Low-wage Lessons 
John Schmitt 
Center for Economic and Policy Research 
January 2012 	
http://www.cepr.net/documents/publications/low-wage-2012-01.pdf

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Introduction

Over the last two decades, high - and, in some
countries, rising - rates of low-wage work have emerged
as a major political concern. According to the
Organization for Economic Cooperation and Development
(OECD), in 2009, about one-fourth of U.S. workers were
in low-wage jobs, defined as earning less than two-
thirds of the national median hourly wage (see Figure
1). About one-fifth of workers in the United Kingdom,
Canada, Ireland, and Germany were receiving low wages by
the same definition. In all but a handful of the rich
OECD countries, more than 10 percent of the workforce
was in a low-wage job.

If low-wage jobs act as a stepping stone to higher-
paying work, then even a relatively high share of low-
wage work may not be a serious social problem. If,
however, as appears to be the case in much of the
wealthy world, low-wage work is a persistent and
recurring state for many workers, then low-wages may
contribute to broader income and wealth inequality and
constitute a threat to social cohesion. This report
draws five lessons on low-wage work from the recent
experiences of the United States and other rich
economies in the OECD.

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

Countries do not appear to "outgrow" low-wage work.
Higher levels of GDP per capita, for example, are not
associated with a reduction in the share of low-wage
workers. As Figure 2 demonstrates, there is no
relationship between the level of per capita GDP and the
low-wage share. Nor is rapid growth associated with a
shrinking low-wage share. As Figure 3 shows, the
relationship between real growth in a country's GDP per
capita over the period 1980-2010 is not meaningfully
related to a country's low-wage share in 2009.

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

As Appelbaum and her colleagues have argued, "...the
most important influence on the observed differences in
low-wage work is the `inclusiveness' of a country's
labor-market institutions."2 In their view, "inclusive"
labor-market institutions "have formal - and sometimes
informal - mechanisms to extend the wages, benefits, and
working conditions negotiated by workers in industries
and occupations with strong bargaining power to workers
in industries and occupations with less bargaining
power."

The most obvious of the inclusive labor-market
institutions is collective bargaining. Figure 4 shows a
strong relationship in our sample between collective-
bargaining coverage and low-wage work.

Collective bargaining, however, is not the only
"inclusive" labor-market institution. Other important
inclusive institutions include minimum wages,
employment-protection legislation, the enforcement of
national labor laws, and the benefit systems for the
jobless and low-income households.3 Figure 5, for
example, demonstrates that higher shares of GDP devoted
to public social expenditures are also strongly
associated with lower shares of low-wage employment.

More generous social expenditures may reduce low pay by
forcing employers to raise wages to compete with social
benefits. Or the social expenditure effect may simply
reflect the high correlation between social expenditures
and union power, with union power acting to increase
social expenditure and decrease the low-wage share
through extending collective-bargaining coverage to
otherwise low-wage workers.

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

The United States has the highest share of low-wage work
in the OECD countries analyzed here. Moreover, the
incidence of low-wage work in the United States has been
rising for at least three decades, from just over 20
percent in 1979 to just under 30 percent in 2010 (see
Figure 6). This performance makes the United States a
poor model for those seeking to reduce low-wage work.
The U.S. experience, however, may still offer some
lessons in the negative.

The United States has two principal policies designed to
address the problem of low wages: the minimum wage and
the Earned Income Tax Credit (EITC). The U.S.
experience with each of these policy tools provides some
specific lessons.

Lesson 3A: The U.S. Minimum Wage is Set Too Low to
Reduce the Share of Low-wage Work

In principle, the minimum wage can have an important
impact on the share of low-wage work. A minimum wage set
at or near the threshold for low-wage work (two-thirds
of the median hourly wage) can substantially reduce the
incidence of low pay. In France in the mid-2000s, for
example, the minimum wage was set near the country's
low-wage threshold and that country had among the lowest
levels of low-wage work in the OECD.5 The implementation
of the national minimum wage in the United Kingdom in
1999 may have contributed to the leveling off in the
2000s of the low-wage share, which had been rising
almost continuously from the end of the 1970s.6

The United States has had a federal minimum wage since
the Great Depression. Over the last three decades,
however, the minimum wage in the United States has been
set at a level that is well below the threshold for low-
wage work (Figure 7). As a result, the federal minimum
wage has had little or no impact on the share of the
workforce experiencing low pay by the standard
definition.

Starting in the late 1980s, as the real value of the
federal minimum wage fell far below its historical
levels, many states began to set state-specific wage
floors above the federal minimum. In 2011, 17 states had
state-level minimum wages above the federal minimum
wage.7 The highest of these, however, were still about
20 percent below the low-wage threshold and therefore
likely had only a limited impact on these states' low-
wage share.

Lesson 3B: The Earned Income Tax Credit (EITC) has
Contradictory Effects on the Volume of Low-wage Work and
on the Well-being of Low-wage Workers

Since 1975, the United States has had an Earned Income
Tax Credit (EITC) that effectively tops up the earnings
of some low-wage workers in lower-income families. The
program began modestly, but has grown to be the largest
program providing financial assistance to low-wage
workers and their families.9 In 2009, over 27 million
families received $60 billion in tax credits through the
EITC.

The structure of the EITC is complex, but thanks largely
to the relative generosity of offered benefits and to
the administration of the program through the income tax
system, the take-up rate is high. The value of the
EITC's refundable tax credit varies according to a
worker's family income and size. In 2008, the maximum
benefit per family was about $4,800 per year for a
family with two or more children and a maximum income of
about $39,000 per year.10 The benefit levels, however,
vary substantially across family types. In the same
year, the maximum EITC payment for a single person with
no children, for example, was under $500 on a maximum
eligible income of just under $13,000 per year.

In practice, it is difficult to estimate the impact of
the EITC on the wage structure. The EITC is not a direct
subsidy to the wages of low-wage workers because its
value depends on both the worker's family size and the
income received by other adults in the family. For
single workers with no children, the EITC has little
effect on hourly earnings. 

For example, a single, childless, full-time, full-year
worker earning the federal minimum wage in 2008 would
have earned about $12,280 before the EITC - an average
of $6.14 per hour. If eligible for the maximum EITC,
this same worker would have seen his or her annual
earnings rise to about $12,720. This translates to about
$6.36 per hour, or an EITC top-up of about $0.22 per
hour, leaving this worker still only about half way to
the low-wage threshold in 2008.

To further complicate the calculations, if the same
childless worker were in a family with another worker
who earned more than about $1,000 per year, neither
worker would be eligible for any EITC payment because
they would exceed the family income limit for a
childless family.

The EITC has the greatest impact on the earnings of low-
wage, single parents with children. Eissa and Hoynes
estimate that in 2004, the EITC raised the hourly
earnings of a single, full-time, full-year minimum-wage
worker with two children by about $1.90 per hour
(relative to a minimum wage of $5.15 per hour in that
year), and the wages of a similar worker with only one
child by about $1.30 per hour. In either case, the
combination of the minimum wage and the EITC would still
leave this worker below the low-wage threshold in that
year.

The EITC may also have a perverse impact on the wages of
workers who do not qualify for the program.14 Since the
EITC significantly raises the after-tax wages of many
eligible low-wage workers, the EITC effectively raises
the labor supply for eligible workers, which may act to
lower the before-tax wages paid by employers. The EITC
more than compensates recipients for any decline in the
wage employers paid, but a large share of low-wage
workers, especially those without children or in
families with other adults in work, experience only the
supply-induced reduction in the hourly wage because they
are not eligible for the EITC (or receive much smaller
payments). 

Rothstein estimates that the net result of these gains
and losses for different types of workers is that an
additional dollar spent on the EITC only raises after-
tax wages by about 73 cents. Leigh concludes that "a ten
percent increase in the generosity of the EITC is
associated with a five percent fall in the wages of high
school dropouts and a two percent fall in the wages of
those with only a high school diploma."

Many states operate their own state-level EITC programs
that supplement the benefits paid by the federal EITC.
In 2010, 24 states had EITC programs, usually linked
explicitly to the federal EITC. The generosity of these
programs ranged from 3.5 percent (Louisiana) to 45
percent (Minnesota) of the federal EITC.

The state programs, which are modeled closely on the
federal EITC, reproduce the strengths and weaknesses of
the federal EITC. The state EITCs raise the after-tax
wage of eligible workers, sometimes considerably, but do
so in a way that has a complicated impact on the after-
tax wage structure. The EITC increases earnings of low-
wage, low-income single parents substantially. But, the
program has little direct impact on the wages of low-
wage, even low-income, workers with no children, and
likely a negative impact, through supply effects, on
these same low-wage workers.

Taken together, the minimum wage and the EITC could act
as an effective tool to combat low-wage work in the
United States. The EITC could substantially raise the
after-tax hourly wage of eligible workers, without any
negative impact on the employment prospects of low-wage
workers. The minimum wage, meanwhile, could put a floor
on the wages of workers ineligible for the EITC and
limit the ability of employers to capture an important
share of the total tax expenditure.  In practice,

however, the EITC and minimum wage in the United States
have been set too low to limit the incidence of low pay,
and the minimum wage has been set too low to prevent
employers from reaping windfalls from the eligibility
structure of the EITC.

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

If low-wage work were a short-term state that helped
connect labor-market entrants or re-entrants to longer-
term, well-paid employment, high shares of low-wage work
would be less of a social concern. Indeed, if low-wage
work facilitated transitions from unemployment to well-
paid jobs, countries might want to encourage the
creation of a low-wage sector to improve workers'
welfare in the long term.21

Unfortunately, the preponderance of evidence suggests
that low-wage work is a "sticky" state. Not only are
low-wage workers likely to stay in low-wage jobs from
one year to the next, they are also more likely than
workers in higher-wage jobs to fall into unemployment or
to leave the labor force altogether. 

From 1995 through 2001, for example, about half or more
of low-wage workers in Denmark, France, Germany, the
Netherlands, the United Kingdom, and the United States
remained in low-wage work from one year to the next, and
between 8 and 23 percent of low-wage workers left the
workforce year-to-year. Over the same period, between 25
and 41 percent of low-wage workers in these countries
crossed the threshold into higher-paying jobs.

The years 1995 to 2001 were particularly good for low-
wage workers in the United States, with sustained low
unemployment and the most rapid wage growth over the
last three decades for workers at the bottom of the wage
distribution. More recent, internationally comparable,
data are not available for any of these countries, but
given the general deterioration in world labor markets,
these transition probabilities are likely to be lower
now than they were in the boom at the end of the 1990s.

Low-wage jobs may not help, and may even hurt, the
future labor-market prospects of the workers who hold
them. Low-wage jobs, like spells of unemployment, may,
for example, be associated with the erosion of a
worker's accumulated skills. If so, a worker's long-term
earnings potential would be enhanced more by a period of
education and training than by working in a low-wage
job. 

Low-wage employment, like an unemployment spell,
may also send a signal to potential employers that a
worker has low productivity, reducing the probability
that the low-wage worker will move up the pay scale.
Based on an analysis of data for the United Kingdom,
Stewart, for example, finds that low-wage work has
"almost as large an adverse effect as unemployment" on
low-wage workers' future employment prospects.   He
concludes: "not all jobs are `good' jobs, in the sense
of improving future prospects, and ... low-wage jobs
typically do not lead on to better things."

None of this is to suggest that economic policy should
not seek to create employment opportunities for less-
skilled, less-educated, or less-experienced workers. The
point is that low-wage work does not appear to be a
self-correcting problem.

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

The intense policy focus on low pay can obscure the
reality that low pay is often among the least of the
labor-market problems facing low-wage workers,
especially in the United States. U.S. labor law offers
workers remarkably few protections. U.S. workers, for
example, have the lowest level of employment security in
the OECD25 and no legal right to paid vacations, paid
sick days, or paid parental leave.  The low level of
union coverage in the United States means that
contractual obligations generally don't make up for the
lack of legal guarantees.

In the absence of legal or contractual rights, low-wage
workers are the least likely to have access to core
benefits. Almost half of private-sector workers in the
bottom fourth of the wage distribution in 2010, for
example, had no paid vacations. In the same year, about
68 percent of private-sector workers in the bottom
fourth of the wage distribution had no paid sick days,
compared to only about 11 percent of workers in the top
fourth.   

In the U.S. context, however, probably the most critical
problem facing low-wage workers is the lack of access to
health care. Rho and Schmitt estimate that in 2008, more
than half (54 percent) of workers in the bottom wage
quintile did not have employer-provided health insurance
and more than one-third (37 percent) had no health
insurance of any kind, private or public. The 37 percent
non-coverage rate for the bottom quintile of wage
earners in 2008 was up from 15 percent in 1979.

In countries with welfare-state institutions and labor
laws that provide significant rights and protections to
all workers regardless of their wage level, a focus on
the wage problems facing low-wage workers makes sense.
In a country such as the United States, however, where
welfare-state institutions and labor laws offer only
weak protections, low-wage workers face a host of
problems beyond low wages. In the U.S. context, raising
wages at the bottom would certainly help. But, raising
wages alone will do little to address these same
workers' lack of access to health insurance or to
alleviate the "time bind" caused by a lack of paid
vacation, paid sick days, and paid family leave.

Conclusion

The experience of the last few decades suggests that we
have a pretty good idea of how to reduce the size of the
low-wage workforce. "Inclusive" labor-market
institutions that extend the pay, benefits, and working
conditions negotiated by workers with significant
bargaining power to workers with less bargaining power
appear to be the most effective general remedy for low-
wage work. The specifics can take many forms, from
extending collective bargaining agreements to cover
workers who are not themselves members of unions, to
setting a minimum wage at or near the threshold for low-
wage work.

Greater public social spending may be another way to
increase the "inclusiveness" of national industrial
relations systems since a generous social safety net
improves the bargaining position of low-wage workers
relative to their employers. The national details aside,
the available cross-country data show a strong
association between higher levels of inclusiveness and
lower levels of low-wage work.

The United States, as one of the least "inclusive" OECD
countries, primarily offers cautionary lessons when it
comes to low-wage work. Union coverage rates in the
United States are the lowest among comparable OECD
economies, providing little in the way of protections
for the large majority of low-wage workers. In
principle, federal and state minimum wage laws and
federal and state EITC programs could significantly
lower the incidence of low-wage work. But, in practice,
wage floors and EITC payments in the United States have
been set too low to prevent a long-term increase in low-
wage work, let alone reduce the ranks of the already
sizable sector.

For some workers, low-wage work is a stepping stone to
better things. For an important share of low-wage
workers, however, a low-paid job is not much better than
unemployment and can even harm their long-term wage and
employment prospects. Policy discussions often rightly
emphasize the importance of a job, any job, in the fight
against poverty (particularly in contexts where national
benefit systems are not generous enough to raise jobless
families out of poverty). But, the relatively low levels
of mobility out of low-wage work argue against seeing an
expansion of low-wage employment as a straightforward
solution to the problems of poverty or wage inequality.

In the United States, in particular, low wages are only
the most obvious problem facing low-wage workers. In the
absence of legal or contractual guarantees, low-wage
workers in the United States are far less likely to have
health insurance (private or public), paid sick days,
paid family leave, paid vacation and holidays, and other
benefits that are more routinely provided to higher-wage
workers (and to low-wage workers in other rich
economies). Raising wages at the bottom - without other
measures to address the terms and conditions of low-wage
employment - will do little or nothing to address these
other pressing concerns facing low-wage workers.

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