The working-poverty trap

IMAGINE working full-time, but nonetheless living in poverty. Hard as this may be for many of us to imagine, almost a quarter of the nation's workforce in 2001 earned less than $8.70 an hour. Full time, full-year work at this wage placed a family of four very close to the official poverty line. Most workers with earnings in this range are among the 42 percent of American workers who have never attended college.

On average, workers without a college degree earn somewhat more than poverty-level wages, but their wages are still quite low. Moreover, trends for the past few decades have been dismal. Prospects for these workers have been markedly inferior to those for college graduates and are worsening. For men and women alike, high school graduates' hourly earnings in 1973 were roughly 70 percent those of college graduates. But by 2001, the figure dropped to 50 percent and 60 percent respectively. Hourly earnings for all women with at least a high school education increased from 1973 to 2001, but only slightly. Higher levels of schooling yielded bigger gains. In real, inflation-adjusted 2001 dollars, high-school educated women without college degrees earned about $10 per hour in 1973 and $11 per hour in 2001.

The average purchasing power of men without college degrees actually fell over the last 30 years. Measured in 2001 dollars, male high school graduates in 1973 earned an average hourly wage of $16.16. This had declined by 17 percent by 1995, and then rose by about 6 percent during the latter half of the 1990s when the economy was unusually strong. Still, the earnings of male high school graduates are lower on average today than in the mid 1970s. Among men, only the college-educated have more purchasing power than their counterparts in the mid 1970s.

Economists have been studying these trends for many years. Especially puzzling has been the finding that the disparities grew not only between workers with different amounts of schooling (for example, high school versus college-educated), but also among people with the same amount of schooling. The poorly defined phrase "skill-biased technical change" became the leading hypothesized explanation during the 1980s and 1990s. This hypothesis holds that even holding constant the years of schooling a worker has achieved, workers with more skills were for some reason becoming relatively more valuable and attracting higher wages than their counterparts who had the same years of formal schooling, but apparently fewer skills. What skills were increasing in value and why? Much was uncertain, including whether we were even observing a skill-related phenomenon.

Most studies over the last two decades relied on data gathered for purposes other than studying these questions. Fortunately, the data were sufficient to identify wage patterns, to document how they were changing, and what correlations exist with education and skill level. The studies indicated as well that disparities increased more in sectors of the economy that were experiencing more growth in the use of computers. However, correlation is not necessarily causation, and there was insufficient detail in the data to confirm technology-related explanations. In addition, it was difficult to understand the ways that other factors, such as economic globalization and trends in immigration and unionization, might also be implicated in the puzzle.

The findings of a recently published book, Low-Wage America: How Employers are Reshaping Opportunity in the Workplace, [dagger] edited by Eileen Appelbaum, Annette Bernhardt, and Richard J. Murnane (and to which I am a contributor), help us to better understand these changes in the American income structure. The book is the work of 36 authors who collaborated to study 464 establishments in 25 industries. The sectors studied include manufacturing, retail sales, telecommunications, the hospitality industry, and health care. Researchers surveyed more than 10,000 managers and workers and interviewed more than 1,700. The case studies provide the most complete understanding to date of low-wage work over the past few decades. Generally, in sector after sector, managers report that pressures to cut costs and raise quality have increased, and that managers have adapted in ways variously reflected in wages, benefits, and working conditions. The reasons that pressures have grown and the ways that managers have adapted are the subjects of this essay.

Manager adaptation

No single explanation accounts for why competitive pressures have grown and low-wage workers' earnings have stagnated. Many factors seem to come into play, including economic globalization, advances in information technology, deregulation, declining unionization, the falling real value of the minimum wage, and growth in the temporary help industry.

Whatever the causes, businesses are not passive victims of these changing conditions. Indeed, managers are active agents in the selection of those market segments in which they will compete. By targeting particular segments, they select the competitive pressures to which they will subject their businesses. At the same time, market niches can experience rapid change, and managers must adapt or suffer the consequences. Markets differ with regard to rates of innovation, the error or defect rates that customers will tolerate, the speed of delivery that customers require, and the distribution of market power between buyers and sellers. The past few decades have seen increased innovation, reduced customer tolerance for errors, growth in demand for speedy responses to orders, and growing sophistication among businesses in the ways they pressure suppliers.

Business responses to all this have included adaptations in human-resource policies for low-wage workers. Generally, analyses of human-resources strategies distinguish three contrasting approaches: "high-road," "middle-road," and "low-road." In the first, employers invest generously to create working conditions that are attractive, training that is developmentally valuable, and pay that is financially attractive for workers. On the middle and low roads, things get progressively less auspicious. For an outside observer, it is difficult to know what the options are for any given firm regarding the profitability of low-, middle-, or high-road strategies. However, it seems clear that executive and managerial sophistication and ambition are key predictors of which road a firm selects for its employees. Consider, for example, the range of approaches taken by firms in the service sector of the economy.

The hotel industry

The vast majority of jobs in the U.S. economy are found in the service sector. They cover a variety of functions: Low-wage jobs range from hotel maids and fast food cooks to call-center operators and check processors in banks. Technology and globalization have caused some service jobs, such as call-center operators and check processors, to be downsized, but in other areas these large forces play at best minor roles. Service jobs in the hotel industry are good examples of this.

There is no machine that can change a bed and clean a bathtub as economically as a human being, so we still need hotel maids. Maids and other hotel workers have not been immune to pressures on low-wage workers. Small highway hotels have thin profit margins and typically pay very low wages--but so do high-end, full service five-star hotels with profit margins averaging between 20 and 40 percent of revenue. It would seem that such high profit margins could accommodate substantially higher wages for non-college-educated workers than most hotels pay. But actual results have been otherwise.

The hospitality industry employs almost two million workers, mostly in metropolitan areas. Losing jobs to foreign competition is not a danger. What holds compensation down in this sector is that hotel workers have few other options given their limited skills. Many are recent immigrants, part of a massive migration to the United States that began in the 1970s and continues today. Competition from immigrants is part of the story as to why wages in the hotel industry are low (especially from the perspective of native-born U.S. workers).

Despite high profit margins in this sector, pressures on managers to control costs have grown because of trends toward consolidation and public ownership. The four largest hotel firms in 1997 accounted for one-fifth of total industry sales and the largest 50 accounted for almost half. By the late 1990s, a handful of hotel companies, such as Accor, Bass, Marriott, Hilton, and Starwood, were effectively dictating industry standards. The impact of widespread public ownership, in particular, has been to increase pressure for short-term performance. The issue is not low profit margins. Instead, it is the maintenance of profit margins that are attractive in comparison with other firms in the industry.

Managers endeavor to cut costs while maintaining an industry-standard level of service quality. The most prevalent trend in cost-cutting measures is the subcontracting of food preparation and restaurant services. Not only do subcontractors have economies of scale that individual hotels cannot achieve, they also escape any wage premiums associated with unionization of hotel restaurant employees. Even so, hotel food preparers and servers continue to account for about a quarter of hotel workers; housekeepers and cleaners account for another quarter.

How workers perform these jobs seems to have changed very little, but other important variables have changed significantly. For one, the amount of work has increased, as managers require employees to do more to save money. Employees cannot easily refuse such requests, since replacements are plentiful in most labor markets. The uncertainty of work hours has increased, too. A core cadre of senior employees is often guaranteed a 40-hour work-week, but many and sometimes the majority are now "on call," with hours that depend on occupancy rates and event schedules. Some weeks workers have too few hours; in others, they have forced overtime. W orkers and managers report that the combination of low wages and variable work hours leads to a situation in which "almost everyone" has to work multiple jobs.

Hotel workers do best when unionized and when in labor markets where there is high union density in low-wage occupations. In national data, unionized frontline hotel workers earn 30 percent more than similar non-unionized workers. The union effect is strongest in metropolitan areas where larger shares of low-wage workers are unionized. Unions have also helped members by negotiating more favorable working conditions, such as lower room quotas for house-keepers and reduced restaurant subcontracting (which also protects the jobs of food service workers, as it happens).

Thus the reasons the hospitality sector maintains low wages and poor conditions for its frontline workers have little to do with technology and globalization. Instead, it is that there are others with similar skills available as replacements in these jobs where little training is necessary and where immigrants with few English language skills can perform on par with native English speakers. Unions have helped some, and there are initiatives underway to train hotel workers for upward job mobility. But unions and training programs are both rare in the industry.

The banking industry

Banking is a very different segment of the service sector. Here, the impact of technology has been substantial. In their contribution to Low Wage America, David Autor, Frank Levy, and Richard Murnane explain the important role played by computers in this industry. The authors studied two back-office departments of a large bank under the pseudonym "Cabot Bank" in order to investigate the impact of technology on work organization and skill demands. Historically, one department handled routine check processing and the other handled "exceptions." The latter are checks requiring individual attention because of errors. The main job in routine check processing was the proof machine operator, who would receive checks, align them in the reader-sorter machine, key in amounts, examine deposit slips and checks for consistency, and forward any checks needing further attention to the exceptions processing department. The latter department was divided into a number of specialized but relatively low-skilled jobs. Workers knew their own jobs well, but had little knowledge of others. Thus a check that needed attention from several employees could take quite a while to move through the department.

Under pressure to cope more expeditiously with a large and growing volume of checks, the bank introduced "check imaging" into both departments in 1994. Imaging machines have high-speed cameras that make digital images of the front and back of checks as they pass through the readersorter. Electronic images eliminated the bottleneck that had resulted from checks being in only one place at a time. Check images were now available simultaneously to several workers at networked personal computers. In addition to check imaging, the bank introduced optical character recognition to scan and capture amounts on checks and deposit slips.

How did these technological innovations impact low-wage jobs? They reduced the number of such jobs, substituting technical solutions and fewer more highly skilled jobs in their place. The tasks formerly associated with the proof machine operator's job have now been divided into four jobs, one of which is performed by a computer and the other by people. Since the jobs require skills of differing complexity, they pay different wages. The least challenging job is removing staples and ensuring that checks all face the same direction. This job pays the lowest wage. Next is the job of the "image balancer," who must discover why some deposits do not balance. Whereas the proof machine operator under the old regime worked with paper checks, the image balancer works with electronic images, which requires more skill. Most image-balancing jobs went to former proof machine operators following 36 hours of classroom training and two weeks of on-the-job support. Most made the transition successfully.

The highest wage under the new regime is paid to the "keyers" whose job it is to recognize and enter into the computer the amounts on checks that are not readable by the new technology. This job pays an hourly wage plus a bonus for speed and accuracy.

These changes in check processing were "skill-biased": That is, their net impact was to decrease the share of high-school-educated workers in the bank relative to managers with more formal education. Only one job, that of the person removing staples and aligning checks in the machine, required fewer skills than the original proof machine operator job. The other two jobs required more skill, but the technology resulted in substitution of computers for people.

While image processing led to a greater division of labor in the check-processing department, it led to consolidation in the exceptions department. The manager consulted with workers on how best to reorganize their work. They merged several job functions into one job, even though doing so required some additional training. Combined with other elements of work reorganization, productivity in exceptions processing rose substantially, with technology accounting for about a third of the increase. Jobs for non-college-educated workers decreased at the bank because of the combination of new technology and more efficient organization.

Technology is affecting other departments in the bank as well. Employees who package paper checks for return to customers are likely to be displaced in the future as customers opt for electronic summaries instead. In addition, with electronic images, there is no reason why balancers and keyers cannot be on the other side of the world. And here we see the effects of globalization. Much of this work can be easily relocated to low-wage offshore locations where wage rates are lower than in the United States.

Plastics

Improving technology, increasing globalization, declining unionization, and consolidation of market power among customers are all part of the story in manufacturing, and the plastic products industry is no exception to this.

Plastics is an industry of many products serving many markets. During the 1940s and 1950s, when the industry was still quite young, the technology was relatively simple. It involved processing plastic resins and making molds into which the molten resins are placed and shaped into plastic products. The resins and molds were used in two production technologies called injection and extrusion. Injection involved forcing molten plastic into a closed mold in the shape of the ultimate project. Extrusion involved placing molten plastic in a hollow mold then blowing off the excess, leaving a product in the shape of the external wall of the mold. For example, plastic forks and knives are made using injection technologies, while extrusion is the technology for such things as plastic bags and bottles.

Things have changed. Injection and extrusion are still the generic technologies for plastics production, but the range of products to which these technologies are applied is exponentially greater today than 50 or 60 years ago. More importantly, the sophistication of machinery and production processes now ranges from machines that resemble early models to others that use the latest advances in computer-aided manufacturing and robotics.

Plastics firms that use more advanced technologies have automated many rank-and-file jobs. Many of the remaining jobs require skills--such as the ability to read and interpret graphs on computer screens--that many non-college-educated workers lack. Some of the largest and most profitable firms offer training to help workers upgrade to the requirements of the new technology, especially to work with statistical process controls. Whether workers succeed in such training depends often on their basic facility with math and literacy skills. Those lacking sufficient skills lose their jobs or get retained in the shrinking number of lower-skilled jobs. Employers' willingness to pay premiums for workers who can adapt to the new technologies have contributed to growth in earnings inequality even among workers who have the same amount of schooling.

Like other industries, firms in the plastics industry occupy different places along a spectrum of sophistication. They have different business cultures, reflecting not only current personalities, talents, and capacities, but also a history of formative decisions and outcomes. The most important dimension of cultural variation seems to be the inclination among some firms to remain at the cutting edge of technology and product development, while at the other extreme, firms struggle to survive in established market segments, providing more standard products at low prices. Profit margins are low among the latter, and pressures are high to keep labor costs to a minimum, lest customers quickly find other suppliers. As a result, low-end firms provide little if any formal training to workers. Their wages and benefits, not surprisingly, are the lowest in the industry.

Pressures on low-end firms to keep costs down have only grown because of consolidation in the retail trade sector. Firms often specialize in products marketed through large retail chains such as Bradlees, Kmart, Wal-Mart, BJ's Wholesale Club, Costco, and Sam's Club. In the 1960s and 1970s, there were more stores (and chains of stores) to sell to, so manufacturers had more competitive advantage. As the number of chains has shrunk, however, plastic product manufacturers' market power has fallen, even as cost and competitive pressures have reduced the number of competitors within the plastics industry.

There are pressures on high-end firms involved in plastics as well. For example, in the late 1980s, U.S. auto manufacturers undertook a number of measures to compete more successfully with the Japanese. This included adopting many Japanese supplier-relations practices. Today, a manufacturer's viability as a major supplier to the auto industry depends upon its technological edge and product development capability. If it cannot design a method to build a particular part at a price that the auto company sets, then one of a small number of competitors is likely to get the contract instead. Further, there are now "zero defect" requirements, since auto companies no longer inspect parts, instead sending them directly to the assembly line. A defective part can create major problems and the resulting costs are charged back to the company that supplied the part. Because parts are delivered straight to the assembly line, and because there is very little provision for inventories, suppliers must deliver exact numbers of parts "just in time," which in the auto industry typically means within a 30-minute time frame. The automakers may want this service at all of their plants around the globe, so some parts suppliers need facilities around the globe as well. Finally, contracts with automakers may require the price for any particular part to fall 3 to 5 percent per year.

Such pressures have induced changes in human resource policies throughout American manufacturing. They include strengthened resistance to unionization, stagnation of wages, and growing involvement of workers in monitoring quality and cost. In setting wages, benefits, and training policies, firms carefully balance the need for qualified workers with the need to control costs. As one method of cost control, there is increased outsourcing of production around the globe to locations where labor costs are lower. Consequently, low-skilled manufacturing activity in the United States is now small and declining. Total manufacturing employment in the United States fell from almost 17 million in 1992 to slightly over 15 million in 2002 and is projected by the Bureau of Labor Statistics to fall even further over the coming decade. At the same time, manufacturing productivity is rising because of technological innovation and higher skill levels. As employment fell, according to estimates published in the Monthly Labor Review, the value of U.S. manufacturing output (in 1996 dollars) rose from 3.1 trillion dollars in 1992 to 3.8 trillion in 2002 and is projected to be 5.4 trillion by 2012, when employment will be even lower.

The public ethos

Many researchers who have studied firms up close argue that managers have substantial discretion in the selection of the high-, middle- or low-road human resource policies for non-college-educated workers. They argue that firms can increase efficiency and cut labor turnover by making jobs better. Making jobs better entails such measures as upgrading workers' skills through training, raising wages and benefits, improving working conditions, and building internal job ladders so that workers can be upwardly mobile. In addition, some argue that managerial collaboration with workers and unions in redesigning jobs and workplaces is a grossly underutilized strategy.

The potential gains from making jobs better and the true scope of managerial discretion in such matters are impossible to gauge for the economy overall. Experts differ in their judgments. However, there are enough successful examples to make plausible the proposition that far more opportunities exist than are currently being used. Managerial sophistication and access to expertise on how to identify and exploit high-road opportunities are key in determining which path firms take. Local and regional business training alliances, some focused on particular sectors, can supplement firm-level expertise in ways that have substantial positive spillovers in a region's economy. Such alliances can be worthy investments for both public and private sector resources.

In the end, however, the resources available to low-wage workers depend fundamentally on the ethos of the society. The earned income tax credit and other income transfer mechanisms are available to supplement what workers bring home in their paychecks. There are also regulatory mechanisms, including the minimum wage, "fair trade" regulations, and rules governing union organizing, all of which affect compensation and working conditions for low-wage workers. Our society has many options available for assuring that low-skilled workers who labor long and hard hours are not mired in poverty due to forces beyond their control. We should avail ourselves of these in ways both wise and generous.

Editor's Note: We wish to express our gratitude to the Russell Sage Foundation for a grant that made these articles possible.

[dagger] Russell Sage Foundation Press. 535 pp. $45.00.

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