Table 1. Job growth in Ames, Des Moines, and Iowa, June 2010 June 2016 since 2015 since 2014 since Des Moines Iowa Ames. Des Moines Iowa Ames

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1 Ames Economic Outlook, Second Quarter 2016 Peter F. Orazem Iowa State University I. The Ames Labor Market The Ames Labor market continued its 6-year expansion through the first half of The gain has been steady, gradually adding 4,900 jobs over that period, 4,600 of those added jobs in the private sector. The Ames private sector grew faster over that period than any other Iowa metropolitan area. As a milestone against the past, this 6-year period represents the fastest 6 years of job growth since 1990 when Iowa Workforce Development first began reporting monthly employment data on the Ames market. Since June 2015, the Ames labor market grew by 600 jobs or 1.8%. Job growth in Ames was second only to Moines among the metropolitan areas. The expansion at Iowa State has contributed modestly to job growth of state government jobs, but the private sector continues to be the primary driver. Private sector jobs grew by 1.9% while government jobs grew by 1.7%. It is likely that Ames will continue its growth going forward for the near term provided the rest of the U.S. economy continues growing. However, the goods producing sectors (manufacturing and construction) have retrenched slightly, even as Moines and the state as a whole have added jobs in these areas. New space available for industrial expansion has been added for the first time since originally proposed in the Land Use plan nearly 20 years ago, but Ames has not been a serious player in attracting new goods producing jobs since the Barilla plant was built. The growth has been through firms that were already here or from new construction investment. While Ames stopped the loss of families that led to the decline in numbers of students in Story County, it has yet to begin growing those numbers in any significant way. With job growth, newly available space for new housing, and a revitalized school infrastructure, we should be getting more attractive, and that should show up in increased enrollments in Story County this fall. If not, we have to ask why. Part of the answer must be the even faster job growth in Moines that attracts families seeking two jobs in the same market. Some suggest that the issue is housing prices, but Ames and Ankeny housing prices are similar. Enrollments are booming in Ankeny and barely increasing in Ames. An upcoming study funded by the City of Ames should identify why so many choose to commute into Ames rather than reside here. Table 1. Job growth in Ames, Moines, and Iowa, June 2010 June 2016 since 2015 since 2014 since 2010 Ames Moines Iowa Ames Moines Iowa Ames Moines Iowa Total Nonfarm 1.8% 2.3% 1.5% 2.7% 4.2% 2.3% 10.9% 13.5% 7.6% Total Private 1.9% 2.7% 1.5% 3.9% 4.7% 2.6% 16.8% 15.6% 9.4% Goods Producing -1.4% 2.1% 1.5% -2.7% 2.1% 2.0% 24.6% 24.3% 14.0% Service-Providing 2.4% 2.3% 1.5% 3.6% 4.5% 2.3% 8.9% 12.3% 6.2% Private Service Providing 2.9% 2.8% 1.5% 6.0% 5.1% 2.8% 14.7% 14.5% 8.1% Government 1.7% -0.7% 1.2% 0.6% 0.5% 0.4% 1.7% -0.2% -0.9% Federal Government 11.1% 1.6% 1.7% 0.0% 1.6% 1.7% -37.5% -3.1% -12.3% State Government 2.6% -6.3% -0.5% 1.7% -5.1% -1.3% 4.4% -12.9% 1.4% Local Government -1.9% 0.3% 1.8% -1.9% 1.7% 0.9% 8.5% 4.2% -0.3%

2 II. Alice Doesn t Live Here Anymore On June 29, 2016, the Ames Tribune reported that 42% of Story County households struggle to make ends meet compared to 31% for the state as a whole. 1 The report labeled Story County the second most impoverished county in the state. Ames, Iowa was reported to be the poorest metropolitan area in the state with 47% of its residents having trouble meeting expenses. Iowa City was the third poorest at 43%. Moines was fourth poorest at 40%. The report was commissioned by the State of Iowa United Way to provide a broader picture of financial insecurity than traditional federal poverty guidelines. ALICE is an acronym that stands for Asset Limited, Income Constrained, Employed. The report claims to measure individuals and families who are working but are unable to afford the basic necessities of housing, food, child care, health care, and transportation. Note that our local Story County United Way had no part in the study and would not have been able to correct some of the issues that I list below. The United Way says the study is an improvement on federal poverty measures, but is it? Is Story County really among the poorest counties in the state? Is Ames the poorest city? Are residents of Iowa City struggling to make ends meet? Available federal data certainly seems at odds with the improved United Way conclusions. Ames, Moines and Iowa City along with Cedar Rapids have the highest average wages in the state at over $22/hr, 16% above the average in other metro areas and 25% above the average for nonmetro areas. Median family income in Ames is over $80,000 per year, 22% above the Iowa average. So why do Ames and Story County score so low in the United Way study? One reason is that Story County is listed as having poor job opportunities. We are in good company. Job opportunities are labeled poor in Johnson County and Polk County as well. How is that possible as those are three of the fastest growing labor markets in the state? The study measures job opportunities using the unemployment rate, an income distribution measure and the average wage for new jobs. Left off the list is an actual measure of job growth, a seemingly important element of the strength of the job market. Ames, Moines and Iowa City typically show up in the listings of the strongest labor markets in the country when job growth is used as a measure. However, the United Way study s use of the unemployment rate would be a reasonable second choice if the data used was accurate. But it is not accurate. Ames has the lowest unemployment rate in the nation at 2.1%. However, the United Way study says Ames has a 6.2% unemployment rate, and so Ames is incorrectly reported as having a higher unemployment rate than the Iowa average! The data is wrong. Another reason the best performing cities in Iowa score poorly on economic opportunity in the United Way study is the odd choice of wage measure. Ames has a very high average wage rate, but its new jobs will be disproportionately in the retail sector because of its transient student population. Communities with poor retail prospects will show up higher on that average. Hence 1

3 Ames and Iowa City, two of the most dynamic labor markets in the state, score low on the wage measure even though they pay the highest average wages in the state. As for the income distribution, it includes the students working part-time and so we have a very unequal wage distribution. Ames is below average in household income because the student population drags down the average for households. We score way above the average on family income because students are excluded from that sample. Choosing to base the inequality measure on household income will exaggerate the inequality measure for college towns and so Iowa City and Ames score poorly. Redefining the income measure using family income would have placed them at the very top of the state. Ames also scores poorly on housing affordability because 59% of renters pay over 30% of their income on housing. Only 12% of Ames home owners pay over 30%. Again, the difference is the high concentration of students in the population of renters whose own income is a poor measure of their access to resources. Students are not in the population of home owners, and so Ames scores well above average on that metric. In short, Ames and Story County are characterized by the United Way as atypically poor because the study uses incorrect data or data that is poorly constructed for counties with high college student populations. The report lists Ames as having a 28% poverty rate, almost double the Iowa and national rates. Take out year olds from the analysis, and the Ames poverty rate is 7.1%, well below the Iowa and national averages. While one might applaud the United Way for trying to come up with a better measure of poverty, the study completely mischaracterizes the problems in Ames and Story County. Because only an idiot would take the time to seriously wade through the methodology and data to find out why Ames and Story County score so poorly, these studies become the new facts to be repeated by newspapers, politicians, government officials and nonprofit agencies. But these findings for Ames and Story County are so far removed from reality that I do not believe they are in the public service. We need real numbers on needs in order to better allocate resources to those most in need, the 7.1% who show up as poor on the federal poverty statistics who are outside the year old age range. III. The Rise of the Middle Class In December, the Pew Research Center released a study titled The American Middle Class is Losing Ground. The report stated that since 1971, the middle class has shrunk from 61% to 50% with some dropping to lower classes and others rising to the upper classes. The report s conclusions have been widely repeated in the print and broadcast media with headlines such as CBS The Incredible Shrinking Middle Class or the Washington Post s The Middle Class is Shrinking Just About Everywhere in America. However, the conclusion is wrong. The Pew study defines the middle class as composed of households between 67% and 200% of the median household income. Median U.S. household income correcting for inflation rose 33% between 1971 and Consequently, to be in the middle class in 2014, Pew requires that you have a 33% higher real income than in 1971.

4 To illustrate why the Pew measure makes no sense, we can compare their strategy to our poverty statistics. The Census defines the poverty rate based on the income necessary to purchase a fixed basket of goods believed to provide a threshold quality of life. The income level necessary to maintain that constant quality of life is adjusted as the price of the goods changes over time, but we do not add more items to the basket. The Pew strategy applied to our poverty statistics is the same as adding 33% more items to the basket. In effect, a family of three whose income was at the poverty threshold in 1971 would need to buy $6,221 more stuff in 2014 to remain at the poverty threshold, the income equivalent of adding one more child and a 26.7 cu. ft. refrigerator. In the table below, I present the Pew estimates and then show what happens if a constant income threshold is applied for entry into the middle and upper classes. Pew reported their estimates as a share of individuals, but the available Census data is reported by household. In addition, the closest comparable data to the 1971 data available on the Census web site was 1975, a year with nearly identical median household income as When I apply the Pew definition for the middle class to the household data, the percent of households in the middle class falls from 57% to 46%. Unlike the Pew estimate, all of the decline is due to the movement from middle class to upper class, but there is no gain in the total percentage of households that have attained at least middle class status over the 40 years. The conclusion is very different if I apply a constant threshold real income level for entering the middle or upper classes. Using the 1975 threshold income level, the proportion of U.S. households in the upper class rises from 7% to 30% and the proportion of households attaining at least middle class status rises from 64% to 73%. Using the 2014 threshold criteria, only 2% of households were upper class in 1975 but 18% were upper class by The percentage of households attaining at least middle class status rose from 50% to 64%. As acknowledged by Pew in its study, households in every income tier of the U.S. economy gained between 1971 and That impressive accomplishment of the U.S. economy should have been the story, and not the fictional tale of the declining middle class. It is important to note that since 2000, gains in household income have been slow. This reflects the slower growth in the economy from 3.5% from to below 2% since then. Before 2000, we borrowed at a slower rate than we grew, and so the debt as a share of GDP decreased. Since then, we have done the opposite. Economic growth pays for government services and it allows household incomes to grow. We cannot expect to have rising incomes and improved government services if we do not expand the economic base. Society can opt for a zero or low growth strategy, but it has to accept that weak income growth and reduced government support of infrastructure are a consequence of that strategy.

5 Table 2: Middle Class Households definedd by the Pew Institute and then defined by a constantt real income level over time, Pew Pew equivalent Using constant 1975 Using constant 2014 (% of individuals) (% of households) income thresholds income thresholds (% of households) (% of households) Middle class Upper class Middle class + 61% 14% 75% 50% 21% 71% 57% 7% 64% 46% 18% 64% 57% 7% 64% 43% 30% 73% 48% 2% 50% 46% % 18% % 64% % a Kocchar, Rakesh, Richard Fry and Molly Rohal. The American Middle Class is Losing Ground. Peww Research Center, December 9, 2016 b Author's compilation of Current Population Survey, Annual Sociall and Economic Supplement, 1976 and Middle class + means living at or above the middle class,, or the sum of the first two columns. Source: Authors compilation of data from the Federal Reserve Bank of St. Louis