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Gregory Acs
The Urban Institute
2100 M Street NW
Washington, DC 20037

May 1999

I. Introduction

In his 1999 State of the Union Address, President Clinton hailed the US economy, proclaiming that America was in the midst of the longest peacetime economic expansion in history and citing the creation of 18 million new jobs, the lowest unemployment rate in four decades, and wages rising at twice the rate of inflation. But despite this strong economic growth in the 1990s, the earnings of the lowest paid 20 percent of workers in 1997 were still below their 1989 levels. This apparent paradox raises three inter-related questions:

(1) Why has a strong economy failed to raise the wages of the lowest earning workers?

Some analysts argue that recent economic growth has been "skill-biased," allowing the economy to expand, rewarding highly-skilled workers handsomely, and leaving less-skilled workers behind (Levy 1999). The problem is systemic. Alternatively, the strong economy could have drawn many less-skilled individuals into the labor market--if this is the case, then the fact that earnings have not grown among lower paid workers may indicate that these new workers simply have fewer skills than the lower paid workers of a decade ago. If this is the case, then the "problem" reflects the changing composition of the work force.

(2) Should we be concerned about the wages of the lowest earning workers?

Concern over low wages generally stems from concern for low-income families. Finding that workers holding low paying jobs are young indivi2duals without children or secondary workers from higher income families blunts the impetus for policy interventions aimed at raising wages. Finding that the earnings of low wage workers represent a substantial share of their families' incomes and that these workers support children would indicate a more urgent need requiring attention.

(3) What can be done about low wages?

Depending on the nature and seriousness of the problem, a host of interventions are available to policy makers. If workers with persistently low wages have few skills, education and training initiatives may be beneficial. If low wages reflect rigid institutional factors, then raising the minimum wage and making it easier for workers to enter into collective bargaining agreements with employers will raise wages. And if wages are low because demand for workers is low, then wage subsidies and public sector job creation may well raise wages. Finally, it may prove to be more effective to raise family incomes through transfers and the tax system rather than to intervene in the labor market in an attempt to raise wages.

This paper begins to address these questions by profiling the low-wage workforce in 1997. I find that over one-quarter of all workers earned less than $7.50 an hour, but only one out of every ten workers were low-wage workers living in low-income families. In the following sections, I discuss the meaning of the term "low-wage worker" and then adopt a working definition. Next, I present a profile of low-wage workers and their jobs based on data in the March 1998 Current Population Survey (CPS) reflecting earnings and employment in 1997. Finally, I discuss how the characteristics of low-wage workers can inform the debate over policy interventions aimed at raising wages.

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