Progress Toward Self-Sufficiency for Low-Wage Workers

Abstract

Over the last decade, American social policy has increasingly focused on encouraging and requiring work for those receiving government supports. This study analyzes the dynamics of the low-wage labor market and the role of work supports in helping workers move toward economic self-sufficiency. Monthly data from January 2001 through January 2003 shows that over one-quarter of workers earn low wages. We find evidence that low-wage workers are moving to higher-wage jobs, but two years later, the majority of low-wage workers either remain in low-wage jobs or are not working. Our analysis provides some, although limited, evidence that government-provided work supports promote self-sufficiency.

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Introduction

People think of low-wage jobs in starkly different ways. For some, low-wage work connotes an image of unstable, "dead end" jobs filled by parents struggling to support their families while earning below-subsistence-level pay. In contrast, others view low-wage jobs as entry points to the labor market for new workers, an important first step toward better jobs and self-sufficiency. Such characterizations, however, obscure a far more complex reality facing low-wage workers. Low-wage workers include teenagers working summers as well as single mothers supporting a family; new entrants out of high school as well as middle-aged married men with families. Understanding the complexity of the low-wage labor market and the diversity of low-wage jobs and the workers that fill them is important to policymakers as they seek to find ways to help lowwage workers remain stably employed, attain higher wages, and become independent from public assistance programs.

A considerable body of research on low-wage workers has emerged in recent years. Although there is no single, standard definition of the term "low-wage worker," various approaches produce qualitatively similar findings, about $10 an hour in current dollars. Most studies establish a "low-wage" line, analogous to the federal poverty threshold. Consider a few representative examples. Acs and Nichols (2007) set their low-wage line at 150 percent of the minimum wage. When the minimum wage increases are fully phased in (in July 2009) the implied low-wage line will be just under $11 an hour. Schochet and Rangarajan (2004) set the low-wage line by computing the hourly wage required for a full-time, full-year worker (2,080 hours in a year) to earn enough money to keep a family of four out of poverty. Today their lowwage line would be slightly over $10 an hour. The Congressional Budget Office (CBO, 2006) sets its low-wage line using a relative rather than an absolute standard. CBO defines low wages as those that fall below the 20th percentile in the wage distribution. In 2005, the CBO approach resulted in a low-wage line of about $9.00 an hour, or about $10 today. This approach, however, does not allow the size of the low-wage workforce to vary over time; rather, it deems that 20 percent of the workforce is always low wage.

In addition to how the low-wage threshold is set, other differences across studies can affect findings about the low-wage workforce. For example, there are different views on who should be counted as a worker—anyone employed at a specific point in time? Those who work a minimum number of hours in the average week? Those who work a minimum number of hours during the course of a year? Studies also vary in the specific populations considered—for example, include workers of all ages or exclude students or retirees? And of course, different studies draw on different datasets.

Despite these potential differences, the size and composition of the low-wage work force is relatively similar across studies. By definition, the CBO (2006) study reports that 20 percent of workers are low wage. Acs and Nichols (2007) find that 23 percent of all workers are low wage, and Schochet and Rangarajan (2004) find that 28 percent of workers fit their low-wage definition. Both the Acs and Nichols and Schochet and Rangarajan studies find that more than seven in ten low-wage workers work full time, the majority are over age 30, less than one in five lack high school degrees, about seven in ten are white, non-Hispanic, and about one in seven are black, non-Hispanic.¹

Like other workers, low-wage workers experience wage growth as they gain experience. Schochet and Rangarajan (2004) find that the wages of low-wage workers grow by 8 percent a year, on average. Gladden and Taber (2000) assess wage growth among less-educated workers (who are disproportionately low wage) and report that wages of less-skilled workers rise from 4 to 6 percent for every additional year of experience they gain. French, Mazumder, and Taber (2006) reach a similar conclusion: they find that wage growth averaged about 4 percent per year from 1984 through 1995 regardless of education level. Despite this growth, broader research on economic mobility finds that those near the bottom of the income distribution (bottom quintile) seldom move up to become middle-income families or beyond (e.g., Acs and Zimmerman 2008).

These papers also consider the factors associated with wage growth and the transition to a better job (i.e., a job with better pay and benefits). Several consistent findings emerge. Lowwage workers that change jobs enjoy more wage growth and are more likely to escape low-wage status and bad jobs than those who remain with their current employer, although the differences between job stayers and job changers is fairly modest. In addition, those with more education are more likely to transition into higher-paying jobs.

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