It's nice to discover I'm not crazy: http://www.goodman-games.com/forums/viewtopic.php?p=36918#p36918
At least someone else was under the same impression I was. I think I can remember the concept coming up at the playtest in February at DunDraCon, but perhaps I misunderstood Joe's intent at that time. I seem to recall the words "An elf that then levels up as a Wizard would be less elf-y" or something to that effect, and maybe there was an unstated "and that would be crazy! So the game doesn't work that way" that I didn't pick up on. It could also have been eaten up in background noise.
And so, I suppose my reading of the RAW is actually the discovery of a typo of sorts...
The demi-human classes of dwarf, elf and halfling may only be selected by characters whose 0-level occupation was of that race.
This reads to mean that my human farmer can't turn into a dwarf (by choice of class, anyway). It does not
preclude an Elf Thief or a Halfling Wizard...
The book should say something like...
The demi-human classes of dwarf, elf and halfling advance only in their appropriate racial class.
...or words to that effect.