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Low-wage lessons

from John Schmitt

As I write in a new CEPR briefing paper (pdf), the United States leads the wealthy world in the share of its workforce in low-wage jobs. According to the commonly used international definition of low-wage work –earning less than two-thirds of the median hourly wage– about one-fourth of US workers are low-wage.

The report draws five lessons from the experience of the United States and other rich countries over the last several decades:

Lesson 1: Economic Growth is not a Solution to the Problem of Low-wage Work

Lesson 2: More “Inclusive” Labor-market Institutions Lead to Lower Levels of Low-wage Work

Lesson 3: The United States is a Poor Model for Combating Low-wage Work

Lesson 4: Low-wage Work is Not a Clear-cut Stepping Stone to Higher-wage Work

Lesson 5: In the United States, Low Wages are among the Least of the Problems Facing Low-wage Workers

The countries that have been most successful in reducing the share of their population in low-wage work have typically done so by having widespread collective bargaining or by funding a reasonable and reliable safety net (which, among other things, raises the bargaining power of low-wage workers). See, for example, Figures 4 and 5 from the paper:

Graph of low-wage work share against collective-bargaining coverage

Graph of low-wage work share against public social expenditure

The United States, meanwhile, has relied primarily on the minimum wage and the Earned Income Tax Credit (EITC). Both could dramatically reduce the share of the workforce on low pay (see, for example, this excellent paper by Jeannette Wicks-Lim and Jeffrey Thompson), but the US minimum wage and EITC have both been set too low to have a meaningful impact on low-wage work. This figure, for example, shows the gap between the low-wage threshold (what a worker would have to earn to rise above “low-pay”) and the federal minimum wage, in each year from 1979 through 2010.

Times series graph of low-wage threshold and federal minimum wage

But as the paper also emphasizes, low-pay isn’t even the worst of it. Low-wage workers are also much less likely to have health insurance (of any kind, employer-provided or from other sources), paid sick days, paid parental leave, or paid vacation. Not to mention very little in the way of job security.

  1. February 8, 2012 at 6:51 pm

    I should read the report first but i wanted to make sure to post this question before i forget.

    Looking at this list it does appear that nations that traditionally have been considered to have more flexible labor markets have a higher % of the workforce in low-wage jobs. Could this be due to lower skill people being a part of the labor force in the US and UK versus other nations where those people never join the labor force?

    I am going to read this during lunch today and i am sure i will have more questions and comments.

  2. February 8, 2012 at 7:26 pm

    Any want to bet that low wage jobs are not disproportionately held by women and people of color? Oh … not taking that bet are you. Why am I not surprised.

  3. Lucy L. Honeychurch
    February 8, 2012 at 7:39 pm

    I’d posit the gap between the US and the rest of the world widens when you add in cost of living essentials like parity healthcare costs, housing, and personal debt service expenses.

    Not sure how we can call ourselves a wealthy nation – let alone the wealthiest – when Americans’ standard of living is so low comparatively speaking.

  4. apj
    February 8, 2012 at 9:27 pm

    yeah, but you have really, really rich people … isn’t that all that matters? That’s what the magazines seem to suggest! Sigh

  5. February 9, 2012 at 1:32 am

    Woaw, a quarter of the work force in the US is paid low wages. Not completely surprised.

  6. Alice
    February 9, 2012 at 8:49 am

    Oh dear – a greater percentage than in Greece earning low wages in the US.

    What went so wrong? Hmm – was it globalisation? Was it de-regulation? Was it a flexible labour force? Was it de-unionisation? Was it low taxes on the rich? Was it a refusal to measure history and real statistical trends in favour of arrogant futuristic models? Was it having a few bad Fed Treasurers? Or a few bad Presidents or a few bad men holding the reigns of power?

    Or was it all of the above? (it was all of the above and it wont be easy to fix).

  7. February 9, 2012 at 11:21 am

    Interesting to see the slow rise in “Employees Earning less than two thirds of the median wage, U.S” (figure 6 of the paper) and put it in perspective with the development of real wages, shown e.g. here: http://www.elcosh.org/record/document/127/figure2.1.jpg

    Something serious happened in the 1970s

  8. February 9, 2012 at 8:56 pm

    The US economist Henry George explained the mechanism – and described what had to be done about it – in his book Progress and Poverty, published in 1879. Nothing has changed so the problem continues. Unfortunately Henry George has been forgotten so that what is perfectly explicable has come to seem like a mystery.

    If you want to read the book, the Hogarth Press edition is both readable and true to the original.

    • Dave Taylor
      February 9, 2012 at 10:40 pm

      My copy has survived 130 years! A great book.

    • February 12, 2012 at 3:54 am

      The Robert Schalkenbach Foundation publishes works by Henry George, as well as other authors on land issues. Progress and Poverty is now at http://www.henrygeorge.org/pcontents.htm

      Note: high VAT, sales and consumption taxes reduce the net wages in some of those economies. We need to compare wages net of all taxes.

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