the age of 65. But with many Americans unprepared for retirement at the traditional age, the typical American's working life could grow by 10 or even 15 years. That in turn could lead Americans to "inverted, nonlinear" lives, according to Weiner, the futurist. "People could take more sabbaticals, try new things, do the things that they'd ordinarily do in retirement when they're younger," she says. 

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There would be trade-offs. Navigating between jobs and other pursuits would produce up-and-down income instead of regular raises. Consumers would have to spend less, save more, and grow comfortable with uncertainty. Yet these things are already happening, whether people choose them or not, and some workers have already adjusted to "nonlinear" careers. Allan Fawcett, a 53-year-old computer consultant in Burbank, Calif., routinely alternates between high-paying contract work and periods of unemployment—which he cherishes. "It's the perfect time to travel or pursue whatever passion you have or organize the many things left undone during the crazy days of work," he says. To prepare, Fawcett lives frugally, keeps at least six months' worth of living expenses on hand, and plans for what he'll do during the gap between jobs. He has earned one master's degree during breaks from work, with plans to pursue another. When the next break between jobs occurs, he says, "I am hoping to stay unemployed for at least six months. These gaps always seem too short." Now that's a fresh way of looking at things.