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

May 1999

IV. Discussion of Policy Options

Before exploring the policy options for raising the earnings and incomes of low-wage workers, it is important to establish the goals for such policies. Clearly, there is a role for low-wage jobs in the economy. Low-wage jobs allow employers to provide goods and services to consumers at lower costs. And low-wage jobs provide important experience and training to younger and less-skilled workers. Thus, the fact that 27.9 percent of all workers earn less than $7.50 and hour is not in and of itself a source for concern. Rather, our concern hinges on the relationship between low-wages and low-income. Interestingly, two-thirds of low-wage workers live in families whose annual incomes exceed $24,600. And only half of these low-income families have children. Consequently, a reasonable goal for policies aimed at the "low-wage problem" is to raise the earnings and incomes of low-wage/low-income workers, especially those low-wage/low-income workers with children.

Policies aimed at raising the earnings and incomes of low-wage and low-wage/low-income workers can be divided into three categories: (1) those focused on employers, the demand side; (2) those focused on the workers, the supply side; and (3) those focused on wage setting institutions.

Demand side policies to raise the earnings of lower-paid workers include job creation, wage subsidies, employer tax credits and regional development strategies. Because low-wage workers work fewer hours and fewer weeks during the year, creating more employment opportunities either through public sector job creation or through employer tax credits could increase the amount of time low-wage workers spend on jobs and increase their earnings if not their wage rates. Of course, such policies raise some questions: with tax credits, is the government simply underwriting employer costs for jobs they would have created anyway? For public sector jobs, are the jobs just "make-work" or are these workers producing something of value to their communities? Wage subsidies clearly would raise the wage rates of recipients, but they can be hard to administer, and employers have demonstrated some reluctance to hire workers eligible for such subsidies (Bishop 1991). Finally, regional development strategies would need to be targeted very carefully. Low-wage workers in low-income families are disproportionately found in rural areas and are thus dispersed across large geographic areas. They are also found disproportionately in certain cities, not cities or even large cities in general.

Supply side interventions center on enhancing the skills of low-wage workers. Although education is an imperfect measure of skill, low-wage workers have considerably less education than other workers. Hence, skill enhancement, whether basic skills or firm-specific skills, may raise low-wage workers' productivity and their wage rates. While such interventions hold much promise in theory, however, actually raising the skill level of even a small segment of the low-wage workforce, is very challenging in practice. Further, it is important to note that not all less-educated workers are low-wage workers--finding a job that matches a worker's skills, whatever they are, can also improve the worker's earnings prospects.

Institutional approaches to helping low-wage workers include earned income tax credits and the minimum wage. The earned income credit rewards work effort among low-wage workers in low-income families. As such it is a very well-targeted approach to providing aid to needy families while encouraging work. However, most families receive most of their earned income credit with their income tax refund in the following calendar year. Raising the minimum wage could increase the wages and earnings of low-wage workers; the benefits would accrue to all low-wage workers, not just low-wage workers in low-income families. Further, while at its current level, modest increases in the minimum wage are not likely to have large (if any) disemployment effects, more significant increases could cost some jobs.

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