IZA World of Labor

Low-wage employment

Are low-paid jobs stepping stones to higher paid jobs, do they become persistent, or do they lead to recurring unemployment?

Friedrich-Alexander University of Erlangen-Nuernberg, and IZA, Germany

one-pager full article

Elevator pitch

Low-wage employment has become an important feature of the labor market and a controversial topic for debate in many countries. How to interpret the prominence of low-paid jobs and whether they are beneficial to workers or society is currently an open question. The answer depends on whether low-paid jobs are largely transitory and serve as stepping stones to higher-paid employment, whether they become persistent, or whether they result in repeated unemployment. The empirical evidence is mixed, pointing to both stepping-stone effects and “scarring” effects (i.e. long-lasting detrimental effects) of low-paid work.

Incidence of low pay in selected OECD
                        countries, 2013

Key findings

Pros

Having a low-paid job may be better than having no job at all.

Accepting low-paid jobs prevents scarring effects of unemployment that could create long-term problems for the worker.

Low-paid employment may serve as a stepping stone into higher-paid employment, for instance, by improving an individual’s employment-related skills.

For less qualified or long-term unemployed persons, low-paid jobs may offer a suitable way to re-integrate them into the labor market.

Cons

Individuals can be trapped in low-paid jobs.

Accumulation of human capital while working in low-quality jobs is often limited.

Employers may interpret low-paid jobs in an individual’s employment history to be an indicator of low productivity.

Accepting low-paid employment may be a negative signal, particularly for qualified workers, though it may be less of a problem for other unemployed persons.

Low-paid employment can drive individuals into repeated spells of unemployment, which may result in a low-pay no-pay cycle.

Author's main message

Although upward mobility is limited, low-wage jobs can act as stepping stones to better-paid jobs for certain groups of workers. This provides some support for the “work-first” strategy that forms the basis for welfare reforms in many countries. However, as low-wage employment is not a self-correcting problem and can induce scarring effects, a comprehensive policy approach is needed. This should include active labor market policies and a philosophy of lifelong learning that increase workers’ chances to move up to better jobs, as well as a strategy of promoting “good firms” that invest more in training and provide better opportunities for workers to acquire high-paid jobs.

Full citation

Full citation

Data source(s)

Data type(s)

Method(s)

Countries