Barely Scraping By.

L.A.'s huge underclass struggles to make ends meet as those around them get rich in boom times. But economic co-existence is sure to disintegrate when the next downturn takes hold.

IT is a perverse kind of contract -- but in a strange way it has managed to serve L.A.'s economy pretty

It starts with the demand from higher-income Angelenos for busboys, gardeners, housekeepers, janitors, day laborers and other low-wage workers -- demand that has only intensified during these flush economic times.

It continues with those same lower-income workers, many recent immigrants or those coming off welfare, who are only too happy to fill these positions, even if it means earning only the minimum wage or not having health care or other benefits.

Both sides recognize the value of the contract. Without such a ready pool of labor, low-wage services would become more expensive -- that is, if they were available at all, given the county's current unemployment rate of 5.6 percent.

And without the steady demand for their low-skilled services, many of L.A.'s poor would find themselves without a job at all. And given their limited education and language ability, without much hope of finding one.

The problem with this loosely fashioned economic contract is that it's not likely to last. Its obvious inequity, along with the economy's inevitable twists and turns, won't allow it to.

Whether it happens in a year, two years or five, the economic cycle will turn downward. And a growing chorus of elected officials, academics and social activists warn that when the downturn does occur, it could spur a dangerous chain of events not only for the region's poor, but for all Angelenos. Many of those plentiful low-wage jobs could well disappear, throwing the newly employed out of work. And the safety net that in past recessions has been available for the less fortunate is being chipped away, leaving them vulnerable.

Los Angeles Mayor Richard Riordan says, "In human terms, it means that the vast majority of the poor are not going to have any hope of being part of the middle class. This hopelessness is what leads to antisocial behavior. In economic terms, the prospect that the poor aren't going to be part of the middle class means that the economy won't have the skilled workforce to compete in the information age."

In simple terms, adds Peter Dreier, director of the public policy program at Occidental College, there is diminishing hope that the poor will ever climb out of poverty. "A generation of people who have 'worked hard and played by the rules' have been left behind," he says. "As that hopelessness grows, I fear it will lead to crime and drugs and riots and more riots."

Economic good times

To be sure, that's a ways off, if it happens at all. Just last week, the Los Angeles Economic Development Corp. projected that county non-farm employment would grow by 75,000 jobs next year, an increase of almost 2 percent. The EDC also concluded that by the end of 2000, the county is expected to recover all the jobs that were lost during the recession of the early '90s.

Such data only confirm what can be seen all over Los Angeles this holiday season: increased consumer spending and continued optimism about the economy. At the high end, enormous amounts of money are being made and spent -- surpassing, in pure dollar terms, any previous upturn.

With that prosperity has come relief, even for the poor. The percentage of Angelenos at or below the federally set poverty level of $16,534 (for a family of four) has fallen from a high of 24 percent in 1995 to the current 19 percent.

But look beyond that marginal improvement and the picture becomes more sobering.

For one thing, that 19 percent poverty rate still represents nearly 2 million Angelenos, with another 1.5 million eking out a living just above the line. And it remains higher than the 15 percent level in 1990, the peak of the last economic cycle.

What's more, the poor -- especially the working poor -- have lost ground, both in relative terms to other income groups and in absolute terms, because of faster rises in the cost of living.

Minimum-wage workers have seen their income remain stagnant over the past two years, while other income groups have received both annual raises and hefty stock bonuses. (The difference is more extreme for those workers in the underground economy who receive less than the minimum wage with no benefits.) Meanwhile, rents have increased at an average 6 percent a year and the supply of affordable units has virtually disappeared.

Distressing picture

The Business Journal has spent the last three months examining this crisis in poverty and its effect on the area's overall economy. The conclusion, based on extensive interviews and analysis of available data, paints a distressing picture:

* Wages for the lowest 10 percent of California wage earners have fallen steadily over the last 30 years, down 35 percent in real terms.

* The gap between the top 10 percent and bottom 10 percent of California wage earners has widened: In 1967, the wage ratio was about 5 to 1; today, it's almost 10 to 1.

* The percentage of L.A. households paying more than 35 percent of their income for rent -- the threshold for affordable housing -- has risen from 28 percent in 1970 to 41 percent today.

* About one-third of children in Los Angeles County lack health insurance. The medical care they receive, if any at all, is in public emergency rooms.

* High school graduates are leaving school less prepared for college -- and by extension, for the workforce. The California State University system reports that 68 percent of last year's incoming freshman class needed remedial course work in math or English. That's about twice the percentage of freshmen who needed remedial help in 1989.

"People who have lots of skills have always done well, but over the past 20 years there's been an increasing gap between wages at the top and the bottom of the income distribution," says Alec Levenson, a labor-market expert at the Milken Institute in Santa Monica.

As a result, those with modest levels of education and low skills can no longer count on getting ahead merely by working hard. "In the past, high school graduates could get jobs on a manufacturing line and retire with a decent pension," Levenson says. "That's not true anymore."

For those left behind, the last few years have been nightmarish -- a stark contrast to the good fortunes of so many plugged into the Internet revolution.

Consider the plight of one homeless man across the street from the Midnight Mission on downtown's Skid Row. The 42-year-old man, who would only give his first name as Steve, said he was working on the manufacturing line at Boeing Co., both in Seattle and in L.A., before being laid off in 1996 during one of the many mergers hitting the local aerospace industry.

"The economy has failed me. All I want to do is work with my hands," Steve says.

Yet while the mission was set up to take care of the homeless and jobless like Steve, more than one-third of its clients are the working poor.

"These people earn maybe $30 or $40 a day unloading trucks or working in garment factories, if they are lucky," says human resources supervisor Paul Ray. "They cannot afford three meals a day, so at least once a day they come to us."

Rich-poor divide

The Bureau of Labor Statistics reports that by 1997, the nationwide hourly wage of the typical low-income worker (measured as a worker in the bottom fourth of all wage earners) had bounced back to its pre-recession 1989 level. But in California, low-income hourly wages remained more than 12 percent lower than they were in 1989.

Meanwhile, from 1994 to 1998, as the recovery began gathering steam, incomes for the richest 25 percent of L.A. County households jumped by 15 percent.

Experts cite several reasons why the rising tide isn't lifting all boats. The biggest is the surge of immigrants from Mexico and Central America, many of whom lack the skills and education to get high-paying jobs. The Latino population in L.A. County has leapt from around 1.2 million in 1970 to more than 4 million last year.

One-third of all those below the poverty line in L.A. County are Latino.

"The one major difference separating California from other states is the high proportion of immigrants among the working poor," says Deborah Reed, an economist with the Public Policy Institute of California, who recently released a report on the widening income gap. "New arrivals almost always start out at the bottom. And in L.A., this is true in spades."

Many of those immigrants are cutting the lawns, cleaning the houses, and taking care of the children of the middle and upper classes -- typically at minimum wage or less. In fact, there are so many immigrants coming from Latin America and other parts of the world in search of a better life that there is an oversupply of low-skilled labor.

This has distinct benefits for many Angelenos.

Consider that it costs nearly twice as much to employ a housekeeper in Minneapolis ($29.03 an hour) as in L.A. ($16.35 an hour), according to Runzheimer International.

It's not just domestic help that feels the impact of this low-wage labor pool.

"We had people sewing for a subcontractor of Guess who worked nine hours a day, 11 days every two weeks, and they were paid $22.56 for a whole week," says Alice Callaghan, director of Las Familias del Pueblo, a community center on Skid Row serving the families of garment workers. "And there are people that are willing to do that."

Why? Because like so many before them, they see it as grabbing a foothold in the American economy -- perhaps even the American dream.

"Many of these people came from conditions of absolute poverty in Mexico and other places in Central America, where there were no jobs and families were practically starving," says Abel Valeazuela, associate director of the Center for the Study of Urban Poverty at UCLA. "To these people, having any job at all is an improvement."

(Last June, Guess agreed to pay up to $1 million to settle a lawsuit brought by sweatshop employees in 1996. Guess maintains that subcontractors had employed the sweatshop workers and never accepted any responsibility for their employment practices.)

Moving up the ladder

In many ways, the huge labor pool is reminiscent of New York in the late 19th and early 20th centuries, when millions of immigrants poured in from across Europe seeking a better life.

In New York, it took a generation or two for immigrant families to move up the economic ladder. It was the children and the grandchildren of these immigrants who became the engineers, the builders and the financiers of future economic booms.

Yet this time around in Los Angeles, some question whether having so many low-wage workers will help the economy in the long run -- and whether succeeding generations can move up the ladder, as they did in New York 100 years ago.

After all, today's working poor need skill sets that haven't been provided by L.A.'s public education system. And given the troubled Los Angeles Unified School District, any improvement in the quality of education is likely to be a slow process.

Which could mean that for the first time in memory, the children of today's working poor could themselves remain in the ranks of the working poor.

Take Sylvia Gutierrez, a 28-year-old single mother who emigrated from Jalisco province in Mexico with her baby son nine years ago. For the past six years, Gutierrez has worked as a janitor for a non-union firm, cleaning offices in a commercial building on the edge of Beverly Hills. She empties wastepaper baskets, vacuums and cleans floors in a job that has no benefits or paid vacation.

The minimum wage, many long have argued, is often a starting salary and many workers soon progress to higher wage levels. But after six years on the job, Gutierrez still works for $5.75 an hour. Her only raises came thanks to Congress and the voters of California, who approved three modest hikes in the minimum wage in the mid-1990s.

After taxes, she is left with $860 a month.

"I don't have enough money to buy a car," Gutierrez says. "If I have anything left over, it might be $15 or $20 at the end of the month. I really want to earn more."

Gutierrez says she envies the salaries earned by her counterparts at unionized janitorial firms, which range anywhere from $7 an hour to $10 an hour - or $12 for the most experienced janitors. These workers also get full benefits, which she doesn't have.

A hard life

Two of the biggest hurdles for the working poor are transportation and housing. Without a car, Gutierrez takes the subway from her Echo Park home to Wilshire Boulevard and Western Avenue, where she gets on the No. 320 bus down Wilshire to the building where she works. The trip takes more than an hour. Because she gets off work at 2:30 a.m., Gutierrez says she often fears for her safety.

Meanwhile, the lack of affordable housing has forced low-income workers like Gutierrez to double and triple up with relatives or friends. That way, her rent is only $160 to $180 a month for the house she shares with her mother, sister and brother.

With nearly half a million low-income households in L.A. County and only 120,000 low-cost rental units, the vise tightened for low-income workers like Gutierrez.

In fact, the affordable housing shortage is so severe that 30 percent of all households in the city of L.A. live in overcrowded conditions, which federal standards say is more than one person per room. (A one-bedroom apartment typically has four rooms: bedroom, dining room, kitchen and bathroom.) And 10 percent of all households live in severely overcrowded apartments, with at least 1.5 people per room.

With so few affordable units available, 40 percent of all rental households devote more than 35 percent of their income toward rent, the official threshold for affordability. And many of the working poor devote far more of their income toward rent.

"We have people paying 75 percent, 80 percent and even 90 percent of their income to get a roof over their heads," says the Midnight Mission's Paul Ray. "They have no money left over for food, so they come to us."

Looking for answers

What can be done to help the poor, particularly now, before the good times end? There's no "killer app," a single solution to lift them permanently into the middle class.

But some piecemeal approaches could help. Dreier notes that a third of L.A.'s working poor do not claim their share of the federal earned income tax credit, a program that can boost a working household's income by as much as $3,700 a year. Nationally, more than 80 percent of those eligible for the EITC claim it.

He says other cities and states have encouraged or required businesses to let their employees know about the EITC. "It's free money," Dreier says. "All it takes is a bit more investment by human-resources and personnel offices in community outreach to take advantage of this program."

In fact, according to Mark Bender, a legal advocate with Bet Tzedek, a Jewish legal aid foundation, many of the working poor don't know about any of the rights they have.

"They don't know that they are entitled to a minimum wage and overtime, so when their employers don't grant them these rights, they don't protest," Bender says. "A better job needs to be done to reach these people, to let them know they have these rights."

Others say welfare programs should be redirected to give the working poor better access to child care and health care. State and local legislators have supplemented benefits that were cut off as a result of federal welfare reforms, notes Sandra Semtner, director of special projects for the county Department of Public Social Services.

As a result, she says, 85 percent of former welfare recipients who get jobs outside the home receive some benefits. The county Board of Supervisors recently voted to extend those benefits and add training programs over the next five years.

Levenson says that over time, one key is additional investment in "lifelong learning," beginning with the community college system. This can be a relatively inexpensive, accessible way for the working poor to boost their skills. For now, he has little hope that the local K-12 schools can do the job.

Programs that mandate lower class sizes may help, he says, but "right now, the demands being placed on the schools have outstripped their ability to provide the skills that the marketplace demands."

Taxpayer-funded solutions aren't popular with voters, though. Witness the broad bipartisan support for federal welfare-reform measures that placed a time limit on the benefits families could receive.

And other measures that are intended to aid the working poor could unintentionally hurt them. Callaghan notes that moves to crack down on abuses by sweatshops are putting low-wage garment workers out of their jobs.

"(They) are not going to go home," she says. "What they're going to do is look for another industry to move into." As a result, she fears, former garment workers will end up taking the jobs of people in other industries who now make slightly more money.

Some cause for hope

With all that, some observers remain cautiously optimistic. "Through hard work and perseverance, (today's immigrants) believe they can succeed," Valenzuela says. "It's possible but extremely difficult to do so."

One person embodying that optimism is Angel, a 26-year-old day laborer who came to L.A. from El Salvador two years ago. Every morning at 6, he joins several dozen other day laborers at a site the city operates in North Hollywood.

He says he makes between $7 and $10 an hour painting, laying tile, or installing carpet, drywall or roofing, and has had no trouble finding work, though he tends to get there early to get his pick of the better jobs.

"This is a good place," he says of the site, "because employers that come here tend to treat you better. There is also not as much drinking and, you know, rough stuff that goes on at some other places."

Though he makes more than the minimum wage, he says he's not earning enough to save. "I like getting paid every day," he says. "But if you don't come here every day, you don't work and you don't get paid."

Angel lives about a mile from the site in a two-bedroom apartment with his two sons, a brother, uncle, and a couple of cousins, and says he has no intention of returning home. He is confident that one day he will get a contracting license and become his own boss.

"Right here, you can do everything that you want, you can learn any kind of work," he says. "Someday it will happen. I will own my own business."

L.A.'s Changing Underclass

WITH the notable exception of the Depression, whites have rarely made up a large component of the underclass in Los Angeles. Even so, the racial and ethnic composition of the poor has changed over time, as different groups of migrants have come here with the hope of improving their lot.

"Since the late 19th century ... the (local) landscape has been quite distinctly marked by race divisions that were also class divisions." Said Philip Ethington, a history professor at USC.

The city's first major underclass emerged in the 1890s, as the ranchos went into decline and oil was discovered near downtown. Oil attracted large numbers of white Americans from the East, many of whom displaced local Mexicans and Mexican Americans.

During this time, African Americans did surprisingly well, especially when compared with the plight of blacks in other parts of the country, according to Jacqueline sands of blacks migrated here, taking advantage of cheap land and housing to establish stable neighborhoods around Central Avenue, where musicians and artists worked alongside doctors and other professionals in a kind of mini-Harlem.

Even so, L.A. was a Jim Crow town, and by the 1910s whites used mob intimidation and restrictive housing laws to confine the city's blacks to the areas surrounding Central Avenue. The oil, film and rubber industries were also segregated, forcing black Angelenos to take jobs in domestic service and transportation.

By the time the Depression arrived, L.A. had imported a new underclass: "Okies," white farm workers from the plains states who had lost their jobs -- first from the adoption of tractors and then from the ravages of the Dust Bowl. More than 300,000 Okies came to California between 1930 and 1934; meanwhile, another 10,000 migrants from other parts of the country rode into the state each month on railroad boxcars.

The Golden State was slow to receive much public-works spending during the New Deal era, and local charities were overwhelmed by the demands of the newly poor, according to historian Kevin Starr's 1996 book "Endangered Dreams: The Great Depression in California." It took the completion of the Central Valley water project and World War II to lift the local underclass. Thousands of white males were employed in public-works jobs associated with the water project.

During the war, L.A.'s African-American population nearly doubled, with many black men arriving here to work the shipyards and in the steel and aircraft industries. Many kept their jobs after the war, but housing remained segregated and racial and class divisions intensified.

Today's poor are predominantly Latino, made up of recent immigrants from Mexico and Central America. Nearly a third a L.A. Latinos now live in poverty, compared with 22 percent of African Americans and 10 percent of whites.

Rick Henderson

About This Series

FOR the next three weeks, the Business Journal takes an extensive look at why the number of poor in Los Angeles is increasing and what it means for the economy at large. The three-month project involved scores of interviews with local and national experts, as well as an extensive economic analysis of L.A.'s lower-income groups.

This week, the focus will be on the ever-increasing division between rich and poor in Los Angeles. Next week, attention will, shift to the problems of the chronic poor, including the homeless and the elderly, and whether government and private initiatives are providing enough support. The last part, on Dec. 20, looks at the challenges facing L.A.'s working poor.

Poverty by the Numbers

* L.A. County residents living at or below the poverty level of $16,530 (for a family of four):19.2%

* L.A. County poverty rate in 1990: 15.1%

* L.A. County residents now living in poverty (estimate): 1.9 million

* Number in poverty in 1990: 1.3 million

* L.A. County residents receiving public assistance (as of September 1999):

Cal WORKS: 610,000

General relief: 63,000

Medi-Cal: 832,000

Food stamps: 102,000

* K-12 students in L.A. County who were enrolled in the federal school lunch program in 1997: 58.7%

In 1989: 45.7%

* L.A. County high school graduates who enrolled in higher education in 1996: 56%

In 1987: 64%

* Day-laborer sites in L.A. and Orange counties: 87

* Employer abuses most frequently cited by day laborers: No food, water or breaks

* Lowest hourly wage day laborer says he will accept (average): $6.91

* State minimum wage: $5.75

* City of L.A. living wage: $7.25

* Percentage of households earning less than $12,000 a year that don't have health insurance: 59%

* Average hourly cost of a housekeeper:

L.A.: $16.35

Minneapolis: $29.08

Fargo, N.D.: $10.75

* Average monthly cost to commute to work by bus on the MTA: $62

* Ethnic group with highest percentage living in poverty: Latino (32 percent)

* L.A. households paying more than 35 percent of their total income for rent in 1995: 41.1%

In 1970: 28%

* Families in the city of L.A. living in subsidized housing: 88,000

* Per-capita taxpayer expense for public housing programs:

Los Angeles: $31

Chicago: $74

New York: $90

Sources: U.S. Bureau of Labor Statistics, California Budget Project, Public Policy Institute of California, Runzheimer International, Southern California Association of Non-Profit it Housing, UCLA Center for the Study of Urban Poverty. United Way of Greater Los Angeles