7 Why accept low wages?
The simple answer to the question of why accept a low wage job is that people cannot do any better. But within this overall response are hidden a number of reasons that are worth distinguishing.
7.1 Low productivity
A whole book could be written on why people have low productivity. Here we summarise the sources of low productivity without providing a full explanation of any of them. The purpose of this section is to make clear that there is a variety of reasons why people have low productivity.
In the simple model of the labour market, people are paid low wages because they have a low marginal product. In practice, low marginal product is interpreted to mean that they have low skills. A human capital perspective dominates our understanding of what comprises skills, and how to obtain them. Thus people have low wages because they have low human capital. The major components of human capital are formal education and skills learned on the job. This line of reasoning concludes that people have low productivity, and hence low wages, because they have not put the effort into learning productive skills through the formal education system, or have not found a job, and stuck at it, in which they can learn skills in a less formal manner.
Why do people not learn the skills necessary to obtain a job that pays a reasonable wage? Part of the reason may be choice. Learning skills is an investment, in which the costs are incurred early and the payoffs are received over time. As in any investment, the present value of the return on the investment depends on the discount rate, or emphasis given to the present over the future. For a number of reasons (including inability to borrow or to otherwise finance their time out for education) some people have higher discount rates than others. People with high discount rates will be discouraged from investing in education. We do not here go into the reasons for high discount rates. We note, however, that there is a systematic relation between high discount rates and low socio-economic status.
The expected returns to formal education will also be low for people (women) who do not expect to spend the major portion of their working age years in full-time employment.
But low levels of human capital are not always a matter of choice. We need to remind ourselves that earnings equations that seek to explain differences in levels of earnings, and emphasise returns to human capital, leave a great deal of the variance unexplained. Some people do not proceed with formal education because they fail. They may be poorly taught or not have the intellect required to comprehend the material, or not have access to a range of educational opportunities, or be bullied and humiliated at school. People who come from difficult family backgrounds, for example where there is abuse, or addiction or criminal behaviour or mental illness, are not likely to find the ordinary classroom a very productive place.
On-the-job learning is possible, of course, only if the work requires more than elementary skills, and the employer is willing to provide support for that learning.
People who have acquired some level of skills may lose them through job loss. Job loss can lead to loss of human capital because skills were specific to the employer or the occupation. If the job loss results in unemployment, there can be a general loss of skills and motivation, especially if the unemployment is long term.
Le and Miller (2001) study marginal workers in Australia (ie, people who obtained jobs from unemployment or under-employment). They conclude that the overwhelming reason for the low socio-economic status of the jobs these people are able to find is their low levels of human capital (formal education, general work experience, tenure on the job, and the negative effects of a long elapsed time between leaving education and finding their first job). The fact that they were less likely to work in the public sector and more likely to work for small employers also contributed to their poorer outcomes.
7.2 Other causes of low wages
While most attention in the economics literature is directed to low human capital as the source of low wages, there are other causes which we draw attention to here.
People may be paid a low wage because the skills that they have do not match what the employer wants. There is now a considerable literature on job search and the importance of a good match and we will say more about this later. A mismatch may occur because of ignorance on either side of the match. Or it may occur because the worker does not live within reach of a job that suits her or his skills. Geographical mobility is an important source of reduced unemployment, and has identifiable positive impacts on wages as well.
The job offers available to workers may be poor because of discrimination. There is a large literature on discrimination against women that identifies the wage penalty that they face on account of their sex. In the US, discrimination on the grounds of race is also well documented. People with criminal backgrounds (up to 60% of young black men in the US, Rangarajan, forthcoming) face even greater obstacles. Discrimination does not necessarily mean that the only job available is a low wage job. But its effect is to lower the quality of the job offers received, and thereby will lead to a larger proportion of the relevant group having to accept a low wage job.
Wages are not the only attribute of a job. People may accept low wages because they are compensated for by other characteristics. The work to be done may be especially attractive (in the arts, or as a park ranger). There may be excellent opportunities for further skills development, as is formally structured into apprenticeships. There may be high levels of job security (although in the main low wage jobs are less attractive in non-wage benefits, including security). Finally, some people are constrained by other dimensions of their lives to limit their search to jobs that are geographically proximate or have hours of work that fit with their other obligations.
7.3 Jobs as stepping stones
The whole notion of on-the-job training as investment in human capital implies that the return to employment in a job (including a low wage job) can include the expectation of a greater level of future earnings. A job with initial low earnings that leads to a future job with higher earnings can be called a stepping stone job. In an important paper, Connolly and Gottschalk (2001) analyse such jobs both theoretically and empirically.
In brief, they model jobs as having three dimensions. One is the current wage. The second is the expected rate of growth of that wage with tenure. The third is the access that the job will give to a better set of wage offers in future. This neatly represents the difference between a dead-end job and a stepping stone job. The former is one where there is little or no prospect of real wage growth in that job and the job does not improve future wage offers. We report their empirical findings in a later section which discusses how to exit low wage jobs.
7.4 Is a low wage job better than no job?
It is tautological to say that people accept low wage jobs because they are better than the alternative. In the short run, the alternative to a low wage job is no job. There are a number of dimensions to the comparison between no job and a low wage job, and we here set them out briefly.
A job provides:
- a current wage
- an expected future wage in that job
- an expected future probability of being employed
- an expected future wage in a different job
- an imposed structure to the use of time
- an obligation to undertake tasks at the direction of someone else
- an impact on self-esteem and psychological well-being.
The current policy movement to emphasise employment rather than the receipt of social welfare is justified in large part by the belief that, whatever the individual at the time thinks, he or she is better off in the longer run by taking any sort of job than by being on a welfare benefit. In signing the US Personal Responsibility and Work Opportunity Reconciliation Act, President Clinton said “Today, we are ending welfare as we know it. But I hope that this day will be remembered not for what it ended, but for what it began—a new day that offers hope, honors responsibility, rewards work---” (cited in Rangarajan, forthcoming). In fact what Clinton was signing was an Act that severely limited the alternative to a low wage job that many Americans relied on. Whether or not it is in the interests of potential low wage workers (as distinct from the taxpayers) to require them to work in a low wage job, rather than to receive a welfare payment, is a question that we explore empirically later on. It is clear from their choices that many of the people affected by the welfare changes in the US did not anticipate being better off from working in a low wage job. Were they wrong?
