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


In this section, two types of nonexperimental evidence are reviewed.  The first comes from the broad-based studies of the impact of experience on wages.  The second set of studies are more tightly focused on persons with limited skills.

Claims about the long-term benefits of work partially reflect the well-documented fact that the average wages of persons with more labor market experience are higher than the wages of persons with less work experience.  The growth in average wages are particularly large in the first few years on a job.  Loprest (1992) estimates that the average gain in earnings during the first four years of full-year work is 7.1 percent per year for males and 5.7 for females.(11)  Part of this reflects growth in wages on the job, but a large part reflects wage increases that accompany job changes.  While the gains from experience decline with age, they still remain substantial.  For example, the four-year growth for persons with 10 years of experience is about 10 percent per year for males and 5 percent for females.(12)  Thus, if getting the target population started into work world yields these average benefits, then there would be substantial long-run benefits from work.

The problem with using this evidence on the average return is that the rewards to experience vary widely across the population.  The estimated average return includes persons who gain little or nothing from greater work experience.  Their below average return to experience is offset by others who gain substantially from working an extra year, thus pulling up the average.  Likewise, the average gains from job changes may not be relevant for the population of policy concern.  What may be stepping stones to better jobs for some may be dead-end jobs for others.  Thus, averages may tell us very little about what would happen if the target population were gaining experience.

More tightly focused studies are, therefore, required to measure future benefits to a low-skilled worker from taking a job.  The key question is how to tighten the focus.  One approach is to limit the analysis to persons who started with low wages.  But this is likely to be misleading for two reasons.  First, low-wage workers include a large number of young people who face very different prospects than the population of policy concern.(13)  Again, we are faced with a counterfactual question.  If a welfare recipient had taken the same lowwage job that went to a college-bound 18-year-old, would she have experienced the same wage growth  This seems unlikely.  There are too many differences between an AFDC recipient and a college-bound teenager to use one's experience to infer the experience the other would have had.(14)  Second, some of these people received low wages temporarily, which would have rebounded in any case, even if the person had not landed the job.  This "reversion to the mean" will tend to overstate the gains to those who were not on the rebound.

An alternative is to limit the analysis to persons who have characteristics similar to the target population, such as persons in low-income households or welfare recipients.(15)  But even this will not be satisfactory if the workers in these groups are systematically different from the target population.  For example, if the welfare mothers who work are more motivated or living in areas with greater access to jobs, then their future outcomes could reflect these differences rather than the causal effects of their lack of early work experience.  If these individual characteristics (e.g., greater ability or motivation) are the source of their success, then we cannot use their experiences to infer what would have happened to less-skilled or less-motivated recipients had they gained early labor market experience.

A few studies have tried to estimate the returns to experience of welfare recipients and some have tried to adjust their estimates for the fact that the welfare recipients who did work were likely to be the ones who would gain the most from work.(16)  Moffitt and Rangarajan (1989) estimate wage trajectories for female heads with children less than 18 years old.(17)  Their estimates indicate that the average wage growth of an 18-year-old former recipient is only 2 percent per year.(18)  These very flat profiles are not directly comparable to the much steeper experience profiles discussed above (5.7 percent gain), which are for full-time work.  Since many former recipients work part-year, their returns are proportionally lower.  For example, if full-year work increases wages by 5.7 percent per year, then half-year work would increase wages by roughly 2.9 percent The relevant growth rate depends crucially on the question being asked.  Do we want to know the wage gains former welfare recipients would have experienced if they had landed full-time/full-year jobs or the wage gain from the jobs they would typically get?(19)

Again, it is important to recognize that the estimated wage growth of 2 percent per year for welfare recipients who landed a job is an upper bound estimate of the wage growth for non-working recipients.  These non-working recipients either had less to gain from working or were less likely to be hired if they did apply for jobs.  As a result, their expected wage growth is likely to be lower than the 2 percent per year wage growth for those who did land jobs.

Bartik (1997) also attempts to estimate the returns to work for welfare recipients by using a sample of female heads who received some form of public assistance in the previous year.  He estimates that the female heads who worked the average number of hours per week in the previous year (31.5 hours) at the average wage rate ($5.14) experienced a 4.5 percent increase in wages.(20)  Part of the difference between these estimates and those from Moffitt and Rangarajan (1989) seem to lie in the high proportion who worked last year (30.4 percent) and the high average number of hours per week worked last year.(21)  It is again unlikely that those welfare recipients who did not work would have had as high a wage growth or worked as many hours.  Therefore, this again forms an upper bound on what non-working recipients would have gained had they worked.

Two other studies give indirect evidence on the future value of work experience.  Burtless (1995b) traces the wage histories of a cohort of young women who received AFDC in the late 1970s.  These young recipients had an average wage that fluctuated in the $6 to $7 range throughout the next 10 years.  Two things are striking about Burtless's numbers.  First, these wages are low.  Even if current recipients could earn as much as these women who voluntarily entered the labor market, they would still earn less than $15,000 a year working at a full-time, full-year job.  Second, and more importantly for our question, is the low change in wages as these women gain experience.  Over a 12-year period the average wages of these former recipients grew by less than $1.  This amounts to a growth rate of roughly 1 percent per year, which is even lower than from Moffitt and Rangarajan's (1989) estimate and consistent with the small long-term effects on wages of work found in the experimental literature.  Corcoran and Loeb (1999) also find small average wage gains for former welfare recipients (wages rise from $6.32 to $7.86 over the course of the panel).  This seems to be largely the result of former welfare recipients working few weeks and being disproportionately likely to work part-time, which has little or no effect on future wages.  However, when former welfare recipients do work full-time, their future wages increase by roughly 6 percent for every year of work.

Finally, Newman (1999) has followed a sample of 350 low-wage workers households who applied for entry-level jobs in fast-food establishments.(22)  Newman has recently reinterviewed 103 of these low-skilled women to find out whether their initial success at entering the work world had paid off.  For roughly a third, the news is good.  They have moved up in the fast-food business or obtained jobs in unionized shops and are making more than $10 per hour.  Another third is earning between $5.50 and $10 while the remainder of those who initially landed jobs in the fast-food industry now find themselves unemployed or still at the minimum wage.  The fact that a third are earning $10 or more and that another third experienced some growth in wages is impressive, but this must be tempered again by the caveat that these growth rates almost certainly overstate the returns to experience of people who do not seek or cannot find entry-level jobs.  These job applicants had considerably higher education and experience than the typical welfare recipients.  In fact, even the applicants who were turned down for the fast-food jobs had higher education than the typical welfare recipient.(23)