Good Jobs: Three Reasons There Aren’t More

April 5, 2012

Boston Review:

Far too many American adults work in low-wage jobs. In 2010, 20 percent of adults earned a wage that would put a family of four below the poverty line. Twenty-four percent of adults earned less than two-thirds of the median wage, another widely used international standard for gauging low-wage work.

Better jobs seem the obvious solution. The government could raise and enforce labor standards and push firms to invest in training and to create advancement opportunities for low-wage workers. Unions can also play a key role by advocating for increased wages and training opportunities within firms. These steps would be effective, but they would face enormous resistance, even among liberals, because they intervene directly in the job market.

The conventional wisdom focuses almost entirely on two strategies: educating people so they can escape the low wage–job trap and, for those who cannot, providing some level of support through programs such as the Earned Income Tax Credit, an income supplement conditioned on work. The idea is to let the economy generate jobs of whatever quality firms choose and then, if necessary, compensate by enabling people to avoid the bad ones or by shoring up people who are stuck. The nature of available jobs is a given.

In practice this restrictive framework condemns millions to low wages and poor working conditions. And it continues to be the norm thanks to three myths: 1) economic growth and high rates of upward mobility will solve the problem; 2) policy efforts to alter the distribution of economic rewards inevitably slow down growth and damage labor market efficiency; 3) education alone is enough to help low-wage workers get better jobs.

None of these claims holds water when confronted with data. That’s good news because it opens the door to serious consideration of the low wage–jobs problem and how to fix it.

Myth 1: Lifting All Boats

Was President Kennedy right that “a rising tide lifts all boats”? When we climb out of the Great Recession, will we put the challenge of low-wage jobs behind us?

The 1990s offer a perfect test of a strong overall economy’s capacity to improve the quality of employment. It was a decade of remarkable prosperity during which unemployment steadily dropped, from 7.5 percent in 1992 to 4 percent in 2000. What happened to low-wage workers?

At the beginning of the boom, 25 percent of adults fell below the poverty line; by 2000, the rate was 19 percent. It is hard to look at these figures and argue that the boom substantially improved the low-wage labor market. Obviously full employment and a strong economy are good things, but generating better jobs requires more direct interventions.

And just as we can’t expect aggregate growth to improve jobs by itself, we can’t expect low-wage workers to move up without changes in policy. There is considerable evidence that U.S. adults remain confined in low-wage jobs over the course of their working lives. A 2004 study by economist Harry Holzer found that over the course of six years in the early 1990s—a growth period—less than a third of low earners raised their incomes enough to bring a family of four consistently above the poverty line. Studies of more recent data by Pamela Lopresete, Brett Theodos, and others find similar results.

Myth 2: Good-Jobs Policy Hurts the Economy

One critique of efforts to improve job quality and reduce the size of the low wage–labor market is that such efforts distort incentives and damage overall economic performance. The idea is that people will work harder and invest more if they fear the consequences of not doing so. There is an argument on the other side: people respond better to the carrot than to the stick, and if working conditions were improved, effort and productivity would rise.

These arguments can be tested by examining the performance of several northern European nations, all at the same level of technological sophistication as the United States and all competing in international markets.

How does America compare in terms of income inequality? Table 1 shows the ratio of the earnings of the top 10 percent of wage earners to the bottom 10 percent as well as the ratio of the median to the top 10 percent. Clearly the United States is the outlier. It is not surprising that the U.S. poverty rate substantially exceeds that of other developed nations.

Europeans achieve these results through a combination of higher minimum wages, stronger unions, and more egalitarian social norms. Economists often argue that more egalitarian wages reduce incentives to work and that a higher minimum wage increases the cost of labor and therefore encourages unemployment, so the European job market should suffer as a result of lifting the bottom. Does it? In fact, among both women and men, the fraction of the “prime age” (25–54 years old) population that works is higher in Germany, France, the United Kingdom, Sweden, Denmark, and the Netherlands than in the United States.

This pattern has persisted for many years, and researchers looking at different measures reach similar conclusions. As labor economist Richard Freeman writes, “The best summary of the data—what we really know—is that labour institutions reduce earnings inequality but that they have no clear relation to other aggregate outcomes, such as unemployment.”

Myth 3: Education Solves Everything

Scholars and policymakers point to the correlation between education and wages and argue that if people had more skills and schooling then they would not find themselves in bad jobs. In other words, inevitable market forces are at work. But this commonly accepted narrative obscures important alternative solutions to the challenge of low-wage jobs.

“Human capital” is only part of the story. When we probe more carefully the relationship between education and earnings, we find that the average masks a great deal of variation, suggesting that job quality is influenced by much more than educational attainment. To illustrate this point, Table 2 shows the distribution of earnings among men and women, 31–39 years old, with only a high school degree. Even within these narrowly defined groups there is much variation in earnings, which cannot be explained by education, age, or gender. More sophisticated statistical analyses reach the same conclusion…

Read it all.

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