The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Work as a Stepping Stone for Welfare Recipients: What Is the Evidence? . Impact on Earnings

02/16/2000

Given this experimental and nonexperimental evidence, what can one conclude about the ability of less-skilled workers to attain self-sufficiency through work  While the estimates of returns to experience for less-skilled people vary widely, there is a strong consensus that they all start with low wages and that they work only part-year.  Thus, even fairly high rates of growth in wages will leave them with low earnings.

This is illustrated in table 1, which shows estimated wages, earnings and earnings plus the Earned Income Tax Credit minus child care costs for a woman with two children.(24)  This example uses an entry wage level of $5.50, which is consistent with evidence on the wages received by welfare recipients mandated to work.(25)  Future wages are calculated under alternative assumptions about growth rates.  Columns 1 and 2 use a wage growth rate of zero, as suggested by the experimental literature.  Columns 3 and 4 assume that low-skilled workers who did not work would have experienced growth rates half as much as those estimated by Moffitt and Rangarajan (1989) for former welfare recipients who did work.  Columns 5 and 6 are labeled "high growth" since these columns assume that low-skilled persons who did not work would have experienced the same growth as those who did work.  In order to translate wage rates into annual incomes, earnings for persons working quarter-time and half-time are used.  This covers the range of hours worked in the experiments reviewed in Friedlander and Burtless (1995).(26) 

Table 1.
Growth in Wages and Earnings Net of EITC and Child Care Cost for a Mother with Two Children

(Poverty Line of $12,641)
  No Growth Low Growth High Growth
  Quarter-time Half-time Quarter-time Half-time Quarter-time Half-time
Wage
Age
18 $5.50 $5.50 $5.50 $5.50 $5.50 $5.50
25 $5.50 $5.50 $5.74 $5.96 $5.96 $6.47
30 $5.50 $5.50 $5.88 $6.27 $6.27 $7.15
35 $5.50 $5.50 $6.02 $6.56 $6.56 $7.83
40 $5.50 $5.50 $6.14 $6.84 $6.84 $8.50
Earnings
Age
18 $2,503 $5,005 $2,500 $5,005 $2,503 $5,005
25 $2,503 $5,005 $2,611 $5,427 $2,713 $5,884
30 $2,503 $5,005 $2,677 $5,708 $2,854 $6,510
35 $2,503 $5,005 $2,739 $5,974 $2,987 $7,130
40 $2,503 $5,005 $2,795 $6,221 $3,110 $7,731
Earnings plus EITC
Age
18 $3,504 $7,007 $3,500 $7,007 $3,504 $7,007
25 $3,504 $7,007 $3,655 $7,598 $3,799 $8,238
30 $3,504 $7,007 $3,748 $7,991 $3,996 $9,113
35 $3,504 $7,007 $3,835 $8,363 $4,182 $10,786
40 $3,504 $7,007 $3,913 $8,709 $4,354 $11,387
Earnings plus EITC minus Child Care
Age
18 $2,254 $4,507 $2,250 $4,507 $2,254 $4,507
25 $2,254 $4,507 $2,405 $5,098 $2,549 $5,738
30 $2,254 $4,507 $2,498 $5,491 $2,746 $6,613
35 $2,254 $4,507 $2,585 $5,863 $2,932 $8,286
40 $2,254 $4,507 $2,663 $6,209 $3,104 $8,887
 
  Growth adj 0.5 0.5 1 1
  Full time adj 0.5 1 0.5 1

 

Since columns 1 and 2 assume no growth from experience, wages are constant at $5.50 per hour at all ages.  This translates into annual earnings of $2,503 for quarter-time work and $5,005 for half-time work.  The EITC raises this to $3,504 for quarter-time and $7,007 for half-time work, but the cost of child care brings net earnings back down to $2,254 and $4,507 for these two groups.  With a poverty level of $12,641 for a single woman with two children, this leaves the family in poverty, even if the mother works half-time year-round.  In fact, even full-time work would leave a three-person family in poverty.  Thus, if the experimental evidence is correct that wages do not grow with experience, then even a full-time job will leave the family poor.

As discussed above, the nonexperimental evidence is more optimistic.  If low-skilled workers experienced half the growth in wages of working recipients, then a mother working quarter-time year-round in all years between ages 18 to 40 would find herself with a wage of $6.14 by the time she reached 40, which yields annual earnings of $2,795.  Her income net of child care costs plus the EITC would be $2,663.  A woman working half-time would have higher earnings both because she worked more hours and because she gained more experience.  As a result, the $5.50 wage would grow to $6.84 by the time this half-time worker reached 40.  After the EITC and child care cost, this woman would have an income of $6,209, or 49 percent of the poverty level.

If one were to assume that the gains from work would be as high for the target population as it was for the sample of working former recipients, then the $5.50 wage at age 18 would have grown to $8.50 by the time this half-time worker reached 40.  While this rapid rate of growth would have raised wages by 54 percent over this 22-year period, the person started with such a low wage that net earnings would still only be 70 percent of the poverty level for a family of three.