Are low-paid jobs stepping stones to higher-paid
jobs, do they become persistent, or do they lead to recurring
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 still 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.
Overtime penalties, payroll taxes, and other
labor policies alter costs and change employment and output
Higher labor costs (higher wage rates and
employee benefits) make workers better off, but they can reduce companies’
profits, the number of jobs, and the hours each person works. The minimum
wage, overtime pay, payroll taxes, and hiring subsidies are just a few of
the policies that affect labor costs. Policies that increase labor costs can
substantially affect both employment and hours, in individual companies as
well as in the overall economy.
Strictly controlling overtime hours and pay does
not boost employment—it could even lower it
Regulation of standard workweek hours and
overtime hours and pay can protect workers who might otherwise be required
to work more than they would like to at the going rate. By discouraging the
use of overtime, such regulation can increase the standard hourly wage of
some workers and encourage work sharing that increases employment, with
particular advantages for female workers. However, regulation of overtime
raises employment costs, setting in motion economic forces that can limit,
neutralize, or even reduce employment. And increasing the coverage of
overtime pay regulations has little effect on the share of workers who work
overtime or on weekly overtime hours per worker.
The variation of racial wage gaps across and
within groups requires differing policy solutions
In many developed countries, racial and ethnic
minorities are paid, on average, less than the native white majority. While
racial wage differentials are partly the result of immigration, they also
persist for racial minorities of second and further generations. Eliminating
racial wage differentials and promoting equal opportunities among citizens
with different racial backgrounds is an important social policy goal.
Inequalities resulting from differences in opportunities lead to a waste of
talent for those who cannot reach their potential and to a waste of
resources if some people cannot contribute fully to society.
Declining union power would not be an
overwhelming cause for concern if not for rising wage inequality and the
loss of worker voice
The micro- and macroeconomic effects of the
declining power of trade unions have been hotly debated by economists and
policymakers, although the empirical evidence does little to suggest that
the impact of union decline on economic aggregates and firm performance is
an overwhelming cause for concern. That said, the association of declining
union power with rising earnings inequality and the loss of an important
source of dialogue between workers and their firms have proven more
worrisome if no less contentious. Causality issues dog the former
association and while the diminution in representative voice seems
indisputable any depiction of the non-union workplace as an authoritarian
“bleak house” is more caricature than reality.
Despite major efforts at equal pay legislation,
gender pay inequality still exists—how can this be put right?
Despite equal pay legislation dating back 50
years, American women still earn 18% less than their male counterparts. In
the UK, with its Equal Pay Act of 1970, and France, which legislated in
1972, the gap is 17% and 10% respectively, and in Australia it remains
around 14%. Interestingly, the gender pay gap is relatively small for the
young but increases as men and women grow older. Similarly, it is large when
comparing married men and women, but smaller for singles. Just what can
explain these wage patterns? And what can governments do to speed up wage
convergence to close the gender pay gap? Clearly, the gender pay gap
continues to be an important policy issue.
Labor market regulation should aim to improve the
functioning of the labor market while protecting workers
Governments regulate employment to protect
workers and improve labor market efficiency. But, regulations, such as
minimum wages and job security rules, can be controversial. Thus, decisions
on setting employment regulations should be based on empirical evidence of
their likely impacts. Research suggests that most countries set regulations
in the appropriate range. But this is not always the case and it can be
costly when countries over- or underregulate their labor markets. In
developing countries, effective regulation also depends on enforcement and
education policies that will increase compliance.
The institutional structure of pension systems
should follow population developments
For decades, pension systems were based on the
rising revenue generated by an expanding population (the so-called
demographic dividend). As changes in fertility and longevity created new
population structures, however, the dividend disappeared, but pension
systems failed to adapt. They are kept solvent by increasing redistributions
from the shrinking working-age population to retirees. A simple and
transparent structure and individualization of pension system participation
are the key preconditions for an intergenerationally just old-age security
Increased competition affects the pay incentives
firms provide to their managers and may also affect overall pay
Deregulation and managerial compensation are two
important topics on the political and academic agenda. The former has been a
significant policy recommendation in light of the negative effects
associated with overly restrictive regulation on markets and the economy.
The latter relates to the sharp increase in top executives’ pay and the
nature of the link between pay and performance. To the extent that
product-market competition can affect the incentive schemes offered by firms
to their executives, the analysis of the effects of competition on the
structure of compensation can be informative for policy purposes.
When minimum wages are introduced or raised, are
there fewer jobs?
The potential benefits of higher minimum wages
come from the higher wages for affected workers, some of whom are in poor or
low-income families. The potential downside is that a higher minimum wage
may discourage firms from employing the low-wage, low-skill workers that
minimum wages are intended to help. If minimum wages reduce employment of
low-skill workers, then minimum wages are not a “free lunch” with which to
help poor and low-income families, but instead pose a trade-off of benefits
for some versus costs for others. Research findings are not unanimous, but
especially for the US, evidence suggests that minimum wages reduce the jobs
available to low-skill workers.