The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. Characterizing the Low-Wage Labor Market


The first two papers describe the low-wage labor market, how it varies over time, and how outcomes vary for different populations and regions. Jared Bernstein and Heidi Hartmann show how the labor market facing low-wage workers differs in important respects from the labor market as a whole. David Smith and Stephen Woodbury address how this market changes over time and through business cycles, and how it varies across different geographic regions.

What Is the Low-Wage Labor Market?  As Bernstein and Hartmann point out, traditional labor theory views all workers as competing together in a single integrated market and being paid according to their marginal productivity (how much additional product they bring to the firm). In such a market, low-wage work can provide an opportunity to become employed in a stable job and advance up a career ladder. Theoretical and empirical work, however, suggests that the labor market is, in fact, divided into two largely separate sectors, often referred to as the primary and secondary labor markets. In the primary market, most jobs have opportunities for advancement, there is substantial job mobility, and workers typically have employment-related fringe benefits. In the secondary market, in contrast, there is generally considerable job instability but little opportunity to advance up the career ladder, few fringe benefits, and more gender and racial discrimination than in the primary market.

The workers in the secondary labor market of main concern to policy makers are those who are the primary source of income support in their households. Low-wage workers who provide secondary earnings to middle or upper income households are not viewed with the same concern in this policy area; nor are teens who earn low wages temporarily but whose human capital, current or future, gives them strong prospects for job advancement over their working lives.

It is important to note, as Bernstein and Hartmann do, that analysts view low-wage workers through different lenses. Some focus on those who earn low hourly wages, others on those who have low skills, and still others on those who, although their wage rates are somewhat higher, work too few hours (through involuntary part-time work) or too few weeks (through periods of lay-off or unemployment) to yield incomes above the poverty line on a yearly basis. The groups overlap but they are not the same. In particular, though many workers in the secondary market have low basic skills, some have higher skills but fall into the secondary market for other reasons. Different policy interventions may be needed for different situations.

Whatever choices analysts make to identify the low-wage market, the share of all workers who have low earnings is substantial. For example, as Bernstein and Hartmann note, 29 percent of all workers and 35 percent of females workers in 1997 had hourly wages that would be insufficient to lift a family of four out of poverty even if they were to work full-year, full-time. Poverty is a serious problem for many groups of workers, particularly minorities, the less educated, and women with families. Consider workers in the labor force for more than 27 weeks in 1996. Of those with no high school diploma, 16 percent had household incomes below the poverty line. The shares for Black and Hispanic workers were 12 percent and 16 percent-compared with the poverty rate for all workers of 7 percent.

Poverty among workers can result from either low wages or spells of joblessness, particularly among the low-skilled. During 1997, according to Smith and Woodbury, the unemployment rate for men and women without a high school diploma were 13 and 14 percent. These are more than double the unemployment rates for men and women with higher levels of education.

Not all workers in the low-wage market lack education, however, as Bernstein and Hartmann explain. Of those workers with below-poverty hourly wages in 1997, for example, less than one-quarter lacked a high school diploma. But 40 percent had a high school diploma and 38 percent had at least some post-secondary education. As a result, new entrants to the low-wage labor market, particularly those coming from welfare, may find it difficult to compete with the more highly educated working poor.

Has the Low-Wage Labor Market Been Changing?  The share of workers with low earnings has been rising in recent years. Bernstein and Hartmann document that the share of workers with below-poverty hourly wages has risen from 25 percent of all workers in the early 1970s to 29 percent in 1997. Smith and Woodbury find that the share of workers with low-wage or near low-wage jobs (below $7.50 an hour) rose from 36 percent in 1988 to over 41 percent in 1997. And among workers in the labor force for more than 27 weeks in the year, the poverty rate for women without a high school diploma increased from 14 percent in 1988 to 19 percent in 1997. (For changes in the characteristics of the working poor, see Appendix Tables 3.1 to 3.4.)

The hourly wage gap between women and men has narrowed since the 1970s. But this primarily reflects steep wage declines for men rather than wage improvements for women.  Although real wages for both men and women fell from 1973 to 1997, the sharpest decline occurred for men, according to Bernstein and Hartmann. Men with and without a high school diploma suffered real wage declines of 17 percent and 30 percent. Real wages for women during this same period fell much less, 16 percent and 3 percent for women with and without a diploma.

Bernstein and Hartmann emphasize that these wage declines occurred in spite of increasing education and work experience among workers and increasing returns to human capital. They suggest that at least some of the reason may be changes in institutional factors such as minimum wage laws, macroeconomic monetary policy, the role of unions, and international trade policies.

In spite of the narrowing gender gap in hourly wages, women remain disproportionately represented in the low-wage market.

How Was the Low-Wage Labor Market Affected by the Last Recession?  The economy is currently strong and unemployment at its lowest point since 1970. Policy makers need to worry about how the low-wage labor market will fare during a future economic downturn, however, since Smith and Woodbury show that low-wage jobs are often the first to be cut during a recession. Overall job growth among hourly paid workers, though remaining positive, slowed during the recession of the early 1990s, for example. But job growth among low-wage (less than $5.15 an hour) workers was negative, with nearly one million jobs lost. The drop was particularly marked in occupations traditionally considered low-skill, such as sales, clerical, and household and personal services.

Unemployment increased for all workers during the recession of the early 1990s, with the increase being greater for low-skilled workers than for workers generally. Between 1988 and 1992, for example, unemployment for workers without a high school diploma rose from 12 percent to nearly 14 percent for women and nearly 17 percent for men. These compare with an increase from about 5 percent to about 7 percent for all workers. Unemployment might have been even higher among the less educated had it not been for a drop in the number of such workers, particularly women, competing for jobs.

Joblessness has continued to rise slightly for women without a high school diploma, even though unemployment rates had receded to their pre-recession levels for nearly all educational groups by 1997. Smith and Woodbury suggest this may be due to a declining demand for low-skilled workers between 1992 and 1997, combined with increased labor force participation for less educated women.

Do Labor Market Outcomes Differ by Geographic Area?  Nationwide figures provide good indicators of the overall strength of the economy. But they often obscure regional differences in labor market opportunities. Even during the current tight labor markets, employment difficulties remain more serious in some areas of the country. While the national unemployment rate in 1997 was 4.9 percent, for example, state unemployment was over 5 percent in eight states, including California and New York.

When the focus shifts to disadvantaged workers, regional disparities remain substantial. Smith and Woodbury note that the Northeast was hit particularly hard during the recession of the early 1990s. Labor markets there was still slack in 1997, with relatively little job growth and unemployment rates among women without a high school diploma still substantially above 1988 rates, at around 7 percent. The Midwest experienced a milder recession and its labor market is currently very tight, with good job growth since 1988 and substantial declines in unemployment rates for less educated women. Unemployment rates for less educated women remain highest of all in the South and the West, reaching between 8 and 9 percent in 1997, in spite of reasonable job growth and a labor demand shift toward low-wage jobs.

Not surprisingly, labor markets tend to be stronger in the suburbs and rural areas than in central cities. From 1988 to 1997, the number of hourly paid jobs in the suburbs grew over 23 percent, in contrast to an increase of only 13 percent in the central cities. The last recession hit harder and faded more slowly in the central cities compared with suburbs and rural areas, and central-city unemployment rates for women with no college education had not dropped much below 10 percent by 1997. Thus, achieving self-sufficiency through employment could be particularly difficult for welfare recipients living in central-city areas. It should be noted that central-city labor markets have shifted more toward low-wage jobs than their suburban counterparts. This can be viewed as an increased opportunity for low-skilled workers to enter the labor market. But it is also a sign of reduced opportunities for job advancement.