Down And Out In Silicon Valley

Plenty are left behind by the greatest wealth machine in history

Don't talk to Fawnda Stewart about the economic miracle of Silicon Valley. The 24-year-old high-school graduate moved to the fabled Valley in early 1999 from her native Bellingham, Wash., after her marriage of three years ended in divorce. She had heard that jobs were plentiful, and sure enough, Stewart found work packing software for Oracle Corp., whose runaway success landed it in the BUSINESS WEEK 50 this year. Although she was actually employed by a temp agency that fills 30 of the 40-odd positions in Oracle's Belmont (Calif.) facility, the $8.50-an-hour pay was nearly 25% more than Stewart earned as a nursing assistant back home.

But Stewart quickly discovered that the promised land of sunshine and untold wealth was a dead-end trap for blue-collar workers like her. Her $1,400-a-month salary wasn't enough to pay for even a studio apartment, which starts at $800 a month, and still cover food and day care for her son, Justyn, 3. And as a contract worker, Stewart had little chance to move up at Oracle or get in on its employee stock-purchase plan. (Oracle's stock has soared eightfold since Stewart started there a year ago.)

For months, Stewart and her son lived like virtual prisoners in paradise. First, they crashed with Oracle co-workers, then stayed in hotels. Finally, last summer, they moved into a homeless shelter in nearby Menlo Park. When her allotted time there ran out in December, Stewart shipped out to another shelter in Redwood City. Justyn spent his days at day care while Fawnda worked. They ate food donated by the shelter, rarely leaving their bare-bones room to save $200 a week. Determined to escape, Stewart calculated how much she needed to save to rent a U-Haul and make the trip back to Bellingham. By early February, she had scraped enough together and left. "There's no way I can make it here," Stewart said before she departed. "I can't keep my head above water."

Stewart's story is the sobering side of one of the greatest economic success stories the world has ever known. Silicon Valley, the heart of the high-tech miracle that has transformed the U.S. economy, has probably created more wealth in a shorter time period than virtually any other place in history. For many residents, it has been a bonanza, turning thousands of ordinary people into millionaires and lifting average incomes faster than in any other major urban area in the U.S.

FALLING BOTTOM. But El Dorado looks a lot less golden to families on the bottom. Average incomes for the lowest fifth of Valley households fell during most of the 1990s and are just getting back to 1992 levels, according to a January report by Joint Venture: Silicon Valley Network, a group of local business and community leaders co-chaired by the Mayor of San Jose, Ron Gonzales, and former Hewlett-Packard Co. Chairman Lewis E. Platt.

Average wages for low-end Valley workers have done even worse: They're 10% lower today than a decade ago. A key reason: high tech's heavy reliance on outsourcing and subcontracting. It's a model that helps higher-skilled techies thrive, able as they are to hop from one employer to another, jacking up their pay with every move. But for the less skilled, outsourcing only serves to hold wages down.

In fact, the Valley's fountain of riches has made life worse for the less fortunate. With so much money sloshing around, living costs in Santa Clara are some 40% higher than in the rest of the country, according to Economic Research Institute, a Redmond (Wash.) firm that does corporate relocation surveys. So the purchasing power of poor families has plunged in the midst of unrivaled prosperity. Last year, San Jose's soup kitchen served 83,000 people a month, a 27% jump from 1998. Much of the burden is borne by minorities, who became a majority of Valley residents in 1999. The growing nonwhite population, largely Mexican immigrants, are the most cut off from the high-skilled job market. "The high-tech people are driving up prices for the rest of us," complains Rachel Rivera, who with her husband, a laborer, raised their five children in Mayfair, San Jose's Hispanic barrio.

Costs have exploded the most in home prices, up by a staggering 65% in the past five years--more than three times faster than the national average. Homeless shelters have long waiting lists of families squeezed out onto the streets even though they hold jobs. Often, people live crammed together, five and six adults or more in an apartment, just to pay the rent. Many middle-class families, too, are struggling to keep up. Just 29% of Valley families can afford the median home, now priced at an eye-popping $421,000.

You might say Silicon Valley is choking on its own success. Rather than a stampede of wealth-seekers anxious to get in on the latest Gold Rush, there was an outflow from Santa Clara County last year: 13,000 more people left than moved in from elsewhere in the U.S., according to the California Finance Dept. Companies are starting to worry that their expansion plans are being crimped by a lack of available workers. More than a third of local high-tech jobs go unfilled, according to a Joint Venture survey of employers. It and other business groups are so concerned that they have funded extensive studies of long-term housing and transportation needs. In 1996, business groups backed a hefty 5 cents county sales tax to raise $1.5 billion for a light-rail system. "These are the biggest challenges for executives here in terms of the Valley's long-term economic health," says Carl Guardino, president of the Silicon Valley Manufacturing Group, whose members include Intel Corp., Cisco Systems Inc., and most of the Valley's large high-tech firms.

It may even be that the Valley is running into structural roadblocks that will prompt companies to expand elsewhere, slowing the region's heady growth. "E-commerce still needs a lot of customer service agents and fulfillment people who can't support the outrageous cost of living," says Christian Larsen, CEO of E-Loan Inc. "You'll have an exodus of these people, which is dangerous for companies." In October, 1998, Larsen moved his 320-employee company from Palo Alto to Dublin, 28 miles away across the San Francisco Bay, because his employees couldn't afford the Valley.

No question, the high-tech explosion has made a lot of people very rich. Consider this: Santa Clara County has at least 13 billionaires worth a combined $45 billion, plus several hundred more families worth at least $25 million, according to a 1999 study by The San Jose Mercury News. An amazing 17,000 households have liquid assets of $1 million or more, excluding the value of their homes, according to market researcher Claritas Inc. Since 1990, average family incomes in the Valley have soared by more than 50%, to nearly $83,000 a year in 1999, without adjusting for inflation--vs. 36% for all U.S. families, which average just $47,800 today.

But when you look at how the wealth has been distributed, a rich-poor gulf emerges that is much wider than in the country as a whole. The incomes of the top fifth of Valley households handily beat inflation, posting a 29% gain since the 1992 recession, according to a Joint Venture analysis. Meanwhile, the bottom fifth saw their incomes lag consumer prices through most of the 1990s. Despite a 7.6% real gain between 1996 and 1998 (the last year available), these families are still earning nearly $1,000 a year less, when adjusted, than in 1992.

Of course, low-skilled Valley workers have been pummeled by the same forces affecting low-end workers across the country: The New Economy rewards skill and education. Valley software workers average $96,000 a year, and those in the semiconductor industry get $86,000, according to Joint Venture. By contrast, workers in retailing, hotels, restaurants, and similar services--the sectors with the most employees in the Valley--average $23,000 a year. "We're a high-productivity economy, which puts a premium on talent," says Joint Venture President Rueben Barrales. "If you're not part of that, you're left out."

The more troubling factor is high tech's growing reliance on outsourced labor. High-tech companies were among the first in the country to adopt the idea of "core competencies," focusing on the products or services they know best while subcontracting other work to outside companies as much as possible. This gives high-tech firms maximum flexibility in a fast-moving industry. It also creates a highly contingent workforce. Part-timers, temps, contract workers, and the self-employed have jumped from 19% of Santa Clara's workforce in the 1980s to 42% today, according to Working Partnerships USA, a union-affiliated group that helps such workers. By contrast, the share of contingent workers in the U.S. as a whole has climbed from 27% to 33% over this period.

OMINOUS LESSON. These loose employment ties work to the advantage of many high-tech employees, whose skills are in hot demand. But contingency has undercut the already weak bargaining power of less-skilled workers, says Doug Henton, the president of Collaborative Economics, a Valley consulting firm that provided the analysis for Joint Venture's January report. After a decade of stagnation, low-skilled Valley workers' wages finally beat inflation in 1998, but by just 2.8%--at a time when bottom-third workers across the U.S. had scored 10% real gains. By 1998, bottom-third Valley workers earned only $10.54 an hour, 11% less than in 1989.

There's an ominous lesson here for Corporate America, much of which has moved to embrace contingent staffing. In recent years, the effect on low-skilled workers has been offset by the lowest unemployment rates in a generation. But if contingency grows to Silicon Valley levels, less-skilled employees in the U.S. may find the tide turning against them again. And because the skill gap in high-tech is so vast, they're likely to benefit less from the upward mobility that allows many low-skilled workers to achieve middle-class status in the U.S. "Silicon Valley companies realize that our economy is shaped like an egg timer, with people at the very top making a whole lot of money and then people at the low end," says Barbara Beck, senior vice-president of human resources at Cisco. "We're working with community colleges to help disadvantaged kids get the education they need for better jobs. But Cisco can't solve all the world's ills."

Low-skilled workers are so lacking in bargaining clout that even in Silicon Valley, some get pushed into illegal piecework and homework. Because high-tech companies outsource so extensively, many factory workers are several steps removed from the household-name corporation that sells the product they make. High-tech companies often turn over their factory work to companies such as Milpitas (Calif.)-based Solectron Corp., a contract electronics manufacturer. It has grown to an $8.4 billion company with 45,000 workers--including 6,700 in Silicon Valley--since its founding in 1977. Like many contract manufacturers, up to 15% of Solectron's workers are temps. Hundreds of smaller contract factories do the work as well, often subcontracting again to even smaller outfits.

Last fall, the California Labor Commissioner fined three Valley electronics subcontractors a total of $185,000 for not paying overtime to workers who did piecework or homework. The fines were the first results of a larger investigation the commissioner launched after a San Jose Mercury News story last summer documenting widespread homework--often at $4 or $5 an hour--at 14 electronics contractors, from small companies to Solectron. They build parts for high-tech firms such as Hewlett-Packard, Sun Microsystems, and Cisco. (The commissioner found no violations by Solectron.)

Kamsan Mao has done his share of homework. In 1992, the Cambodian immigrant was hired to do electronics assembly work at home by San Jose-based Top Line Electronics Corp. Top Line manufactures and repairs computers and computer parts for Lite-On Inc., which does the same thing for major companies such as Compaq Computer Corp. Kamsan would go to Top Line's factory, pick up computer parts, and take them home to assemble or repair. He stopped the homework when Top Line hired him to work in its factory in 1992. But in 1994, his boss asked him to start taking work home again to meet delivery deadlines.

To keep his job, he agreed, even though he earned less than $5 an hour on homework. Kamsan, 32, is single and rents a small room in San Jose with friends. One room is all he could afford on the $11.20 an hour he earned in the factory by the time he was laid off in 1998--a month after he decided to stop doing homework. In December, Kamsan, helped by Equal Rights Advocates, a San Francisco advocacy group, filed a lawsuit against Top Line and Lite-On, alleging that they broke labor laws by paying him below the minimum wage. "Many times I wanted to stop doing the homework, but I felt I couldn't or I would disappoint my bosses," says Kamsan, who's now working at a similar electronics subcontractor. Top Line declined comment. A Lite-On lawyer says the company had nothing to do Kamsan's employment conditions.

HOUSING SQUEEZE. It's not just vulnerable immigrants who are struggling contingent workers. Eileen Wodjuda, a San Jose native, got a marketing job with a Valley firm in the 1980s after graduating from San Diego State University. But she was laid off in the 1992 recession and has been trapped ever since in an endless cycle of secretarial jobs. Wodjuda earns enough to sustain a middle-class lifestyle, but her income is erratic. Wodjuda earned $44,000 in 1998 at a biotech firm before sliding to $41,000 in her next position at a research company. "Here I am with a B.S. from a good college, and I can't even keep a job as an administrative assistant," fumes Wodjuda.

Most corrosive is the high cost of housing. Since 1992, Santa Clara county has created more than 250,000 jobs but fewer than 50,000 new homes, according to a 1999 study by the Silicon Valley Manufacturing Group. So more people are squeezing into existing housing, driving up the average household size from 2.8 persons in 1990 to 3.0 today. Future job growth is likely to create a demand for another 146,000 homes by 2020, says the report, an unusual collaboration with the Greenbelt Alliance, a land conservation group, and local governments. But the current projected supply of new housing will meet just half that need. The report recommends changes in land-use policies to spur increased housing density.

Many low-wage families have to double up in the same apartment or house. Take Juan Manuel Cervantes, a 23-year-old janitor at semiconductor maker KLA-Tencor Corp. in San Jose. He pays $350 a month--nearly half his $800-a-month take-home pay--to share a two-bedroom house with a friend, a brother, a sister, the sister's two children, her husband, and the husband's brother. Together, they pay $1,400 a month for a rundown place with moldy walls. Cervantes, who actually works for a temp agency, sleeps on the couch in the living room. His brother, who works nights, takes the couch during the day.

Then there are those who can't even hang onto a shared apartment. About 20,000 people experienced a bout of homelessness last year, says Maury Kendall, communications manager at the Emergency Housing Consortium (EHC), which runs three homeless shelters in the county. His shelters, plus several run by other groups, accommodate about 500 people a night, leaving as many as 1,000 people sleeping on the street on a typical day, Kendall estimates. EHC's main shelter opened in 1997 in a converted engineering laboratory General Electric Co. shut down in the early 1990s. A large open room with bunk beds sleeps 150 adults, while 10 former office cubicles house families with children. About 40% of the homeless have jobs, with most earning $8 to $15 an hour.

Families face the most difficult time. Because children can't stay in the dorm room, which has drug addicts and alcoholics, families with kids must wait for up to six months to get into one of the few separate shelter rooms. EHC has 10 rooms for families and a waiting list of 125--some of whom stay with friends, in cars, or on the street. A family may stay for up to three months while they search for permanent housing.

Once low-income families lose their foothold, it's easy to get caught in a vicious cycle of homeless and joblessness. Tracey Lovett moved to San Jose in 1985 after finishing a year of college. She earned $15,000 to $20,000 a year as an insurance company claims adjuster. But the job had no medical benefits, so Lovett, a single mother, went on welfare to pay the hospital bills when her son Malcolm was born in 1995. Lovett soon returned to work, but she could only find temp jobs that paid on commission to do claims adjusting. She ended up back on welfare, and last September, she and Malcolm moved into EHC's San Jose shelter. Two months later, she landed an $11.50-an-hour medical records job, allowing her and Malcolm to leave the shelter. But rent now eats up half her income. "It's hard to keep a job if you're homeless," says Lovett.

Silicon Valley's housing shortage affects the middle class, too. The people on whom corporate employees depend --teachers, police, firefighters--are finding there's no room for them. Just ask Adam Casburian and Robin Jungmann, a couple who came from Chicago last fall to teach at San Jose's Lincoln High School. Their unionized jobs pay about $36,000 a year, so their combined income is enough for a decent apartment. But the $2,600 monthly rent has them in shock. "Before I moved, I calculated how much I would need," says Casburian. "But the $3,000 I had saved up is all gone." They're not desperate, like Fawnda Stewart. But "we don't plan to stay here long, maybe through the end of the school year," says Casburian.

There are no easy answers to the problems that gnaw at Silicon Valley. Transportation and housing shortages could be alleviated by more infrastructure spending, although it would require tax hikes. Valley leaders could also push to build more apartment units and other high-density housing, although that would alter the California lifestyle that attracts so many people in the first place.

Wage and income inequality are even bigger obstacles. Groups such as Joint Venture advocate programs to help lower-income students finish high school and get into college. And Working Partnerships USA pushed through the country's highest living-wage measure, a San Jose law requiring city contractors to pay a minimum of $9.50 an hour. But if the Valley's wealth gap isn't addressed in more fundamental ways, its golden reputation will be tarnished.

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