The Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency. The Effect of Various Policy Interventions on the Low-Wage Labor Market


The next three papers in the volume explore the impact of specific policy interventions to raise income or increase employment (or some combination of the two) among the working poor. Gary Burtless examines the effects of recently enacted welfare reform legislation, which while not directly targeted on the working poor, is likely to increase employment among many people with tenuous attachments to the labor force. Mark Turner examines the effect of changes in the minimum wage on the supply and demand for labor in the low-wage labor market. Burt Barnow summarizes evidence regarding the effectiveness of public service employment and targeted tax credits in increasing employment or raising income levels among the working poor.

Will the Low-Wage Labor Market Be Able to Absorb Welfare Leavers?  In the short run many welfare recipients leaving the rolls may have trouble finding employment, predicts Burtless, for two reasons. First, as indicated above, even during economically prosperous times, labor markets in particular regions or neighborhoods may offer very limited opportunities. Second, labor markets need time to expand and adjust, and welfare recipients may enter the job queue behind other, more qualified applicants. As of 1994, for example, 40 percent of recipients had not completed high school and roughly three-quarters of those on welfare had aptitude test scores that placed them in the bottom quarter of all test takers.

Burtless is more optimistic that the labor market will absorb the new entrants associated with welfare reform in the long run. Labor markets have more time to adjust, thus giving opportunities for employers to adapt to emerging markets and workers to adapt to new skill demands, changes in technology, or relocation of job opportunities. Burtless bases his optimistic conclusion in part on Bureau of Labor Statistics projections that the labor market will create seven million additional low-skilled jobs over the next then years, and in part on the fact that the U.S. labor market has absorbed large inflows of new workers in earlier periods. From 1964 to 1989, for example, the labor force grew by over two million workers per year as the baby boom generation entered the labor market. The vast majority (95 percent) of these new job seekers were able to find work.

Even if the market can absorb all the welfare leavers, however, Burtless cautions that the large inflow of new entrants into the low-wage sector could put downward pressure on wages - aggravating the policy concern that many jobs available to welfare recipients will not enable them to work their way out of poverty.

Do Minimum Wage Policies Improve Outcomes for Low-Wage Workers?  Proponents of raising the minimum wage advocate it as a way of raising the incomes of working poor families. The idea is tempting, given that the legislated increases since 1970 (to a current level of $5.15 an hour) have failed to keep pace with inflation. In inflation-adjusted (real) terms, the minimum wage has fallen by 23 percent since 1970. (See Appendix Table 1.5).

However, according to Turner, the benefits of raising the minimum wage may be limited. First, the proportion of hourly wage workers paid at or near the minimum wage has fallen substantially since 1979, by nearly half for men and nearly two-thirds for women. Second, most of the 11.2 million workers currently earning the minimum wage are not poor. Over one-quarter are teens, for example, and of the teens and young adults working at the minimum wage, over half are enrolled in school and living in families with incomes at least 150 percent of poverty. (For information about wage rates, see Appendix Tables 2.4 to 2.6.)

Even so, of the six million adults working at the minimum wage, 1.4 million live below 150 percent of poverty and nearly one million are single parents. Increasing the minimum wage could improve their financial well-being despite its inadequate targeting of the working poor generally.

Opponents of minimum wage increases have long believed that such policies have the disadvantage of reducing job opportunities, because employers will eliminate bottom echelon jobs rather than pay more than those jobs are worth in terms of the additional output they produce. According to Turner, a majority of the evidence indicates that any negative effects of the minimum wage on employment opportunities are small and occur primarily among teens, a group of less concern in this policy area than are low-wage adults and at-risk groups such as women and minorities.

Turner also looks at two other potentially negative consequences of a minimum wage increase. The first is that higher minimum wages could encourage teens to drop out of school to enter the labor market. Turner's reading of the evidence suggests that this is probably not a valid concern, and that raising the minimum wage would not adversely affect educational attainment, although he notes contradictory findings and the need for additional research. The second potentially negative consequence is that higher minimum wages could discourage employers from providing training. Turner finds evidence supporting the validity of this concern -- that increasing the minimum wage could negatively affect the availability of employer-provided training. One study, for example, found that raising the minimum wage to $6.15 an hour would reduce the probability of training by as much as 5.8 percentage points.

Does Public Service Employment Improve Labor Market Opportunities?  Although many public service employment (PSE) programs have been sharply criticized in the past, Barnow finds that PSE can be effective in improving employment outcomes among the economically disadvantaged. Barnow reviews the history of PSE programs, including national programs operating during the Great Depression of the 1930s, and the Comprehensive Employment and Training Act (CETA) programs of the 1970s. Over the years, PSE has changed significantly with respect to funding levels, eligibility requirements, and the work activities themselves. For example, CETA was amended several times during the 1970s, to focus eligibility on the more seriously disadvantaged, limit the length of participation, and limit the wages that could be paid to PSE employees.

Nonetheless, criticism of the whole approach persisted. There were concerns that PSE programs selected (creamed) from the best participants, thus minimizing any beneficial effect of the program on improving individuals' job readiness. It was also felt that federal PSE funds were simply substituting for state and local funds, thus minimizing the job creation aspect of PSE. Significant federal involvement ended in 1982, when CETA was replaced with the Job Training Partnership Act (JTPA) programs. PSE is now carried on to a more limited extent at the state and local levels.

Because there have not been any large-scale PSE programs since 1982, Barnow's assessment of program effectiveness is limited to older studies and smaller scale demonstrations. These, in fact, provide strong evidence that at least some PSE programs have had significant positive impacts on increasing the earnings of participants. Barnow reports on one program in which PSE increased the earnings of men and women on welfare by over $1,000 per year. On the important question of whether PSE creates new jobs rather than displacing existing ones, Barnow is less optimistic. The evidence regarding job creation, in his judgment, is much more ambiguous.

Are Tax Credit Programs Effective in Increasing Employment?  Barnow also reviews tax credits as a means to increase employment among disadvantaged workers in the private sector. These credits can be paid to the worker - as with the Earned Income Tax Credit (EITC) - or to the employer - as with the Targeted Jobs Tax Credit (TJTC) or Work Opportunity Tax Credit (WOTC).

The EITC is intended to increase labor force participation by encouraging people to work who otherwise would not be drawn into the labor force at the prevailing wage. Barnow finds that the majority of evidence suggests the EITC is an effective means of increasing labor force participation among single mothers and in raising the family incomes of poor children. Barnow notes, however, that the increased income associated with the EITC can provide a disincentive to work for some, particularly women in two-earner households. Furthermore, since the EITC does not directly create new jobs, it will benefit fewer workers in the overall labor market.

Employer-targeted tax credits such as the WOTC have been evaluated less favorably, according to Barnow's review. Although targeted employer tax credits are popular among some policy makers, most evidence indicates that the majority of workers hired through WOTC or similar programs would have been hired anyway. In one program, for example, only 0.13 to 0.30 jobs were actually created for each new TJTC hire.

Tax credits paid to employers developing in economically distressed areas, such as those provided with the Empowerment Zone/Enterprise Zone programs, have been found equally ineffective in generating new jobs. Their primary effects have been to relocate economic activity from near the zone to within it, according to Barnow. These findings are based on results from much earlier programs. More recent programs are placing greater emphasis on community building, which may yield more positive results.