August 21, 2006
Understanding Low Wages
To the small cadre of economists who have worked their entire professional lives trying to understand the complexities of how and why the labor market rewards some skills, occupations, and people more than others, the popularity of the idea of a government mandated minimum wage must be depressing. But it shouldn’t be surprising.
The notion that complex market outcomes can be explained by simplistic notions like greed or discrimination – solvable by the stroke of a lawmaker’s pen – will probably always have a superficial appeal. But the fact that problems like poverty and low wages remain with us long after the ink has dried on the legislation that purports to solve them ought to at least give us some pause. And even to ask, what sorts of ideas are these economists working over in the corner coming up with?
Understanding how markets work is what economics is all about, and the labor market has always posed a special challenge. So much of what comprises our worth to our respective employers – like attitude, motivation, and ability to work with others – defies easy measurement. And the practical difficulties involved in finding and taking a new job – not to mention the legal difficulties for employers who might want to fire us – can make wages and productivity get out of synch.
The upshot is that our understanding of wage differences – between people, jobs, and even points of time for an individual worker – is less than perfect. We probably will never be able to pinpoint why you make less than a co-worker, or even to explain 100 percent of the earnings differentials between men and women. But thanks to the efforts of some outstanding researchers, our knowledge is growing everyday.
The concept of human capital, the product of the investments we make in ourselves in the form of education and training, long ago made the leap from economic jargon to everyday usage. But if acquiring skills is at the heart of earnings growth, why do only some of us hear that message? In an era when advanced educational credentials are a requirement to even be considered for many careers, we hear the shocking news that as many as one in four ninth graders in high school will not graduate with their class.
Those unfortunate schooling decisions are also correlated with a number of other outcomes, including teenaged pregnancy, marijuana use, and criminal behavior that push some individuals into the fringes of society, with marginal labor force attachment and low wages as the unfortunate result.
Untangling cause and effect in this lethal mix of life experiences has never been easy, but what we learn or fail to learn from our parents early in life has emerged in recent research as critically important. The very basic skills of self-control, patience, sociability, and the ability and motivation to work towards long-term goals are imparted to all of us somewhere in our lives, some more than others. Those who lag behind in these skills as they grow older are less receptive to the education and training that the labor market so richly rewards.
The impacts of this basic skill deficit go well beyond early adulthood. Those less receptive to training are more likely to go into occupations where less skill acquisition takes place. Not only does this translate into little or no wage growth, it also renders them vulnerable to disruptions caused by economic transformation. And, of course, their attachment to the labor force is more marginal, even in the 25-45 age period of their lives when overall labor force participation rates are highest in the general population.
If you could craft a piece of legislation that will solve this problem, I’d be the first to urge everyone to sign it. But understanding, let alone changing, poorly motivated or socially dysfunctional individuals arriving at early adulthood with little or no preparation for the knowledge-intensive workplace will take more than a legislative mandate. And with the rewards to skill growing, the gap between the haves and the have nots in our economy will continue to grow until we do.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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