1  Introduction

1.2  Policy issues

As Amartya Sen observed, market outcomes can be both perfectly efficient and perfectly disgusting. In an acknowledgement of the risks that labour market outcomes may be disgusting, all developed economies regulate their labour markets, to a greater or lesser degree. These regulations are mostly directed toward providing some limits to the harshness of the terms on which people may be employed. They include minimum wages, prescribed ordinary hours of work, unfair dismissal rules and other forms of job protection, prohibition of discrimination on the basis of sex, race and regulation of the terms of industrial conflict. Here, we present a set of policy questions in order to provide a context and focus for the literature review that is to come.

1.2.1  Low wages and current material well-being

If people are paid low wages, their capacity to support themselves and any dependents is low. The policy issues are a) is the standard of living of low wage workers acceptable? And b) is the level of the wage in low wage jobs fair?

Clearly, if people are employed in low wage jobs for only a small proportion of their working lives, then the terms of that employment will have only a minor impact on their lifetime material well-being. This does not make those terms irrelevant. But it does reduce their social significance. In judging whether wages are too low to provide a decent standard of living, the household circumstances of low wage workers are relevant. Many workers live with other people, and share income and responsibilities. It is important to know the extent to which low wage workers a) rely solely on their own earnings, b) support dependents from their own earnings, and c) share in the housing and income provided by other family members.

If low wages are judged to be inadequate to support a decent standard of living, several policy responses are possible. These include:

• legislate or arbitrate higher minimum wages
• use the tax/transfer system to increase the disposable incomes of low wage workers in low income families
• provide in-kind support for low income (or for all) low wage workers (eg, subsidised childcare, healthcare, transport)
• force up the market wage, by reducing the supply of low wage labour, eg, by providing an alternative welfare income or by increasing the school leaving age, or by restricting immigration of low skill workers, or by supporting the education of low skill workers, or by mandating forms and quantities of training to be provided by employers
• force up the market wage, by increasing the demand for low wage labour, eg, by directly employing low wage workers in the supply of publicly provided goods and services, or by subsidising the employment of low wage workers by the private sector, or by reducing the non-wage costs of employing low wage labour (such as payroll taxes and workers’ compensation premiums).

In the English-speaking world, there is strong evidence that unemployed people are much more likely to be poor than are low wage workers (eg, Harding and Richardson, 1999). It is important for policy makers to know the terms of the trade-off between low wages and jobs for low skilled workers. How elastic is the demand for low wage labour? Does the gain in reducing poverty that would be made by increasing low wages exceed the cost that would be incurred from any increase in unemployment? In thinking about this trade-off, it is essential to know whether low wage employment is a transitory state or likely to be endured over many years. It is this last issue that is the focus of this review. If steps can be taken to increase mobility out of low wage jobs, then the pressure to protect the standard of living of low wage workers, through regulating the wages and conditions of their employment, is reduced.

1.2.2  Low wages and lifetime material well-being

Low wages are clearly much more damaging if people spend a large period of their working lives in such jobs. This is especially true for workers who rely primarily on their own earnings for their standard of living (ie, are not the secondary earner in the household).

The policy issues that surround long term low wage employment are centred on two questions. The first is an empirical one: what proportion of low wage workers stay in such jobs for extended periods of time (and who are they?). Second, what steps can governments take to increase mobility from low wage jobs to higher paid jobs? The first of these we will report on in some detail. The steps available to policy can be grouped as a) skills development and b) job matching.

Theory and evidence both suggest that a common pathway from low to higher wages is through the acquisition of improved workforce skills. These may be acquired in formal educational settings, or on the job. Governments can influence the acquisition of additional skills through:

• the infrastructure of formal education (school, vocational, higher), with an emphasis on the requirements and outcomes of the least skilled
• the encouragement of comprehensive structured training that integrates off-the-job and on-the-job learning
• the provision of tailored assistance for the transition from school to work for those at risk of long term labour market disadvantage
• the provision of second chance education and skills development, for older workers, with attention given to different learning styles and to the needs of people who have found formal education a bad experience
• active encouragement of a culture of training among firms, perhaps supported by tax incentives
• ensuring that there is a reasonable payoff to the acquisition of skills, in terms of the probability of getting a job and the rewards for doing so.

Theory and evidence also suggest that a second important source of upward wage mobility is through workers finding a job that provides a better match for the abilities that they have to offer. It is costly to both firm and worker to search for the best match of job requirements and worker abilities. Governments can take active steps to assist the matching process. The provision of information to both sides of the market is key. Information on housing as well as job prospects will assist geographical mobility, while more active assistance is likely to be valuable for some low wage workers.

1.3  Outline of what is to follow

In the rest of this review, we commence with a brief summary of the major developments in the international economy that have been affecting low wage jobs and workers. We then define low wages, and describe who occupies low wage jobs and where they work. In order to understand this pattern of low wage employment, we examine first why firms would want to pay low wages, and second, why people would accept employment in low wage jobs. This includes the question of whether a low wage job is better than no job, for low skilled workers. We then turn to the big question: What is the extent, nature and change in wage mobility, and who are the mobile/immobile? This is followed by a discussion of strategies by which to exit low wage jobs into higher paid jobs. We provide a brief discussion of the important topic of whether the supply of low skilled people has an identifiable impact on the demand for low wage workers. We conclude with an overview of the evidence and a discussion of its implications for policy in the New Zealand context.