A central analysis issue for the study is how to define low-wage workers. As discussed in detail in Chapter II, researchers have used a variety of definitions of the low-wage labor market, and each definition has advantages and disadvantages. Because of project budget constraints, it was not feasible to conduct analyses using each of these measures. Therefore, we needed to select among the alternative measures.
Our primary approach for defining low-wage workers was to use the hourly wage at which a full-time worker would have annual earnings below poverty for a family of four. We calculated separate low-wage cutoff values for each calendar year the SIPP panel covered. We then classified a worker as "low-wage" if the worker's wage rate was less than the cutoff level in the calendar year when the wage rate was reported. Using U.S. Department of Health and Human Services poverty guidelines and assuming a full-time worker works 2,080 hours per year, we set the low-wage cutoff at $7.50 in 1996, $7.72 in 1997, $7.91 in 1998, $8.03 in 1999, and $8.20 in 2000. We also defined medium-wage workers as those with wage rates between one and two times the low-wage cutoff value and higher-wage workers as those with wages more than twice the low-wage cutoff value.
We adopted the absolute low-wage cutoff approach so that the analysis could focus on low-wage workers and their jobs based on a well-defined cutoff value. We did not use the minimum wage as the absolute wage cutoff value, because it sets the bar too low for defining the low-wage labor market. We rejected using definitions based on family income levels, because that approach would be appropriate for examining working poor households rather than low-wage workers.
We used the absolute wage cutoff rather than a relative wage cutoff, because the relative wage cutoff allows for no change over time in the fraction of the labor force that is defined as low wage, even if living standards of low-income workers change. For example, under the relative wage approach, a worker earning a wage rate at the 20th percentile of the wage distribution at two time points would be classified as a low-wage worker at each point, even if the wage distribution for low-wage workers shifted over time (that is, even if the worker's wage rate changed). Thus, the relative wage approach would provide less information than the absolute wage cutoff approach on the extent to which low-wage workers enter and exit the low-wage labor market over time. Furthermore, we rejected using a definition based on the skill levels of workers, because not all workers in the low-wage labor market have low skills.
We did, however, construct samples of low-wage workers using alternative definitions when we estimated the size of the low-wage labor market as part of the descriptive analysis presented in Chapter III. The rest of the analysis, however, was conducted using only the absolute low-wage cutoff measure.
Finally, one implication with the absolute low-wage cutoff measure is that the low-wage threshold was constructed for a household of average size and, thus, may be too low for larger-than-average households and too high for smaller-than-average ones (although it is correct on average). One approach for addressing this issue would be to define wage cutoff levels by household size so that the cutoff values would be higher in larger households than in smaller ones. We rejected this option, however, for two main reasons. First, the unit of analysis is the low-wage worker, rather than the low-income working household; thus, it is preferable to use a uniform definition for all workers. Second, household size often changes over time, so people's cutoff values would often change over time, which would lead to analytic complications. For example, suppose a worker held the same job and received the same wage rate in two successive months. If the worker's household size decreased in the second month, then the worker could be classified as a low-wage worker in the first month but not in the subsequent one.