Far too many American adults work in low-wage jobs. In 2010, 20 percent of adults earned a wage that would put a family of four below the poverty line. Twenty-four percent of adults earned less than two-thirds of the median wage, another widely used international standard for gauging low-wage work.
Better jobs seem the obvious solution. The government could raise and enforce labor standards and push firms to invest in training and to create advancement opportunities for low-wage workers. Unions can also play a key role by advocating for increased wages and training opportunities within firms. These steps would be effective, but they would face enormous resistance, even among liberals, because they intervene directly in the job market.
The conventional wisdom focuses almost entirely on two strategies: educating people so they can escape the low wage–job trap and, for those who cannot, providing some level of support through programs such as the Earned Income Tax Credit, an income supplement conditioned on work. The idea is to let the economy generate jobs of whatever quality firms choose and then, if necessary, compensate by enabling people to avoid the bad ones or by shoring up people who are stuck. The nature of available jobs is a given.
In practice this restrictive framework condemns millions to low wages and poor working conditions. And it continues to be the norm thanks to three myths: 1) economic growth and high rates of upward mobility will solve the problem; 2) policy efforts to alter the distribution of economic rewards inevitably slow down growth and damage labor market efficiency; 3) education alone is enough to help low-wage workers get better jobs.
None of these claims holds water when confronted with data. That’s good news because it opens the door to serious consideration of the low wage–jobs problem and how to fix it.
Myth 1: Lifting All Boats
Was President Kennedy right that “a rising tide lifts all boats”? When we climb out of the Great Recession, will we put the challenge of low-wage jobs behind us?
The 1990s offer a perfect test of a strong overall economy’s capacity to improve the quality of employment. It was a decade of remarkable prosperity during which unemployment steadily dropped, from 7.5 percent in 1992 to 4 percent in 2000. What happened to low-wage workers?
At the beginning of the boom, 25 percent of adults fell below the poverty line; by 2000, the rate was 19 percent. It is hard to look at these figures and argue that the boom substantially improved the low-wage labor market. Obviously full employment and a strong economy are good things, but generating better jobs requires more direct interventions.
And just as we can’t expect aggregate growth to improve jobs by itself, we can’t expect low-wage workers to move up without changes in policy. There is considerable evidence that U.S. adults remain confined in low-wage jobs over the course of their working lives. A 2004 study by economist Harry Holzer found that over the course of six years in the early 1990s—a growth period—less than a third of low earners raised their incomes enough to bring a family of four consistently above the poverty line. Studies of more recent data by Pamela Lopresete, Brett Theodos, and others find similar results.
Myth 2: Good-Jobs Policy Hurts the Economy
One critique of efforts to improve job quality and reduce the size of the low wage–labor market is that such efforts distort incentives and damage overall economic performance. The idea is that people will work harder and invest more if they fear the consequences of not doing so. There is an argument on the other side: people respond better to the carrot than to the stick, and if working conditions were improved, effort and productivity would rise.
These arguments can be tested by examining the performance of several northern European nations, all at the same level of technological sophistication as the United States and all competing in international markets.
How does America compare in terms of income inequality? Table 1 shows the ratio of the earnings of the top 10 percent of wage earners to the bottom 10 percent as well as the ratio of the median to the top 10 percent. Clearly the United States is the outlier. It is not surprising that the U.S. poverty rate substantially exceeds that of other developed nations.
Europeans achieve these results through a combination of higher minimum wages, stronger unions, and more egalitarian social norms. Economists often argue that more egalitarian wages reduce incentives to work and that a higher minimum wage increases the cost of labor and therefore encourages unemployment, so the European job market should suffer as a result of lifting the bottom. Does it? In fact, among both women and men, the fraction of the “prime age” (25–54 years old) population that works is higher in Germany, France, the United Kingdom, Sweden, Denmark, and the Netherlands than in the United States.
This pattern has persisted for many years, and researchers looking at different measures reach similar conclusions. As labor economist Richard Freeman writes, “The best summary of the data—what we really know—is that labour institutions reduce earnings inequality but that they have no clear relation to other aggregate outcomes, such as unemployment.”
Myth 3: Education Solves Everything
Scholars and policymakers point to the correlation between education and wages and argue that if people had more skills and schooling then they would not find themselves in bad jobs. In other words, inevitable market forces are at work. But this commonly accepted narrative obscures important alternative solutions to the challenge of low-wage jobs.
“Human capital” is only part of the story. When we probe more carefully the relationship between education and earnings, we find that the average masks a great deal of variation, suggesting that job quality is influenced by much more than educational attainment. To illustrate this point, Table 2 shows the distribution of earnings among men and women, 31–39 years old, with only a high school degree. Even within these narrowly defined groups there is much variation in earnings, which cannot be explained by education, age, or gender. More sophisticated statistical analyses reach the same conclusion.
One could argue that human capital is a multi-dimensional construct and that personality and behavior also matter. It is not hard to come up with a list of desirable traits—diligence, cooperativeness, self-confidence, etc. But how important are these traits in explaining wage patterns? If we could control for all these personal characteristics, would it compress the wage distribution shown in the table? In a recent study, researchers Rachel Dunifon and Greg Duncan examined the impact of education, health, family background, and a substantial array of personality measures on earnings. When all these variables were entered into a model estimating wages, only one-third of variance in wages was explained. A different study using two datasets, each including a range of personality variables, was able to explain only about a quarter of wage variance. Other investigations combining data on individuals with data on the firms they work for consistently have shown that a substantial fraction of wage variation is due to firm characteristics and not to the human capital of employees.
Another way to make this point is to ask what would happen if there were a radical increase in the number of people with a college education. Would this eliminate the low skill/low wage labor market problem? All of the evidence commonly cited about the benefits of education focuses on what economists call the margin—that is, what might happen if one additional individual improved his or her education. Telling your nephew to stay in school is good advice. But what if all the employees in low-wage jobs suddenly acquired a community college degree or better. Would their wages go up?
Consider kitchen staff chopping lettuce in a hotel. In the short term, wages might increase if the suddenly better educated employees could work more efficiently, perhaps by planning more effectively. But the likely gains from this change, if any, seem very modest. Or maybe a more educated workforce would be able to take advantage of better capital equipment and hence increase productivity. Yet here too the possibilities are small.
In the long run, an increase in worker education might encourage employers in other sectors to invest in technologies that make use of new skills, and this investment could create better opportunities for those kitchen workers. This logic is plausible, and it underlies the argument that education leads to economic growth. However, this trajectory offers little help to adults working today in low-wage jobs and, perhaps, even to their children.
What Would Work Better?
These myths advance the position of pure-market advocates against those who believe that an effective—not to mention fair—economic order requires that norms govern employment, that employees be heard, and that the social costs and benefits of economic activities are important. Until recently it seemed the latter camp was very much on the defensive. However, the Great Recession may have opened opportunities to make this case both because the pain of the downturn is so widespread and because its underlying sources seem to reside in a market mentality gone out of control.
What would it take to secure a more fair labor market? Once we understand the myths that block action to improve job quality, we need to start thinking about what is achievable.
One key step is to strengthen unions and increase other opportunities for employees to voice their interests. When represented by unions, employees in low-wage sectors—hotels, health care, food services—earn better wages and benefits. The challenge is the substantial decline of union power. In part this is due to aggressive and sometimes-illegal employer opposition. Labor law reform is therefore a central goal. However, unions also bear some responsibility. Unions have been reluctant to invest in organizing and have failed to develop strong leaders. They have also grown suspicious of progressive partners. Unions should form alliances with community groups such as the Industrial Areas Foundation, many of which organize outside the workplace and have proven effective in developing committed leaders.
If everyone suddenly had a college education, would the problem of low wages disappear?
A second important step is improving workplace standards. One standard that could use an upgrade is the minimum wage. The fall in the value of the minimum wage contributed to the explosion of inequality in the 1980s and early 1990s. Today someone working full time at the minimum wage would not earn enough to put a family of four above the poverty line.
New employment arrangements also demand new standards. These arrangements, such as hiring outside contractors, create ambiguity about who is responsible for working conditions. For example building owners who contract out cleaning services as a strategy to drive down labor costs should bear some responsibility for the working conditions of contract employees.
Better standards should be accompanied by better enforcement. There is considerable evidence, as Annette Bernhardt and her colleagues have shown, of widespread violations of workplace standards in U.S. low-wage jobs. It shouldn’t be difficult for firms to accept better enforcement. The vast majority of employers support standards when they are consistently enforced. Indeed, as David Vogel showed in his 1997 book Trading Up, responsible firms like standards because they create a predictable environment and encourage competition based on innovation and quality, not on a race to the bottom with wages.
How can we get better standards and enforcement? Public sector leadership can provide a boost. Federal, state, and local governments increasingly contract out for services, and many of these contract jobs offer low wages. Improved standards and enforcement on behalf of these employees would directly upgrade the circumstances of millions of people and also help change expectations throughout the labor market. In the twentieth century, civil service reform and regularization of government personnel rules set important examples for the private sector and were influential in upgrading job quality throughout the economy. We are at a point where government can once again inspire improvement.
In addition, states could insist, as some now do, that employment-related tax incentives, such as those used to attract firms to an area, include a decent-wage standard. And when governments reimburse private organizations for providing services, they need to think more about how their reimbursement rates affect wages. Medicare reimbursements, for instance, put downward pressure on wages in industries such as nursing homes and home health care. Rate setting could instead provide a framework for improving employment terms for workers in these sectors.
There is no denying that labor standards can be a burden on employers. For instance, a recent sensible effort by the Department of Labor to ensure that firms do not misclassify employees as independent contractors foundered on what appeared to be unreasonable paperwork requirements. Although employer complaints are sometimes self-serving, they should be taken seriously when appropriate. The goal of labor standards is to create an environment—sometimes coercive, but more often normative and supportive—that over time can induce employers to generate higher-quality work. So employers need to have input on standards development.
Policy can help firms improve their practices so that both employers and employees are better off. One such policy is implementing a career ladder, a program aimed at improving opportunities for upward mobility within firms. At its most ambitious, a career ladder program works with employers to create better jobs and then trains low-wage employees to fill them. A less ambitious, but possibly more realistic, strategy is to help firms augment the training low-wage workers receive as they attempt to climb the existing job ladder within their firms.
These workforce training and ladder programs, often called “intermediaries,” can be effective. They have been successful in health care, hotels, and manufacturing, and have been positively evaluated by respected scholars and national research organizations.
Two foundation-funded programs in Boston illustrate what is possible. In the medical sector, Jewish Vocational Service (JVS) works with hospital human resources staff and supervisors to help low-wage workers succeed in community college courses that prepare them for a range of better technician positions. In addition JVS encourages small changes in policy at clients’ organizations in order to enhance their education and training cultures. For instance JVS worked with Boston’s Children’s Hospital to enable pre-payment of tuition assistance, which opened up opportunities for employees whose family budgets could not accommodate tuition bills. JVS also trains human resources staff at client companies in best practices. Because it is large and well known in its community, JVS can effectively link employers to other actors, such as community colleges and state funding agencies.
Another effective program emerged from Unite HERE Local 26, a union representing thousands of Boston hospitality workers. In 2004 the union created a training course where long-time servers teach other union members to work banquets, allowing them to pick up extra shifts during busy periods. The union negotiated with the hotels to ensure that the shifts would first be offered to members who had gone through the training. Once the banquet training was established, the union worked with hotel managers to determine whether there were other needs that a union-run training program could fill. This led to further courses and support from the state Workforce Competitiveness Trust Fund. The training has expanded to courses in food safety and the handling of alcohol and to professional certification for servers and bussers.
The bottom line is that we know how to improve job quality, and we have the tools to make progress. The challenge is political. Good policy is within our grasp, if we can see past the myths and muster the will to move forward.