The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Can the Labor Market Absorb Three Million Welfare Recipients?. Two Views of the Job Market


Economic theory by itself does not tell us whether enough jobs can be found to employ all welfare recipients expected to leave the rolls.  Labor market analysts are divided in their views on this question.  Broadly speaking, analysts can be classified in two schools of thought.

One group, consisting mainly of conventional economists, holds that wage and employment levels are largely determined by standard supply and demand factors.(1)  The wage and employment levels for a particular occupation in a local labor market are determined by the abundance of workers in that market who possess the willingness and necessary skills to enter the occupation on the one hand, and the demand of local employers for persons in that occupation on the other.  Occupations in which qualified workers are abundant relative to employer demand will offer low wages; occupations in which qualified workers are relatively scarce will see high and possibly increasing wages.  Since it takes time, money, and special aptitude for workers to accumulate the skills necessary to enter some occupations, the number of qualified workers in those occupations will be low and the average wage will be high.  Occupations requiring less education, specialized skill, or aptitude can be filled by a much larger percentage of the local workforce, and wages in those occupations will be commensurately low.

In this conventional supply-and-demand model, unemployment is either temporary or is caused by some imperfection in local wage determination that interferes with the market clearing process.  Temporary unemployment is inevitable in any market where people are constantly entering or reentering the labor market, where struggling firms must sometimes lay off workers, and where dissatisfied workers quit their jobs in search of better ones.  In the supply-and-demand model, however, unemployed workers are assumed to quickly become reemployed at the prevailing wage in their occupation.  This will not be true if an imperfection in wage setting causes wages to depart from the "market-clearing equilibrium" level, however.  One such imperfection is the legal minimum wage, which may prevent wages from falling far enough so that employers are willing to offer jobs for every worker wishing to find one.  Another imperfection may be union-negotiated wage settlements or personnel department rules that might boost wages above the level needed to clear the local labor market. Unemployed workers would be willing to work at the union-negotiated wage, but employers will not find profitable opportunities to offer enough positions so that all the unemployed can hold jobs.

A second group of analysts subscribes to the "queuing model" of unemployment.(2)  According to this theory, limits on overall demand or problems inherent in capitalist labor markets are what prevent employers from offering enough jobs for all workers who are willing to hold them.  This job shortage produces a queue of job seekers for each job vacancy.  Unemployed workers in the queue are identified by a variety of characteristics, such as their job skills, educational attainment, race, ethnicity, and gender, characteristics that employers use to distinguish among more and less desirable job candidates.  Workers with the most desirable traits are the first to be hired and are the most likely to hold on to their jobs in a downturn; workers with the least desirable traits are the last to be hired and the first to be let go when employers are forced to scale back their operations.

Predicting the Consequences of Reform

Both models accurately describe some aspects of the U.S. job market, but they provide differing predictions of the consequences of welfare reform. Reform will unquestionably increase the supply of unskilled and semi-skilled job seekers, that is, the number of unskilled workers willing to hold a job at any given wage level.

The conventional supply-and-demand model predicts that the increased willingness of less-skilled workers to hold jobs  the increase in supply  will depress the market-clearing wage.  This, in turn, will persuade employers to offer additional jobs, because unskilled labor can now be hired more cheaply.  At the new equilibrium, the number of less-skilled workers holding a job will increase while the wages they earn will shrink.  The basic model offers no exact forecast of the number of additional workers who will hold jobs.  But it predicts that the level of involuntary unemployment at the new equilibrium will be about the same as it was before welfare reform.  One caution is that the legal minimum wage, as noted, might prevent market wages from falling far enough so that all willing workers find jobs.  In that case, some workers would be willing to accept jobs at the minimum wage but employers will find they cannot profitably offer any additional jobs at that wage.  Consequently, the existence of a minimum wage may mean that welfare reform will push up involuntary unemployment among workers with the least skills.

The queuing model predicts no increase in the availability of jobs but predicts instead a lengthening of the queue of job seekers.  Many welfare recipients pushed off the rolls and into the job market will be forced to join the queue of job seekers.  Some recipients possess traits that make them attractive to employers, and these recipients will displace other job seekers in the queue who would otherwise have been hired.  Most recipients have little education, few skills, and scant work experience, however.  A large percentage are members of racial or ethnic groups that still face discrimination in the workplace. Consequently, welfare recipients will find themselves at the tail end of the job applicant queue, and few of them will obtain jobs.  Those who find jobs will displace other recipients, or former recipients, or similar workers who would otherwise have found employment.  The ultimate effect of welfare reform will be to increase the ranks of the unemployed and to inflict severe hardship on recipients deprived of public aid.

In forecasting the availability of jobs for welfare recipients, it is clearly important whether the supply-and-demand model or the queuing model is more accurate.  The relevance of the two models depends crucially on the time frame of analysis.  In the short run, employers have little flexibility in altering their product lines or methods of production to take advantage of a surge in the number of unskilled job applicants.  They may be unwilling to make a commitment to new product lines or production methods until they are certain unskilled workers' wages will remain low and the supply of unskilled workers remains secure.  In the short run, then, the number of job vacancies in a local labor market will almost certainly shrink as welfare recipients are forced to seek and accept jobs.  Thus, the number of unemployed workers (that is, jobless workers willing to accept jobs at the prevailing wage) will almost certainly rise.

The queuing model provides a plausible description of how local labor markets will operate in the short run.  In the long run, the relevance of the supply-and-demand model increases.  Over a period of several years employers have many opportunities to reconfigure their production methods to take advantage of a more abundant and cheaper unskilled workforce.  They may consider introduction of new labor-intensive goods or services that would have been unaffordable when unskilled workers received a higher wage.  Many of the fastest growing occupations, such as home health care aide, child care worker, and lawn service technician, would not make much economic sense, for example, if the relative wage received by unskilled workers were as high in 1998 as it was in 1968.  The fall in the relative wage of unskilled workers has made it possible for employers to expand many businesses that would have been unprofitable at a higher prevailing wage.

The distinction between the short and long runs is important for another reason, too.  Many people who are pessimistic about the capacity of local job markets to absorb welfare recipients view residential and business locations as fixed.  They recognize that the geographical distribution of jobs differs greatly from the residential location of welfare recipients forced to seek jobs.  The spatial "mismatch" between jobs and job seekers severely limits the employment opportunities available to recipients.(3)

While this view is plausible for short time intervals, such as half a year, it is less relevant when the period of analysis is extended.  People who live in localities, states, or regions where well-paid jobs are scarce or unemployment is high, frequently move to areas where job prospects are better.  For example, among Americans between 20 and 29 years old, the age group in which geographical mobility is highest, one-third of all people moved from one residence to another between March 1995 and March 1996.  In the same period, 12 percent of 20- to 29-year-olds moved across county boundaries and 5 percent moved across state lines.(4)  Business location moves are less frequent but not uncommon.  Businesses often base their location decisions on the availability of a large, adequately skilled, and relatively inexpensive workforce.  Locations in the Southeast and mid-South have long been favored by manufacturing establishments because wages of unskilled and semi-skilled workers are lower in that region than they are in other parts of the country. The migration of manufacturing jobs to the South has helped raise southern wages closer to the national average wage.  Even if existing local employers are unwilling to offer new jobs to welfare recipients, new employers or employers relocating from another region can fill the job gap  in the long run. Alternatively, unsuccessful job seekers can look for work in another area. Jobless workers who are unwilling to relocate can eventually benefit from other workers' mobility.  If their unemployed neighbors move to another area to find work, remaining residents in a neighborhood will face less competition when a new job vacancy opens up.