Center for American Progress

How Can We Help Low Earners Move Up in the Labor Market?

During the 1990s, over 2 million current and former welfare recipients entered the labor market in the United States. Their employment rates were impressive, but their earnings were low – generally in the range of $7-8 per hour with few benefits.

More broadly, millions of immigrant and native-born workers earn low wages in the U.S. today. Many have no high school diploma; often they have poor basic skills and work experience as well. But their labor market difficulties are not entirely of their own making. They have also been hurt over the years by a set of forces – such as technological change, globalization, weakening unions, and the like – that have led to earnings stagnation for U.S. workers without college degrees, and ever-widening gaps between those with and without higher education.

Yet some low earners do manage to improve their labor market standing over time. What accounts for their improvements, and how can we help other low earners make the same progress? In a new book with my coauthors Fredrik Andersson and Julia Lane, we use new Census data to follow a set of low earners in several states over a period of nine years (1993-2001), and analyze the characteristics of both workers and their employers that contributed to success.

Our basic finding is: advancement prospects depend not only on the individual worker’s skills and earnings capacity, but also on the characteristics of their employers. In other words, a given worker with specific skills can be a good deal more or less successful in the labor market, depending on the employer for whom (s)he works and their pay/promotion policies.

What are the characteristics of good employers? The sector of the economy in which the firm is located matters quite a bit. The higher-wage sectors include construction, durable manufacturing (such as cars and other machinery), transportation, wholesale trade, and some parts of the service sector (like financial services and health care). The lower-wage sectors are mostly retail trade and other parts of the services.

Within these broad sectors, some employers pay much better than others. In retail trade, department stores and supermarkets pay more than restaurants and other small outlets; in health care, hospitals pay better than nursing homes. The size of the employer, and the specific “niche” that they fill in the market (in terms of who their customers are and exactly what good or service they provide), can be important here.

But even within narrower categories, some employers choose “higher-road” policies to being competitive and others choose a “lower road.” The higher-road employers compete on the basis of higher worker productivity; they provide higher wages and benefits, as well as training and promotion ladders, in return for high performance and low turnover. In contrast, lower-road employers compete on the basis of low costs, and accept the high turnover/weaker performance that inevitably comes with that strategy.

Unfortunately, many low earners have little access to these higher-wage employers. Not only do their own weak skills and poor labor market histories limit their access; but they are also impeded by a variety of other factors. These include lack of transportation to the local areas in which high-wage employers are often located; lack of information about these employers, and weak informal networks (based on friends and neighbors), that fail to link them to these jobs; as well as outright discrimination against some minority groups, especially native-born African-Americans.

How can public policy improve their access? We found that third-party organizations, especially temporary help agencies, can play a positive role by linking workers to better employers. These organizations can sometimes overcome employer bias and informational problems by making the case for worker qualifications. They can target the sectors in any local area that are growing over time, and that provide somewhat better job opportunities. Any training and educational credentials that workers get in advance of their employment can thus be better linked to these available jobs in growing sectors of local economies, and to actual employer skill needs. Using good local labor market information to advance this process is critical to their success.

At the same time, various federal or state policies can also encourage the formation of more higher-wage jobs. Some policies – like higher minimum wages, benefit mandates or laws to promote collective bargaining – force employers to pay higher wages. They can do so without reducing employment, so long as the higher costs imposed on employers are not terribly large. Another set of policies – like tax credits or subsidies to employers who train or promote more of their low-wage employees – encourage employers to do so without imposing higher costs on them. And a third set of policies involves using third-party “intermediaries” to provide technical assistance and other supports to employers who are building career ladders, developing new credentials and implementing more progressive policies to reduce worker turnover and improve their performance. The federal government can also encourage states to pursue any or all of these goals by making advancement of low earners a performance measure that is rewarded by extra funding when the welfare and workforce bills are reauthorized.

The problems of low earners in the U.S., and the costs to their families and children, are severe. Employers also bear the cost of high turnover and poor worker performance in many cases. Policies that link workers with better employers, and that encourage more employers to take a higher road, can provide benefits to all. It is time to pursue these strategies.

Harry J. Holzer, formerly chief economist for the U.S. Department of Labor, is a professor of public policy at Georgetown University and co-author of Moving Up or Moving On: Who Advances in the Low Wage Labor Market (Russell Sage Foundation, 2004). Professor Holzer is also a member of our Academic Advisory Committee.

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