The Low Wage Labor Market: Problems and Solutions
A Forum — September 5, 1997
By many measures, the American economy is in a period of sustained prosperity. Unemployment and inflation are down, profits are up and individuals have increased opportunities for success. According to Lawrence Mishel, Economist at the Economic Policy Institute (EPI), these indicators paint only a limited picture of the economy as a whole. Mishel highlights other measures, such as family income and "productivity"--the growth of firm efficiency--that suggest the economy may not be as robust as many claim. Family income, for example, is lower for all but the very rich than it was in 1989 and Bureau of Labor Statistics data show that productivity is growing at the same rate now as in the 1970s and 1980s.
The Low-Wage Labor Market Situation
Jared Bernstein, Economist at EPI contends that this situation highlights the connections between the low-wage labor market and welfare reform. The low-wage labor market--which includes welfare recipients and individuals working at a low wage but above the poverty level--has experienced troubling trends over the past 25 years. Wages for high school graduates with no college education have decreased 30 percent since 1973. Unemployment rates for women and minorities--who comprise a disproportionate percentage of the low-wage labor market--are significantly higher than the overall U.S. rate. Opportunities to escape from this low-wage market through additional levels of education and/or training also diminish the longer an individual receives welfare.
According to Bernstein, the low-wage labor market is split into three sub-groups: one-third who are ready for work, one-third who are not and one-third in "the middle." Even for the top third, getting ahead is difficult, as their average hourly wage is $6.00. At the same time, there is a growing pessimism regarding "the ability of women leaving welfare to work at a living wage." This concern is compounded for those in the "bottom third" who are not ready to work, especially as more individuals approach the two-year limit for receiving public assistance.
In addition, there has been a large shift in demand against low-wage workers, particularly since they are seen as having too many skill deficits. Bernstein explains that employers feel that these individuals "just don't have what it takes to succeed in today's skill economy." Simply addressing the skill deficiency, however, is not enough. Even workers who obtain the skills necessary to compete for jobs often obtain work that pays well below a living wage. Minimum wage jobs are becoming more prevalent, however, as trade policies have pitted the American labor force against cheap labor countries, particularly in high-wage manufacturing jobs. Mishel notes that this situation is not as severe in Europe and other countries, whose trade policies do not allow as much low-wage foreign competition to enter their labor markets.
The Minimum Wage Increase
On October 1, 1996, the federal minimum wage was increased from $4.25 to $4.75, and it was raised again to $5.15 on September 1, 1997. According to John Schmitt, Economist at EPI, early indicators suggest three central outcomes: (1) many individuals were affected, (2) the increase was well targeted and (3) there is no evidence that the increase has led to diminished job opportunities. According to Schmitt, the net increase from $4.25 to $5.15 affected 9.9 million workers, representing 8.9 percent of the workforce. Although there has been much variation from state to state (in Michigan, for example, 16.5 percent of the workforce was affected), it is clear that "this is not a trivial event that affected a small number of people."
Schmitt also contends that the wage increase affected the workers most in need of assistance, and that "it's not just so teenagers can buy more CD's." Only 30 percent of affected workers are between 16- and 19-years-old, and only half are part-time workers. As a result, the majority of the increase is going to full-time adult workers, although a disproportionate number are women and minorities. In addition, most of these individuals are the chief supporters of their families, further suggesting the increase was targeted properly. The wage increase also had a minimal effect on job opportunities. A comparison of employment rates for teens showed that the employment dropoff from summer to fall (when many teens stop working to go back to school) was essentially the same as in the year prior to the wage increase. EPI "found essentially the same results" across various demographic groups.
Implications
The preliminary EPI data highlight significant economic problems for low-wage workers, but the minimum wage increase appears to be addressing these problems. There are, however, tremendous implications for the employment training community. Part of the problem, notes Bernstein, is that it will be hard to find the high-wage manufacturing jobs on which employment training programs often focus. In today's economy, those jobs are growing more scarce.
Mishel argues that the real answer lies in the type of jobs that are created and filled by the current low-wage labor market. According to Mishel, too many new jobs are in the low-wage service sector rather than mid-level occupations. While the latter may begin as low-paying jobs, they often have opportunities to move into higher-skill, higher-wage careers. A focus on creating these types of jobs, coupled with an employment training system designed to prepare individuals for these careers, will help address the systemic problems of the low-wage labor market.