In this week’s Q&A, IZA World of Labor Editor-in-Chief Daniel S. Hamermesh asks Claus Schnabel some pertinent questions about issues in his field of interest. Claus Schnabel is professor of economics at the Friedrich-Alexander University Erlangen-Nürnberg and a research professor at the Halle Institute for Economic Research. His main research interests are empirical labor economics, wages, trade unions, and industrial relations.
Hamermesh: Define “low pay.” Is it some absolute amount, unchanged over time? Is it rising over time? Is it relative to some average or median pay in an economy?
Schnabel: Low pay is usually defined as earnings that are lower than two-thirds of the national average or median of gross hourly wages. It is not an absolute but a relative amount; and if average or median wages in an economy rise, so does the threshold below which we speak of low pay. About one out of seven full-time workers in OECD countries earn wages that amount to less than two-thirds of the median wage. In recent years the incidence of low pay has decreased in most OECD countries.
Hamermesh: To what extent does having taken a low-paying job “scar” one’s future labor market prospects (even if one has some skills that will pay off later)?
Schnabel: First of all, being unemployed for a longer time may leave a “scar” since workers become burdened by the negative effects of unemployment such as a loss of human capital and work experience. Therefore, taking up a low-paying job prevents scarring effects of unemployment that could create long-term problems for workers. Employers may, however, interpret low-paid jobs in a worker’s employment history as indicating low productivity. In this case, accepting low-paid employment can be a negative signal, particularly for qualified workers. Given that workers may be trapped in low-paid jobs, taking a low-paying job can hurt their future labor market prospects.
Hamermesh: Is there any way to incentivize employers to increase the training content of their lower-paying jobs so that the negative relationship between pay and the chance to advance economically is reduced?
Schnabel: Various studies have shown that transitions from low to higher pay are more likely for those workers who have received training or vocational courses, particularly those who get on-the-job training. In principle, employers should be interested in continuously training their workforce to maintain productivity, but in practice this is not always the case. Therefore, in countries that pursue an active labor market policy, individuals often receive training through the national employment agency. In addition, governments in several countries, particularly in the EU, think of incentivizing employers to provide more training for their workforce, for instance by offering subsidies. Against the background of rapid technological change through digitalization, many unions too demand that worker training increase. In some countries, unions have been successful concluding collective agreements with employers that provide enhanced possibilities for continuous worker training.
Hamermesh: A strange final question: Is there a point where society should simply say that it is embarrassing to have people working full-time and receiving low pay, so that society would be better off just giving them a decent income whether they work or not?
Schnabel: This embarrassment concerning low pay is indeed growing in more and more countries. Governments have reacted by introducing minimum wages (such as in Germany) or by substantially increasing the level of minimum wages (in the UK and in several US municipalities). These measures do not really solve the low-pay problem, and they do risk that some low-qualified workers lose their jobs because their productivity is lower than the increased minimum wage. Another and probably better approach would be to have low pay topped up by government subsidies. In this case, workers keep their jobs and the dignity and self-confidence that being employed conveys. Since working is not only a means to make a living but a constituent part of most people's life that provides a sense of purpose, I don't think that individuals and society would be better off offering a basic income whether or not someone works.
© Claus Schnabel
Read Claus Schnabel's IZA World of Labor article on “Low-wage employment.”
Find more IZA World of Labor content on Personnel economics.