Low-Wage Labor Market: Challenges and Opportunities for Economic Self-Sufficiency

Contents

• Characterizing the Low-Wage Labor Market
• Policy Interventions Affecting Low-Wage Labor Markets
• Barriers to Entering the Low-Wage Labor Market
• Opportunities for Advancement and Benefits in the Low-Wage Labor Market
• Conclusions and Policy Implications

The low­wage labor market has come increasingly into the policy spotlight following welfare reform, as states strive to move welfare recipients into employment.  In this volume, experts in labor market analysis synthesize the current literature on the low­wage labor market and highlight important policy implications flowing from their review.

Characterizing the Low-Wage Labor Market

• Current research suggests the labor market is not — as classical labor market theory depicts it — a single unified market in which each worker is paid according to his/her additional value to the firm and is promoted to better paid positions as that value increases.  Rather, it has two largely separate sectors a primary sector that functions more or less as classical theory depicts and a secondary sector, which has few ladders to job advancement, little job stability, and more gender and racial discrimination than the primary market.
• Analysts of the secondary market focus on several types of workers — including workers with low hourly wages, workers with low skills, and workers whose annual earnings are low because they work only part­time or intermittently.  These groups overlap but are not identical.  Different policies may be necessary for different groups.
• The share of workers with low earnings is substantial.  In 1997, for example, over a third of female workers had hourly wages that would be insufficient to lift a family of four out of poverty even if they worked full­year, full­time.
• The share of workers with low or near­low earnings is high and has been increasing, up from 36 to 41 percent over the past decade.  The recession of the early 1990’s was particularly difficult for low­wage workers, when nearly one million low­wage jobs were lost.
• Employment outcomes in the low­wage market vary greatly across regions, with lower unemployment rates for less educated women in the Northeast and Midwest compared to the South and West, and more favorable outcomes in the suburbs and rural areas compared to central cities.

Policy Interventions Affecting Low-Wage Labor Markets

• The low­wage labor market should be able to absorb the new entrants associated with welfare reform as long as the economy is healthy.  The needed adjustments may take some time, however.  In the short run, many welfare recipients leaving the rolls may have trouble finding employment.  The large inflow of new entrants into the low­wage labor market could also reduce wage levels in that market.
• Policy interventions designed to help low­wage workers include raising the minimum wage, public service employment, worker­targeted tax credits, and employer­targeted tax credits.
• Raising the minimum wage is not a strategy that is well­targeted on the working poor, because the majority of the working poor are earning more than the minimum wage, and the majority of minimum wage earners are not poor (and include a substantial number of teenagers).  Nonetheless, raising the minimum wage would likely improve the financial well­being for a substantial number of working poor adults, including nearly one million single parents.
• Opponents to raising the minimum wage claim that it would reduce employment opportunities for low­wage workers.  The weight of evidence indicates that this effect would be minimal and impact primarily teenagers who are typically not poor.  Opponents also claim that raising the minimum wage would decrease the availability of employer­provided training.  The evidence provides some support for this concern.
• Subsidized public service employment (PSE) can increase earnings and the value of the output produced by low­wage workers.  But PSE does not appear to create new jobs as much as shuffle workers around among existing jobs.  The PSE evaluation evidence is restricted to older programs and more recent small­scale demonstrations, however.
• The Earned Income Tax Credit (EITC) is an effective means for increasing labor force participation, particularly among single mothers.
• Employer­targeted tax credits, such as the Work Opportunity Tax Credit and the Targeted Jobs Tax Credit, have received less favorable evaluations than worker­targeted credits.  Most workers hired through such programs would have been hired in the absence of the credit.
• Tax credits paid to employers developing economically distressed areas, such as those associated with Empowerment Zone/Enterprise Community programs, have been similarly ineffective in generating new jobs.  More recent programs, which place greater emphasis on community building, may yield more positive results.

Barriers to Entering the Low-Wage Labor Market

• Major potential barriers facing workers entering the low­wage market include:  skills mismatch (including lack of transportation), discrimination, spatial mismatch, and lack of access to informal information networks.
• Skills mismatch is a serious difficulty for many disadvantaged workers, with at least 30 percent of long­term welfare recipients not meeting the basic job readiness requirements of employers.
• Discrimination negatively affects employment rates of African Americans, even when differences in skills have been taken into account.
• While there has been disagreement as to whether there is a spatial mismatch of jobs and workers, the majority of evidence does support the conclusions that the disadvantaged workers from central cities do have trouble getting to jobs located in the suburbs.
• Informal hiring networks account for between 25 and 60 percent of hires, and are a particularly important hiring mechanism for entry level employment, jobs that do not require college education, blue collar jobs, and jobs with small employers.  Such networks tend to be tightly knit and ethnically homogeneous.  African American workers, in particular, tend to be excluded from them.

Opportunities for Advancement and Benefits in the Low-Wage Labor Market

• Job turnover is higher in industries where disadvantaged workers tend to find employment than in the primary labor market.  Job turnover tends to have high costs for disadvantaged workers, leading to more periods of joblessness, reduced earnings, and reduced opportunities for formal training.
• Low­wage workers leaving welfare for work in the wake of welfare reform are likely to experience little wage growth.  Although some studies suggest wage growth of about 4.5 percent over a year (which translates into only about $400 per year for a low­wage worker), other studies yield lower estimates.  Even these may be on the high side, since they are based mainly on the experience of women who have left welfare voluntarily and found jobs.

Conclusions and Policy Implications

• The nation’s labor market will be able to absorb the influx of persons leaving the welfare rolls if the economy retains its current strength.  There are a number of concerns, however, particularly in areas of the country with fewer opportunities for low­wage work, such as large urban areas and the South and West regions of the country.
• The jobs for which most welfare recipients can qualify, given their low skills and education, are concentrated in the secondary labor market — with low wages, few fringe benefits, little opportunity for advancement, and subject to high job turnover.
• The nine expert reviews of the literature on the low­wage labor market highlight several policy options for improving the wage, employment, and economic self­sufficiency outcomes of low­wage workers:
  • Policies to improve labor market access and job retention.  These include continued funding and support for programs that provide labor market information, job networking, job retention counseling, and career planning. Services such as child care and transportation also are important.
  • Policies to encourage or support occupational mobility/job advancement.  These include developing information networks and policies to encourage businesses to delineate skill requirements and career ladders for entry­level jobs, as well as on­the­job training for such career ladders.
  • Policies to raise the incomes of low­wage workers and enhance employment security.  These include the Earned Income Tax Credit, targeted public and community service jobs strategies, and minimum wage policies.