The Low-Wage Labor Market:

Challenges and Opportunities for Economic Self-Sufficiency

Mismatch in the Low-Wage Labor Market:
Job Hiring Perspective

By Harry J. Holzer

Contents

Introduction

In a very tight labor market, such as the one experienced by the United States during the mid- to late- 1990s, there seem to be ample numbers of jobs available for workers who want them.  Yet, while there is no shortage of jobs facing workers in the aggregate, there may be some workers with very poor skills and other labor market problems that prevent them from becoming easily employed, especially in the short-term.

As welfare recipients and other unskilled workers enter the low-wage labor market, many for the first time, what characteristics and behaviors of employers will they encounter?  Will workers have the skills and personal characteristics that employers seek?  Will some face discrimination due to their race or gender?  Will they experience other difficulties gaining access to certain jobs, such as those located in distant suburbs, because of problems with transportation and information?  What are the implications of these difficulties for their employment/earnings prospects, and what policies might be needed to overcome these problems?

This paper considers some evidence on the characteristics of the demand side of the labor market that unskilled workers face, and on the potential mismatches that might result because their own characteristics are not those sought by employers.  It then considers the implications of this evidence for a variety of policy approaches.

What Is Mismatch?

The issues described above are generally associated with the problems of labor market "mismatch," or imbalances, between the characteristics and behaviors of employers and jobs on the demand side of the labor market and those of workers on the supply side.(1)  Mismatches in the labor market can occur along a variety of dimensions, such as skills, geographic location (i.e., "spatial mismatch"), and even race. They often develop as a result of two factors: (1) Labor demand "shifts" away from unskilled workers, or those located in inner-city neighborhoods, for a variety of reasons (e.g., technological change, immigration, and international trade or high crime rates and taxes in the city); and (2) Adjustments occur too slowly by specific groups on the supply side of the market in response to these changes.

When demand shifts occur in labor markets, they create incentives for workers to make a variety of adjustments. For instance, a shift in demand toward more highly skilled labor increases the gap in wages between more-educated and less-educated workers, which should induce more workers to enroll in school and achieve higher educational levels (as emphasized in the "human capital" model). Similarly, when employers relocate from central city to suburban areas, workers can adjust either by moving to these areas or by commuting to jobs located there.

But some of these adjustments take many years, and particular groups might face high costs or other barriers in making the adjustments. For instance, young people from families with very low incomes might not be able to afford additional schooling or, because of the poor quality of schools in their neighborhoods, might not have the academic skills to pursue it. Inner-city minorities, especially African Americans, might be constrained from moving to the suburbs by housing market discrimination or high residential costs (where the latter might partially result from exclusionary zoning practices); and they might not commute to these areas because of lack of automobile ownership and difficulties with public transit, as well as a lack of information or support networks in these areas. Such "mismatch" problems might be exacerbated by discrimination among employers, which some economists had once assumed would disappear in competitive labor and product markets, but which actually appear to persist over time.(2)

Taken together, these labor market factors could result in low wages and/or employment for minorities and other unskilled workers over extended periods of time. An imbalance between supply and demand in the labor market should result only in lower wages for the disadvantaged group if wages are flexible and markets are generally in "equilibrium." But if labor market rigidities (caused, for example, by legal minimum wages or employer wage policies) keep wages from adjusting, or if the disadvantaged workers choose to "queue" for the higher-wage jobs rather than accept lower-wage ones, then mismatches could result in high unemployment rates for these groups as well. Even in equilibrium, low market wages might result in labor market withdrawals and high rates of nonemployment (rather than unemployment) for the disadvantaged group.

Employer Skill Needs and Potential "Mismatches"

Even in jobs that require relatively little in the way of formal education or credentials, employers often seek a variety of basic skills in their job applicants, and a set of personal characteristics that they think reflect those skills.(3)  The skills and characteristics generally sought by these employers can be summarized as follows:

Job Readiness.  Given that poor work performance and employee turnover can be costly to employers (because they have to take time and spend resources recruiting and screening job applicants to replace poor workers), most want some indication that job applicants will meet at least minimal standards of performance before they are hired. These standards include showing up for work each day on time (i.e., minimal tardiness and absenteeism), having a good "attitude" or work ethic, willingness and ability to follow instructions, etc. Employers tend to judge this characteristic by looking for some stable work history and references, by avoiding those who might have substance abuse problems or criminal backgrounds, and through their own judgment of the applicant's character in an interview. Of course, employer abilities to judge job readiness from these factors might not be as strong as they think, and subjective impressions could well lead to discriminatory outcomes in some cases. For instance, roughly half of employers claim that they would not hire someone without stable work experience into noncollege jobs, and roughly two-thirds would not hire someone with a criminal record. Yet, only 35 to 40 percent use drug tests or check criminal records more formally. This suggests that some employers try to infer criminal activity and incarceration from other factors, such as gaps in an applicant's schooling and work history. The limited predictive power of employer interviews with respect to subsequent job performance has been well-documented in the human resources/personnel literature.

Social/Verbal Skills.  For jobs such as those in the clerical, sales, and service areas that involve a substantial amount of contact with customers (either in person or over the phone), employers seek at least a minimal level of social or verbal skill. These may also be needed where workers must interact with each other, in "teams" or the like. Over 70 percent of newly filled noncollege jobs currently involve some daily contact with customers, and a comparable percentage are in the clerical, sales, and service categories.

Basic Cognitive Skills.  Most jobs that employers are currently trying to fill, even when they do not require college degrees or other evidence of skill, involve the need to perform elementary arithmetic calculations, read (or even write) paragraph-length material, and/or use a computer on a daily basis. Each of these tasks is performed daily in 50 to 70 percent of all recently filled noncollege jobs. Indeed, only about 10 to 15 percent of all newly filled jobs require none of these tasks. Employers seek evidence of ability to perform these functions from whether (and where) the applicant has attained a high school diploma, from other jobs that they have performed, and even sometimes from their ability to fill out a written job application without serious misspellings. High school diplomas (or GEDs) are considered "absolutely necessary" or "strongly preferred" in about three-fourths of all noncollege jobs. Yet employers do not necessarily believe that these signals indicate much about cognitive ability, especially when the diploma has been attained at an inner-city high school.(4)  In general, employers seem to regard high school diplomas as minimally "necessary" but not "sufficient" to prove basic cognitive ability.

Job-Specific Skills.  Skills that are somewhat specific to the job in question are needed in many cases as well. These are generally measured by whether candidates have any experience or training in that particular line of work. Employers might also administer job-related tests, such as those for typing ability. Specific previous experience is necessary or strongly preferred in about 65 percent of noncollege jobs; about 40 percent also require previous training or skill certification, and tests are administered in about half.

Summary:  Demand vs. Supply of Skills among the Disadvantaged

While most of the required skills described above are fairly minimal, they may be beyond what many workers bring to the low-skilled labor market. For instance, some research reports that over 60 percent of long-term welfare recipients lack high school diplomas or GEDs.(5)  Most are concentrated in the bottom 20 to 25 percent of the U.S. distribution of test scores, and a majority of those with very limited work experience over many years are concentrated in the bottom 10 percent.(6)  Significant fractions also report disability or substance abuse problems. Indeed, it is frequently estimated that 30 percent or more of current or recent welfare recipients may not meet the most basic job readiness or skill requirements for employment.(7)  Among unskilled and African American young males in particular, skill problems are compounded by the pervasiveness of criminal records. For instance, at least a third of all young black men between the ages of 16 and 34 have some type of criminal record; and this fraction rises to over 60 percent among young black men who are high school dropouts.(8)

Of course, a small number of jobs with minimal or no skill requirements (beyond those of job readiness) might be sufficient to absorb the relatively small number of workers who lack those skills, but there remains considerable uncertainty about whether this is true. Some recent evidence(9) suggests that there may not be enough of these jobs in the short-run for all those who might want or need them, particularly when labor markets are not as tight as they are currently.

Also, more jobs can be created over the longer term in response to increases in labor supply, but these will require even further declines in wages among very unskilled workers. And, to the extent that such jobs are available to workers who want them, the problems of high turnover and very low wages/benefits will almost certainly plague these employees.(10)

Racial Discrimination

Does racial discrimination continue to limit the employment opportunities available to minorities?  This has been a controversial issue in economics. Statistical evidence of racial disparities in employment outcomes across groups does not necessarily imply that some groups face discrimination, since there are many other personal characteristics and preferences of workers that are correlated with race. Recent evidence suggests that, when we net out racial differences in educational attainment and/or cognitive ability (such as test scores), there remains little difference in wages between whites and blacks(11) or between whites and Mexican Americans.(12)  Of course, discrimination in housing markets or unequal funding of school districts could help to generate differences between groups in average educational attainment or quality.

Wage vs. Employment Effects

Furthermore, it would be incorrect to conclude that labor market discrimination is no longer a factor for minorities, especially blacks. For one thing, the evidence cited above is based on hourly or weekly wages rather than employment rates; major racial differences in the latter still can be found even after netting out these differences in skills. For instance, Neal and Johnson report that significant racial differences in annual earnings, which reflect employment rates over the year as well as wages, remain even after controlling for test score differences.

These findings are consistent with the recent results of "audit" studies in the labor market, in which matched pairs of white and black job applicants with equal credentials are sent out to apply for advertised jobs. These studies generally show that white applicants are more likely than equally qualified blacks to receive job offers.(13)  This evidence is also supported by ethnographic studies of employers,(14) which reveal that very negative perceptions of African American workers are held by many employers.(15)

The fact that discrimination may persist in employment but not in wages could also result partially from how Equal Employment Opportunity (or EEO) laws are administered in the U.S. Most EEO cases currently involve charges relating to discharges or promotions, rather than hiring activity.(16) Employers might therefore face a higher probability of lawsuits when they do hire minorities than when they do not, which might then lower their willingness to hire from these groups.(17)

Differences in Discrimination by Sector and Minority Group

Recent evidence from studies of employers also suggests that hiring discrimination against blacks is much more severe at some kinds of firms than others. For instance, black applicants are much more likely to be hired at large establishments than at smaller ones, and they are less likely to be hired in jobs involving contact with white customers.(18)  The latter may be part of a larger pattern of greater discrimination against blacks at suburban than central-city establishments. The evidence also suggests that hiring discrimination is more severe against black males than females and against blacks than Hispanics.(19)  These inferences are based on comparisons of hiring or employment rates of specific demographic groups with the rates at which they apply for jobs at various kinds of establishments. While the tendency of any group to be hired relative to its share of the applicant pool might reflect relative skills or other factors, these seem unlikely to account for the particular patterns that we observe in the data. The relatively greater preference for Hispanics likely reflects a broader preference among employers for immigrants over native-born blacks, in jobs that do not require cognitive or verbal skills, because of a stronger perceived work ethic among the former.(20)

Summary:  Does Discrimination Matter?

Of course, if there are sufficient numbers of non-discriminating employers relative to the size of the minority labor force, it might well be possible for minorities to avoid the adverse effects of discrimination on their employment or earnings by applying for work primarily at non-discriminating firms. Indeed, there is some evidence that Hispanics may successfully be doing so, while blacks are not. Hispanics are hired in rough proportion to their share of the applicant pool, while blacks are hired much less proportionately.(21)  But even if there are sufficient numbers of nondiscriminators in the market, and if they could be clearly identified, the employment opportunities of minorities are likely to be limited by other barriers when they seek employment in these firms (such as those associated with skills, etc.). Indeed, skill demands facing noncollege graduates seem to be relatively higher in larger firms and in those located in the central cities, precisely those where discrimination against blacks seems least severe.

Spatial Mismatch, Information, and "Contacts"

In addition to the problem of greater discrimination against blacks in suburban establishments, they may face limited access to these jobs because of the "spatial mismatch" problem noted above. Despite some modest recent declines in residential segregation between whites and blacks,(22) the geographic concentration of poor people and especially poor blacks in predominantly low-income neighborhoods is on the rise.(23)  While poor people and blacks, on average, live closer to currently existing jobs than do whites, they are generally located farther from areas of net employment growth.(24)  Job vacancy rates and wages are also higher in less-skilled jobs that are located in predominantly white suburbs rather than cities or racially mixed suburbs, suggesting better labor market opportunities for those with access to the former.(25)

Whether these factors have contributed to lower employment rates among blacks or low-income workers has been heavily contested in the economics literature, but the preponderance of recent evidence suggests that it has.(26)  Furthermore, some effort has recently been made to identify the specific mechanisms by which spatial mismatch operates. Transportation does, indeed, appear to play some role.

For instance, inner-city black workers without cars have more difficulty gaining suburban employment than do black workers with cars, and employers located near public transit stops attract more black applicants and new employees than do those located further away.(27)  Presumably, the access of low-income inner-city residents to suburban employers depends not only on the proximity of employers to mass transit stops, but also on the distance of various employers from low-income neighborhoods and the extent to which direct public transit routes are available between these sites (i.e., without the need to change buses or trains one or more times). Suburban areas located near the central city and those with significant minority residential populations will presumably be much more accessible than predominantly white areas located farther away.(28)

There is also some evidence, both direct and indirect, suggesting that the information available to inner-city blacks about job openings in predominantly white suburbs is limited as well.(29)  Finally, the ability of low-income females to engage in lengthy commutes to distant areas is likely to be limited by their child care needs. On average, women engage in shorter commutes than men.(30)

The issue of information about job openings suggests a more general problem facing blacks and perhaps other unskilled workers who live in low-income neighborhoods: their lack of "contacts" and connections in the labor market. While the role of informal contacts in the job search process is stressed elsewhere in this volume (by Henly), there are a few differences across ethnic and income groups in this process. For instance, the use of networks and contacts to generate employment has been very extensive among Hispanic immigrants.(31)  But among native-born blacks, these networks have been somewhat less effective in generating employment and have often generated jobs in predominantly black establishments that pay relatively low wages.(32)  For those minorities in poor communities where few adults reside, the lack of contacts with the labor market might be one of several mechanisms through which "social isolation" appears to limit their employment opportunities over time.(33)

Wage Levels, Expectations, and Illegal Alternatives to the Labor Market

One final source of mismatch might be considered here: a gap between the wages that workers can earn on the demand side of the market, and what they expect or consider acceptable, that is, their "reservation wages." Recent evidence suggests that, while reservation wages are lower among blacks than whites at an "absolute" level, they are somewhat higher among the former relative to what they might actually be offered in the labor market(34); and less-educated young black men appear to have dropped out of the labor force at greater rates than comparable young white men in response to declining wages.(35)

For the former, the opportunities they face in the legitimate labor market may not compare favorably with what they perceive to be available in the illegal market. But, once they become incarcerated and fail to accumulate some early labor market experience, their ability to reenter the legitimate market, and to earn anything above very minimal wage levels, appears to be seriously impaired.(36)

On the other hand, these results also imply that policies that improve the access of unskilled young workers to jobs with higher wages/benefits or potential wage growth over time might raise their willingness to accept early employment, lower their turnover rates out of employment, and thus enable them to gain early market experience that should help them improve their long-term earnings potential.(37)

Policy Implications

The evidence described above suggests that unskilled workers, especially inner-city minorities, face a variety of barriers on the demand side of the labor market relative to their own characteristics: high-skill demands of employers, racial discrimination, lack of transportation to and information about suburban jobs, and lack of effective networks and "contacts." Taken together, these factors generate difficulties for unskilled workers in gaining or keeping employment, especially at wages/benefits above the most minimal level.(38)

These problems suggest the need for a wide range of labor market interventions by government and other local agencies.

Job Placement Assistance from Intermediaries

Many of the "mismatch" problems noted above that are associated with spatial issues, such as transportation and information, can be addressed with assistance from labor market "intermediaries," that is, third party agencies that can help bridge the gap between workers and potential employers along a variety of dimensions. These agencies can assist workers with job search or job placement, particularly if they develop good relations with local (often suburban) employers. They can also provide workers with transportation assistance, limited amounts of training (often targeted to jobs with specific employers), and support services aimed at improving job retention. Well-known examples of intermediaries that incorporate some or all of these activities include the Center for Employment and Training (CET), STRIVE, and Project Match in Chicago; around the country, a wide range of institutions (such as community-based organizations, community colleges, and others) are increasingly looking to play these roles.(39)  The "Bridges-to-Work" demonstration currently being conducted by the Department of Housing and Urban Development also incorporates some of these notions (though with a relatively greater emphasis on transportation).(40)

Thus, the intermediaries can help address "mismatch" problems related to spatial issues and race, and perhaps those dealing with skills as well. The intermediaries should be especially useful in tight labor markets (such as those we are currently experiencing), where many employers have strong needs for unskilled labor and are having difficulty meeting their needs with their traditional hiring practices. But, to maintain the confidence of local employers, the intermediaries must practice careful screening of its participants and cannot place those who lack job readiness or other basic employment skills. Indeed, this conflict between serving the needs of employers and those of disadvantaged workers has hampered the effectiveness of the U.S. Employment Service(41) and other intermediary agencies. If intermediaries need to screen out the most disadvantaged workers to maintain their credibility with employers, then other approaches will have to be developed to provide some opportunities (or at least a safety net) for those groups of workers.

Improving Enforcement of EEO Laws

While racial discrimination in hiring is likely to be less severe in tight labor markets, the evidence suggests that it persists, particularly in small and/or suburban establishments. Improving the enforcement of EEO laws at the hiring stage in these sectors might therefore be a useful complement to activities that are designed to overcome spatial barriers to suburban employment. But to do so effectively the government would need to develop new ways of monitoring employment practices in these types of establishments.(42)

Job Creation

For those individuals who might have difficulty meeting very basic private-sector skill demands on their own, even in tight labor markets, job creation strategies are an option to consider. These should be used as needed, especially in local areas or time periods when there is more slack in labor markets.

These efforts can take the form of subsidized employment in the private sector or direct public-sector employment. The latter can be explicitly "transitional" in nature, designed to provide individuals with early labor market experience and perhaps some credentials that would indicate to private employers their job readiness and competencies with regards to basic skills; at the same time, some services to local communities can be provided as well.(43)  In other cases the employment might be viewed instead as work of "last resort," perhaps as a condition of receiving continued public assistance (such as in "sheltered workshops" for those who are not job-ready).

Wages, Benefits, and Other Supports

Given the high turnover rates and low wages/benefits that characterize employment for unskilled workers in many jobs, enhancing their earned wages and benefits might be a precondition for enabling them to achieve some economic self-sufficiency. Several states already have, or are currently considering implementing, earned income credits against state taxes that parallel the federal Earned Income Tax Credit program. The federal program needs to be periodically updated or indexed to the cost of living, to maintain the real value of credits over time. Since those without children, especially noncustodial fathers, currently qualify for very little credit, we should consider expanding it to cover them as well.

Additional subsidies for health care, child care, and transportation should also be considered. On the last issue, redesigning public transit routes to allow easier access of inner-city residents to areas of high job growth in the suburbs might also be a useful policy approach.

Over the Long Term:  Skills and Mobility

While all of the approaches outlined above might improve employment and earnings prospects for unskilled workers, over the longer term, our goal should be to improve the skills that many workers bring to the labor market in the first place. The relevant skills here include the basic cognitive/social skills described above, early work experience, and credentials that clearly signal those skills to employers. To achieve these, young people in low-income communities must have improved opportunities and incentives for learning over their entire childhood and adolescence. Approaches therefore should include early childhood development programs, school reform efforts and school choice, effective school-to-work programs, and more support (both financial and informational) for post-secondary education and training.

Given the fairly strong evidence that is developing on how racial and perhaps economic segregation impair the educational and employment outcomes of young blacks,(44) policies designed to improve the residential mobility of these individuals seem warranted as well. The "Moving-to-Opportunity" demonstration project incorporates this approach, as did the earlier Gautreaux program. Evidence from the latter indicated positive effects on the earnings and employment of parents who moved as well as on the educational attainment of their children(45); early evidence on the former does not yet show any labor market effects for parents, but implies a major reduction in the exposure of children to crime, which could well lead to improvements in educational attainment and additional decreases in crime participation over time.(46)  Creating incentives for localities to reduce their exclusionary zoning practices or build more housing for lower-income residents(47) should be encouraged as well.

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Footnotes

1.  See, for example, Wilson (1987); Kasarda (1995); Holzer and Vroman (1992).

2.  See Becker (1971).  Discriminatory behavior can persist if employers are catering to the tastes of customers, or due to a variety of labor market imperfections.  "Statistical" discrimination, based on imperfect employer information about the productivities of individuals within different groups, can persist as well under a variety of conditions.

3.  Most of the results cited below appear in Holzer (1996), though some of the qualitative evidence also appears in Moss and Tilly (1995).

4.  Zemsky (1997); Kirschenman and Neckerman (1991).

5.  Pavetti (1995).

6.  Burtless (1995); Pavetti (1997).

7.  Maynard (1995).

8.  Freeman (1992).

9.  Holzer and Danziger (1998).

10.  Blank (1995); Burtless (1995).

11.  Neal and Johnson (1996).

12.  Trejo (1997).

13.  Bendick et. al. (1994); Fix and Struyk (1994).

14.  See, for example, Kirschenman and Neckerman (1991).

15.  Wilson (1996) emphasizes that black employers share many of these negative impressions of young black workers, generating some question about whether these perceptions really reflect discrimination.

16.  Donohue and Siegelman (1991).

17.  Bloch (1994).

18.  Holzer (1998); Holzer and Ihlanfeldt (1998); Lane, this volume.

19.  Holzer (1996).

20.  Kirschenman and Neckerman (1991).

21.  The data on Hispanics are primarily drawn from Los Angeles in Holzer (1996).  Evidence of hiring discrimination against Hispanics appears in Kenney and Wissoker (1994).

22.  Farley (1995).

23.  Jargowsky (1997).

24.  Hughes and Sternberg (1992); Raphael (1997).

25.  Ihlanfeldt (1997).

26.  Holzer (1991); Kain (1992).

27.  Holzer et al. (1994); Holzer and Ihlanfeldt (1996).

28.  Kain (1992); Stoll et al. (1998).

29.  Ihlanfeldt (1996); Raphael et al. (1998).

30.  Holzer et al. (1994).

31.  Falcon and Melendez (1997).

32.  Holzer (1987a); Browne and Hewitt (1996).

33.  Wilson (1987); O'Regan and Quigley (1996).

34.  Holzer (1986).

35.  Juhn (1992).

36.  See Freeman (1992).  Perceptions of higher returns in illegal than legal work are based mostly on relative wages, and may not involve adjustments for the risks of incarceration or long-term prospects.

37.  Holzer and LaLonde (1998).

38.  For discussion of employer perspectives on these issues, see the paper by Lane in this volume.

39.  Of these, only CET has been formally and successfully evaluated (Melendez (1996)), though evaluation of replication efforts are still under way.

40.  Enterprise Zones and other approaches that stress economic development in or near low-income neighborhoods are another way of overcoming the geographic "mismatch" problem.  While evaluations of earlier efforts indicated that they were not cost-effective means of generating employment for zone residents (e.g., Papke (1992)), the more recent "Empowerment Zone" projects of the Clinton administration may prove somewhat more successful, as the funds can be used for a much broader range of community and labor force development activities.

41.  Bishop (1993).

42.  Currently, only firms with 100 or more employees (and smaller ones with federal contracts) are required to file EEO-1 forms so that the racial composition of their establishments can be monitored.  A different approach might involve the use of auditors, who can be targeted toward smaller and suburban establishments.  Another approach could involve the use of real job applicants, who are supported and encouraged to apply for suburban jobs while carefully recording all establishments to which they apply.

43.  Examples of these approaches include the National Supported Work Demonstrations, Youth Corps, and Youth build.  See the paper by Barnow in this volume for more discussion of these issues.

44.  See, for example, Cutler and Glaeser (1997).

45.  Rosenbaum and Popkin (1991).

46.  Katz et al. (1997).

47.  Haar (1996).


Where to?

Main Page and Contents | Preface | Chapter Authors ]
Executive Summary
Introduction & Overview
Defining & Characterizing the Low-Wage Labor Market
Low-Wage Labor Markets: The Business Cycle and Regional Differences
Can the Labor Market Absorb Three Million Welfare Recipients?
Does the Minimum Wage Help or Hurt Low-Wage Workers?
Job Creation for Low-Wage Workers
Matching & Mismatch in the Low-wage Labor Market:  Hiring Perspective
Matching & Mismatch in the Low-wage Labor Market:  Job Search Perspective
Work as a Stepping Stone for Low-Skilled Workers
Job Turnover in the Low-Wage Labor Market
Appendix:  Statistical Data and Background Information

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