Up from the bottom rung

Public Interest, Wntr, 2005 by Marvin H. Kosters

PITY the poor labor economists. They build their careers studying one of the most complicated bazaars in the economic world--the marketplace for jobs. Not only that, but their labors have become even more high-stakes in recent decades, as an increasingly technological economy seems to be pushing more and more unskilled Americans into poverty. The popular magazine BusinessWeek poses the question this way: "What's happening in the world's richest, most powerful country when so many families seem to be struggling? And what can be done?"

BusinessWeek has a point. On the broadest level, the work of labor economists has a moral dimension. What would it say about the "American dream" if some families were unable to rise above the poverty level, despite their best efforts (efforts such as having a family member working full time)? And yet in tackling this dilemma, all too many economists are confounded by a cloudy understanding of the true nature of the low-wage problem and a confused approach to solving it.

Three questions confront labor economists. First, what is "working poverty" and how common is it? Second, why might a full-time worker earn less than he or she needs to support a family? Third, what can society do to help? Unfortunately, answers to these questions often prove elusive; solutions lie at the end of a road intersected with dead-ends and blind alleys.

A question of skill

The first step to answering the low-wage question is to determine the nature and scope of the problem. Here already unwary economists can run into trouble, because when we (meaning economists, policy makers, and the public) talk about the low-wage labor problem, we are really talking about two distinct issues. On one hand, we are confronting the marketplace for jobs, and on the other the well-being of individuals and households. This is an important distinction because the economic concepts that apply to the labor market itself, where wages and employment levels are set, are quite different from those that apply to measurements of welfare (which to an economist means "economic well-being").

Measuring phenomena in the labor market is a tricky business, especially when it comes to comparing wages. An individual worker's wage depends on a combination of factors that gauge the worker's skills and the value an employer places on the ability of that worker's skills to produce goods or services. The result is a huge spectrum of wages. Workers can have widely divergent personal characteristics. Differences in earnings power can depend on whether a worker is young and inexperienced or whether he has developed valuable skills through education and work experience. Meanwhile, different employers can value different types of education, or different previous work experiences, differently. It is customary to speak of average wages when we refer to the aggregate. Still, the range of wages in the labor market is wide, with a large share of workers earning wages near the middle of the distribution, but with some workers earning wages far higher or far lower than the average.

Given such complexity, developing a simple economic model to predict changes in wage levels might seem like a fool's errand. And the labor economist's task only becomes even harder when he turns to predicting the "welfare effects"--the changes in overall economic well-being--of those wage levels on families. One must first estimate how much income is necessary to provide modest levels of food, clothing, shelter, and other amenities to members of the household. Even for simple official measures of economic well-being, the economist must be mindful of how many adults and how many children are in the household, because the two categories require different consumption patterns. Only after one has done this is it possible to estimate the level of income that constitutes the "poverty line" that reporters, activists, and politicians fret about. As of 2001, that line was just below $18,000 for a family with two adults and two children.

As imprecise as all this is, however, at least one thing becomes clear immediately: A consequence of basing wages on workers' productivity, and not on their household needs, is that some workers at the low end of the productivity, and thus the wage, distribution earn incomes too low to comfortably support a family. Certainly, many low-wage workers could not by themselves earn an income sufficient to support a large household above the poverty level. There is really no major puzzle to how one might find a household living in poverty despite being headed by a full-time worker, if that worker is unskilled. (One is especially likely to see this when the household has only one member employed full-time and at a very low wage, or when the household is large relative to the income a low wage, or when the household is large relative to the income a low-wage worker can expect to earn.)

Workers with lower skill levels (usually defined in terms of schooling and work experience) have always earned lower wages than more skilled workers. This difference has widened considerably since the 1970s. For much of the past 25 years, wages of high school graduates and workers with even less schooling have stagnated, while wages of workers with college credentials have increased substantially. The resulting increase in wage inequality has provided ample motivation for a careful look at the low-wage segment of the workforce.