Plenty of good jobs with government and UW-Madison as the solid, steady anchors. Good schools, chock-full of middle-class, college-bound students. Easy to find a nice, affordable place to live.

That was then.

This is now: State government shedding jobs. Madison businesses moving to the suburbs. Companies facing business competition from Austin, Texas, to Shanghai. More families short on cash and stuck in low-paying jobs. Growing numbers of trophy homes priced exclusively for the rich. And a feeling among business people that Madison's city leaders are out to get them.

These changes threaten to create some of the thorniest challenges the Madison area has faced in decades, according to a Wisconsin State Journal analysis of economic data from a broad range of sources and interviews with 100 economists, business operators and others.

"We look relatively rich, relatively low-poverty, relatively well-educated" compared to other cities, said labor economist Laura Dresser. But she added, "Madison is changing much faster than I think people have a handle on."

Some say it's time to quit basking in the glow of No. 1 ratings from magazines that, in truth, signify little. Time to set aside divisive spats and unite as a region, launching bold moves that buck tradition.

Otherwise, the Madison area runs the risk of becoming a home for the rich and the poor - with fewer and fewer holding up the middle - a scenario that could rapidly diminish our treasured quality of life.

"I do worry about that," Mayor Dave Cieslewicz said. "That's the history of much of urban America."

It can happen here. Capitol Square once had empty storefronts. Drug dealers and prostitutes used to ply their trades on now-upscale King Street. Neighborhoods along the south Beltline are only now recovering from years of decay.

And that was before the new challenges to our economy.

Dresser sums up the core problem this way: "How do we spread the wealth, embrace the diversity, upscale the bottom?"

Change is here

For now, Madison's economy is chugging along. Despite some accusations that the city is doing all it can to push business away, the current economy is vibrant, the State Journal analysis found.

"I think that the Madison economy is doing very well right now," said Patrick Schmid, associate economist at Moody's Economy.com, an economic research organization in West Chester, Pa. "It's growing faster than most Midwestern economies, which is spilling over into impressive job creation."

Business services jobs - such as computer programming, commercial art, advertising and equipment rental - are on the rise, he said, and, perhaps surprisingly, "manufacturing is very much assisting in the area's growth."

With Milwaukee County losing jobs and population, "we look at Dane County as being the largest economic county - in total personal income - in the state of Wisconsin by 2020, maybe sooner," said David J. Ward, president of NorthStar Economics in Madison.

But that figure is only part of the equation. There are several key complications on the horizon, experts say:

State government is growing much more slowly than the private sector, and some longtime, stable, white-collar jobs are disappearing from both sectors.

The population is expanding and changing. Many new arrivals have no money, little education and don't speak English.

Growing businesses now consider sites around the globe, and competition is fierce for prized technology companies, where local leaders have placed their faith.

Some commercial developments are heading for Madison's suburbs, chipping away at the city's tax base. Meanwhile, complaints that city leaders are anti-business may be giving the area a black eye.

A slipping anchor

Madison has long been the home for state government and the University of Wisconsin System and its largest campus. Public sector paychecks have powered and protected the local economy.

But government jobs here are no longer the fail-safe path to a good living and a comfortable retirement.

U.S. Department of Labor statistics show that during the past five years the number of state government employees - not including university or health-care workers - in Dane County has shrunk and now includes fewer people than even manufacturing, which provides about 9 percent of the jobs in the county.

Traditional state government employees who work in Madison offices performing functions ranging from collecting taxes to licensing cars - accounted for about 17,083 jobs in 2000 in Dane County or 6.2 percent of the work force. By 2005, more than 1,500 of them were gone, and the total dropped to 15,498, representing 5.2 percent.

More state jobs could disappear, with Gov. Jim Doyle's pledge to reduce the state workforce by 10,000 by 2010.

These are jobs that generally pay well - about $46,000 a year, state figures show - with enviable health insurance and pension benefits. Hiring of state civil service workers has fallen to its lowest level since 1995, according to the state Office of Employment Relations.

Rachel Resch of Middleton took an exam in April to qualify for a $16-an-hour state job determining benefits for people with disabilities. "Working for the state of Wisconsin, I'd be proud," she said then.

She passed the exam, but Resch, 33, wasn't contacted for an interview.

Some private-sector employers are shrinking, as well.

Nearly 500 jobs have been eliminated so far in a continuing "restructuring" at CUNA Mutual Group, historically one of the area's largest, most stable, employee- oriented companies with - in the past - 2,600 local positions.

Coupled with the state reductions, the result is a sizable chink in the armor that's protected Madison's economy from significant harm during past nationwide recessions. It's also a blow to our middle class.

Overall, private sector jobs are on the rise, but most of the fastest growing occupations pay less. State projections show that between now and 2012 these jobs will see the biggest gain in south-central Wisconsin: registered nurse, retail salesperson, nursing aide, customer service representative and food service worker.

Of 12 occupations projecting the biggest jumps in Dane and five neighboring counties during that time period, only three pay an average wage of more than $12 an hour. The other nine average between $8.05 and $11.72 an hour, or $16,744 to $24,378 a year.

Changing populations

Walk into any Madison public school and you'll get a vivid illustration of the area's class, cultural and racial changes.

Poverty is spreading. Students who qualify for free or reduced-cost school lunches now make up 38 percent of the district's enrollment, up from 20.3 percent in 1991, according to School District data.

Their parents are a growing segment of Dane County's workforce. That means a lot of residents are earning wages so low - less than $35,798 a year for a family of four, according to federal guidelines - the government must help feed their children.

Minorities are now 44 percent of the students, nearly three times as many as the 14.9 percent of the school population 20 years ago. They are natives of many lands and many parts of the U.S. Some families have moved here for jobs at UW-Madison or at technology businesses. Others come with little more than their hopes for a better life. The diversity brings a richness of culture and experience, but it also brings social challenges. Like many cities, Madison has its share of racial tensions. Minorities still can face barriers built on prejudice.

Compounding the problem, many of the new immigrants don't speak English, and they are more likely to have less education and few financial means, data show.

The county's Latino population grew 150 percent during the 1990s and, in 2004, was estimated at nearly 19,000, or 4.3 percent of the county's residents by the U.S. Census Bureau. In June, a United Way report, based on school enrollments, estimated the Dane County Latino population at 40,000. The new residents want to work or start a business and have a strong work ethic, said Peter Munoz, executive director of Centro Hispano. "Potentially, they can be a tremendous force for the economy."

But most of the jobs available to them pay little. "Their lack of language skills, lack of knowledge of how things work in this country, and their lack of resources tend to relegate them to certain socio and economic strata in this community," Munoz said.

Antonio Valencia left his wife of one year and his 2- month-old daughter in Guadalajara, Mexico, and came to Madison in February. With the help of cousins and friends here, Valencia soon found a job earning $9 an hour, ripping out carpets and installing new ones.

Like many, Valencia loves the lakes and sports here. He works, attends an evangelical church and sends a little money home when he can.

Valencia, 20, worked in construction in Mexico and never finished elementary school. His dream is to save enough to return to Mexico. But that doesn't necessarily mean he's only a short-term part of the economy - his cousins have been working in Madison on and off for at least five years, he said. For now, he's sharing a rented split-level ranch house with five cousins.

Housing costs soar

For the poor, housing is another "real, very large problem," Munoz said.

The average home price in Madison is now $239,449. Downtown penthouse condos and mansions in gated suburban subdivisions top the million-dollar mark.

In Madison alone, 80 residences are valued at $1 million or more, according to the city assessor's office. In 1997, there were five.

"Questions of diversity and inequality are going to be the big problem," said economist Dresser, associate director of the UW-Madison's Center on Wisconsin Strategy, a left- leaning research group. "We have grown way too many jobs that don't have wages and benefits people need," she said, calling it an "American soft spot."

Unskilled and semi-skilled workers, in general, are affected, said Jim Cavanaugh, president of the South Central Federation of Labor.

"For that kind of work, this is not a high-wage area and never has been, and yet the cost of living, particularly housing, has continued to skyrocket," he said.

Specialized job-training programs fill quickly. Operation Fresh Start teaches young people construction and workplace skills; it has a waiting list of 1,000 - "significantly higher than it's ever been in our 36- year history," said executive director Connie Ferris Bailey.

Pitching for prosperity

While a number of communities in Dane County have a flourishing manufacturing base - a sector with relatively high pay - Madison doesn't see itself as an industrial hub.

"If we had the opportunity to get an auto manufacturing plant, would we take it? That's an interesting question," said Mark Bugher, chairman of the Madison Economic Development Commission, which advises city officials on the needs of business.

Wayne Corey, executive director of Wisconsin Independent Businesses, a group that lobbies and provides other help to small businesses, said the community decided about 30 years ago that it wanted clean industry. "We'll put up with Oscar Mayer smokestacks, but we don't want any others."

Now the big push by civic leaders is to grow existing businesses and expand the area's technology industry, with its highly skilled, high-paying jobs, widely touted as the roadmap to economic success.

It's a natural, with a national stem-cell research center at UW-Madison, technology parks in Madison and Fitchburg, a handful of tech incubators and about 475 science and technology businesses scattered throughout Dane County. The tech field is burgeoning and now makes up about 9 percent of the local economy.

Winslow Sargeant came to Madison late last year. Co- founder of an East Coast semiconductor company that was later sold for $890 million, Sargeant now helps other tech startups as a partner in Madison's Venture Investors venture capital firm. "You can make a mark here," he said.

But it's a field where job growth is slow, with startups generally adding a couple of employees here or there until a company hits it big - which can take years, if it happens at all.

And communities across the globe want tech industry, so competition can be fierce.

Promega, Dane County's premier biotech company, with $176 million in annual sales and 850 employees worldwide, got a whiff of that through an offbeat overture from Jacksonville, Fla.

Three black boxes were sent, a couple of weeks apart, to Promega owner Bill Linton. In the first was a bent golf club with a note: "If you move your business to Jacksonville, the only thing you'll have to worry about is your golf game."

The next box held binoculars and said, "We can see your business here in Florida." That was followed by a Tonka truck with a message: "Let's get to work."

Linton, whose company is building an addition onto Promega's Fitchburg labs and offices, didn't bite. But the creative pitch sent an alert, said Fitchburg economic development director Michael Zimmerman.

"The competition is raising the bar," he said. "We have to make sure we're competing and not falling behind."

Suburban competition

Meanwhile, a trickle of companies has pulled up stakes in Madison and resettled in the suburbs over the last two or three years.

Dwarfing all others is Epic Systems, the medical records technology company with $370 million in annual sales that's been moving its more than 2,000 employees from Madison's West Side to a six- building, 40-acre campus in Verona.

It is a blow to Madison's tax base. But experts say Madison is not an island - this is a regional economy.

"In a sense, there is no Madison economy; there is a Madison-area economy," said Bill Strang, UW-Madison School of Business emeritus professor and former associate dean.

That idea is driving efforts such as the business-led Collaboration Council, which plans to create a regional economic development organization to shine the Madison area's light across a wider market. Local leaders can no longer afford to sit and wait for companies to build here, or even to continue to grow here, experts say.

Already, there have been losses as companies look well beyond Dane County's borders to expand or consolidate. Rayovac Corp. - now part of Spectrum Brands - moved its distribution center from Madison to Dixon, Ill., in 2003 and the following year, shifted its corporate headquarters from Madison to Atlanta.

"Things come and go a lot faster than they used to. So I wouldn't get too comfortable," said NorthStar economist Ward. "There are a lot of competitors out there."