The working-poverty trap

Public Interest, Wntr, 2005 by Ronald F. Ferguson

IMAGINE working full-time, but nonetheless living in poverty. Hard as this may be for many of us to imagine, almost a quarter of the nation's workforce in 2001 earned less than $8.70 an hour. Full time, full-year work at this wage placed a family of four very close to the official poverty line. Most workers with earnings in this range are among the 42 percent of American workers who have never attended college.

On average, workers without a college degree earn somewhat more than poverty-level wages, but their wages are still quite low. Moreover, trends for the past few decades have been dismal. Prospects for these workers have been markedly inferior to those for college graduates and are worsening. For men and women alike, high school graduates' hourly earnings in 1973 were roughly 70 percent those of college graduates. But by 2001, the figure dropped to 50 percent and 60 percent respectively. Hourly earnings for all women with at least a high school education increased from 1973 to 2001, but only slightly. Higher levels of schooling yielded bigger gains. In real, inflation-adjusted 2001 dollars, high-school educated women without college degrees earned about $10 per hour in 1973 and $11 per hour in 2001.

The average purchasing power of men without college degrees actually fell over the last 30 years. Measured in 2001 dollars, male high school graduates in 1973 earned an average hourly wage of $16.16. This had declined by 17 percent by 1995, and then rose by about 6 percent during the latter half of the 1990s when the economy was unusually strong. Still, the earnings of male high school graduates are lower on average today than in the mid 1970s. Among men, only the college-educated have more purchasing power than their counterparts in the mid 1970s.

Economists have been studying these trends for many years. Especially puzzling has been the finding that the disparities grew not only between workers with different amounts of schooling (for example, high school versus college-educated), but also among people with the same amount of schooling. The poorly defined phrase "skill-biased technical change" became the leading hypothesized explanation during the 1980s and 1990s. This hypothesis holds that even holding constant the years of schooling a worker has achieved, workers with more skills were for some reason becoming relatively more valuable and attracting higher wages than their counterparts who had the same years of formal schooling, but apparently fewer skills. What skills were increasing in value and why? Much was uncertain, including whether we were even observing a skill-related phenomenon.

Most studies over the last two decades relied on data gathered for purposes other than studying these questions. Fortunately, the data were sufficient to identify wage patterns, to document how they were changing, and what correlations exist with education and skill level. The studies indicated as well that disparities increased more in sectors of the economy that were experiencing more growth in the use of computers. However, correlation is not necessarily causation, and there was insufficient detail in the data to confirm technology-related explanations. In addition, it was difficult to understand the ways that other factors, such as economic globalization and trends in immigration and unionization, might also be implicated in the puzzle.

The findings of a recently published book, Low-Wage America: How Employers are Reshaping Opportunity in the Workplace, [dagger] edited by Eileen Appelbaum, Annette Bernhardt, and Richard J. Murnane (and to which I am a contributor), help us to better understand these changes in the American income structure. The book is the work of 36 authors who collaborated to study 464 establishments in 25 industries. The sectors studied include manufacturing, retail sales, telecommunications, the hospitality industry, and health care. Researchers surveyed more than 10,000 managers and workers and interviewed more than 1,700. The case studies provide the most complete understanding to date of low-wage work over the past few decades. Generally, in sector after sector, managers report that pressures to cut costs and raise quality have increased, and that managers have adapted in ways variously reflected in wages, benefits, and working conditions. The reasons that pressures have grown and the ways that managers have adapted are the subjects of this essay.

Manager adaptation

No single explanation accounts for why competitive pressures have grown and low-wage workers' earnings have stagnated. Many factors seem to come into play, including economic globalization, advances in information technology, deregulation, declining unionization, the falling real value of the minimum wage, and growth in the temporary help industry.

Whatever the causes, businesses are not passive victims of these changing conditions. Indeed, managers are active agents in the selection of those market segments in which they will compete. By targeting particular segments, they select the competitive pressures to which they will subject their businesses. At the same time, market niches can experience rapid change, and managers must adapt or suffer the consequences. Markets differ with regard to rates of innovation, the error or defect rates that customers will tolerate, the speed of delivery that customers require, and the distribution of market power between buyers and sellers. The past few decades have seen increased innovation, reduced customer tolerance for errors, growth in demand for speedy responses to orders, and growing sophistication among businesses in the ways they pressure suppliers.