The impact of institutions on the supply side of the low-wage labor market

In this chapter, we turn our attention to the supply side of the low-wage labor market. In crude terms, if the bargaining and regulatory structures analyzed in the preceding chapter are the primary determinants of the quantity of low-wage work, we find that the various institutions affecting labor supply play a large role in shaping the composition of low-wage work, which in most of our countries is disproportionately made up of women, young people, older workers, less-educated workers, and immigrants. If firms are to pay low wages to a portion of workers, they must have access to a pool of workers willing to work for low wages. In our six countries, the pool of low-wage workers consistently has three separate (frequently overlapping) features. The first is low levels of skills relative to the typical national worker. In most of our countries, low-wage work is heavily concentrated among less-educated (and less-trained) workers , younger workers with the lowest amounts of on-the-job experience, and less-skilled immigrants. The second feature of the pool of low-wage workers is that these workers can count on little or no financial support when they are not in work. Sometimes this lack of non-work income reflects national policy --such as in the United States, which offers little or no support to out-of-work workers and their families. Sometimes, the low level of non-work income is related to income-support policies originally designed to support full-time male workers with long job histories, which tend to work against younger workers or women, who typically have less labor-market experience and tend to move in and out of the labor market too frequently to qualify for important forms of income support. Finally, the pool of low-wage workers also includes many workers --overwhelmingly women-- who have substantial responsibility for child-care and elder-care. These women, whose responsibilities reduced their bargaining power relative to employers, frequently trade fewer hours or more flexible schedules for lower pay, as part of a strategy to balance their market and non-market work responsibilities. The chapter begins by showing that the difference in the incidence of low-wage work across countries cannot be explained by a simple "market driven" supply-side story. There is no simple correlation across countries between the share of the less-skilled in the working-age population and the national incidence of low-wage work. Immigration has been important and increasing in the recent years in countries such as the United States, the United Kingdom and Germany, where the incidence of low-wage work has been high and rising in the past decade or so. Over the same period, however, Denmark has also witnessed a large increase in immigration without any visible consequence on the incidence of low-wage work. The impact of immigration does not appear to be automatic, but rather mediated through the national system of labor-market institutions. The pay-setting institutions and other labor-market regulations analyzed in the previous chapter and the availability of out-of-work income support play a particularly important role in this respect. The range of institutions that affect the labor supply decisions of women, younger (and older) workers, and immigrants is wide: from the income tax system to child-care benefits, systems of student grants or early retirement schemes – to give only a few examples. Differences across our six countries in these institutions explain part of the difference in both the overall incidence and the national composition of low-wage work. Two distinct models of institutions stand out. On the one hand, in some countries (such as the United States, the United Kingdom, and to some degree Germany since the Hartz IV reforms), unemployment benefits are low, and active labor market policies (ALMPs) are geared toward a "work-first" strategy – i.e. job-search assistance and monitoring that place pressure on the unemployed to return to work as quickly as possible, and therefore to accept low-wage work if available (with in-work benefits acting as an additional incentive in the United States and the United Kingdom). On the other hand, the "Danish model" relies on a generous welfare system, complemented by ALMPs based on training. The Danish approach aims to provide workers with both human capital and out-of-work income to foster their "individual bargaining power" in the labor market. Whether Denmark has gone too far in this direction is an open question. France and the Netherlands are somewhere in between, with more generous out-of-work benefits than the United States, United Kingdom and (in more recent years) Germany, but less active ALMPs than Denmark.