Thank you.
Yes, I should explain to you that four years ago, at the first of these Lindau meetings of economists,
I gave a lecture, probably in this very same room.
And there what I did was to talk not about research that had already been done,
but about a research project that was planned for the future on low wage work in Europe and in the United States,
or in selected countries in Europe and the United States.
This was a project of the Russell Sage Foundation in New York and I discussed the questions we were going to ask
and the way we planned to try answer them.
And today it’s four years later and the project is complete.
And we have published five volumes, one on each of the five European countries that we studied and there is a sixth volume.
An explicit comparative study of those five European countries and the United States
that will probably be finished and published in about six months.
So I’ll take a couple of minutes to talk about the origins of this project,
and then what I want to do is give you survey of some of the broader results.
The Russell Sage Foundation in New York has had throughout its history an interest in the disadvantaged parts of the population.
And years before 2004, perhaps three or four years before that, it had begun to study low wage workers in the United States.
In perhaps as many as 20 or 25 different industries.
The motivation was the thought, the worry that the combination of globalisation, technological change and deregulation
might leave workers with very limited education and skills stranded in a modern economy.
The question is:
What would happen in a technologically sophisticated and internationally competing economy
to workers with very poor education and very low skills?
But there was much work, much analysis of industries in the United States looking at the low end of the workers.
And two conclusions came out of those studies of the US.
One of them was that, while most firms in the industries studied treated their unskilled workers like disposable parts,
you don’t bother training them or trying to improve their productivity, hire them when you don’t need them, fire them,
there are many more people out there who can be hired.
And the research workers tended to call firms that followed this strategy as the low road strategy.
They found, they thought they found in most of these industries a few firms that followed a different strategy
which they called the “high road strategy”.
These were firms that treated their unskilled workers as an asset to be developed, they engaged in more intense training.
They increased capital intensity, they reorganized production processes and tried to adopt technologies that were suitable
and they did things to increase the tenure of the length of time that such workers stayed with the firm.
And the studies argue that there seemed to be a kind of multiple equilibrium possibility.
That in the same industry at the same time firms following each of these strategies,
the low road and the high road could both be viable.
Could both exist, sustain themselves and earn decent profits.
I have to tell you that I, as a typical economist, just like you, was instantly suspicious of this notion
and wondered whether it could really in fact be the case.
The second conclusion that came out of these studies of American firms
and American industries was the sort of general presumption that the nature of labour market institutions,
the nature of collective bargaining, the statutory minimum wage if there is one,
things of that sort can have an important influence on the choice of the strategy by business firms.
It occurred to me and to some other people that it would be a very good idea
to test this kind of hypothesis or this kind of study by looking at the fate of unskilled workers,
of low wage workers in some countries of Europe.
What we wanted was a wider range of institutional practices to observe,
but we wanted to observe these in advanced successful modern industrial economies
with levels of income per head at the US level, because we were hoping to perhaps learn some lessons
about the American economy from a close study of European economies.
And so the five countries we chose, we chose five because that’s the number we could afford.
That’s the number of research teams that we could finance.
We chose the three indispensible large economies, France, Germany and the UK,
and then we took two smaller economies, Denmark and the Netherlands.
We left out countries like Spain and Greece, for instance, because we wanted to observe the unskilled labour market,
the low wage labour market in countries with income levels like the US.
We omitted Italy because Italy has two economies, not one.
And it would be very difficult.
We were extremely anxious that, compared with it –
we did not want five separate studies with no really good prospect of comparison.
We wanted comparison amongst the European economies and with the US to be legitimate and possible.
And so, amongst other things, we asked each of the research teams
- we had a competition and chose a research team in each of those five countries –
we asked them to provide not only a statistical survey of low wage workers and low wage jobs in their own economy,
and also a literary survey, so to speak, of the institutions,
legal and informal in their own country that might affect the way that low wage work is organized
and the way that low wage workers are treated.
And then, in addition to that, we asked them to make a very careful study of five particular jobs,
we chose five occupations that in the United States are definitely low wage occupations.
The five jobs we chose were people who make beds and clean hotel rooms.
Check out clerks in supermarkets and people who stack canned goods and other goods on the shelves in supermarkets.
We chose nurse’s assistants, the people who clean hospital rooms, empty bed pans, and do the manual labour in hospitals.
We wanted one manufacturing industry at least and we choose the food processing industry
which has a lot of low wage unskilled work, putting candies in boxes, operating simple machines,
grinding up sausage in ways you would rather not know intimately.
And the fifth occupation we chose were the simplest outgoing calls in call centres.
Call centres are rapidly growing in Europe as in North America,
and actually there was an ongoing study of call centres that we could piggyback on, that we could use and keep expenses down.
So the five research teams were instructed also to make a detailed study of each of these five occupations,
not only collecting data but interviewing workers, managers, trade union officials, government regulators and any one concerned.
By the way, I should specify something.
In Europe universally low wage work is defined as work that pays less than 2/3 the median national wage.
So that, when one looks at the volume of low wage work,
what you are really looking at is the dispersion of the wage distribution below the median.
There’s a lot of low wage work if that left hand tail of the distribution is relatively fat,
there’s very little low wage work if the density function falls sharply as you go below the median.
So low wage work is defined as relatively low wage work.
The American tradition in this sort of thing is much more to define it absolutely in terms of some fixed standard of living.
But that is not really possible if you are studying European labour markets because that’s not the way the data has been kept.
So that’s what we set out to do four years ago and what I described in much more detail than I have told you now.
We started out, I mentioned that, you see I always know what the average economist thinks because I am an average economist,
I’ve all those instincts exactly.
And my natural reaction to the low road/high road story was “ah, no, that’s not so, there’s the supply curves,
the band curves, they intersect, you know, and the standard model applies everywhere, why not here”.
So the two hypotheses that we started out with in our heads not formally stated really,
but I think this is what we had expected to find, was first of all that the constraints on European employers would mean
that the low skill jobs in Europe are fewer and differently organized, differently arranged from those in the US.
That there would be more high road firms in Europe,
because that kind of strategy would be pushed on them by legislation and custom.
And secondly we expected there would be less employment of unskilled workers in Europe
because we expected the wages of unskilled workers to be higher in Europe
and we expected the working conditions to be better because either of law or of social custom.
And the reality turned out to be quite different from that.
And so I use the rest of my time by trying to describe to you, broadly speaking, what sort of things we found
and what the sceptical economist, average economist, that’s me, now thinks about low wage work
and the quality of the kinds of jobs that are offered to unskilled, uneducated people.
The first fact that one comes upon immediately in making this kind of comparative study is really very striking.
The share, the proportion of all workers, wage and salary workers, who are low wage workers,
according to the definition that I gave you, varies enormously between the US and some countries of Europe
and varies within Europe enormously.
In the US the date here is the mid-2000s, around 2005, let’s say, give or take a year sometimes.
In the US about 25% of all workers are classified according to the definition as low wage workers.
Germany and the UK come close, somewhere around 21% or 22% of all workers.
And that’s true of West Germany, by the way.
Obviously, if you combine east and west, the former East Germany with West Germany that’s a rather peculiar arrangement.
We can get the data for West Germany alone.
Germany and the UK about 21% or 22% of all workers are low wage workers.
And in the case of Germany that fraction has increased fairly dramatically during the last ten or twelve years.
From 10 or 11 or 12% up to 21% or 22%.
In the Netherlands about 18% of all workers are classified as low wage workers.
In France 11% and in Denmark about 8 or 8.5%.
So the range of the incidents of low wage work in the labour force,
in the employed labour force ranges from 25% in the US to 8.5% in Denmark, 3 to 1,
and within Europe from 21 or 22% in Germany and the UK to 8.5% in Denmark.
So there’s a very great variety within Europe.
And what’s more?
The trends over the past 10 or 15 years in the European countries are not all the same.
The fraction of low wage workers has been rising, as I said, in Germany, in Denmark it has been fairly steady.
In some of the other countries it has been falling.
That’s the first gross conclusion.
A second one, and this is really quite remarkable and requires explanation, understanding.
Across these countries there is little or no correlation
between the incidents of low wage work and employment rates across those countries.
It is simply not true in general that, when you look across these countries,
the ones that pay relatively high wages to low wage workers, relatively, relative to the median,
show very low employment of low wage workers and the ones that pay low wages, relatively speaking, to the bottom end,
to the unskilled workers, have relatively high employment of unskilled workers.
There are exceptions to this.
France, which, as will come up again, France has a very high legal minimum wage and you can see a job gap in France.
You can see that there are jobs which appear in other countries that do not appear in France
and are presumably priced out of existence by that high minimum wage.
But France is an outlier in this story and if you look at the other countries,
the only one sentence generalization that makes sense is the sentence that I gave you.
That there is little or no correlation between the status of low wage workers
and the employment rates of low wage workers, across these countries.
What this tells me as an economist is that, contrary to what I might have believed at the beginning of this study,
the incidents of low wage work and the quality of the relatively low wage jobs
is not narrowly determined by technology and market conditions.
All of these countries dispose of the same technological knowledge, there are no technological gaps across those six countries.
And they all operate in the world market.
Some of them to a larger extent than others, but they are all operating in the world market
and yet the number and quality of low wage jobs differs dramatically across them.
The implication has to be, I think, that both the incidents of low wage work and the quality,
the job quality at the low end can be modified fairly dramatically by public and private policy,
by the formal and informal institutions of labour market.
Now, on the other hand, this is rather interesting to me, too.
There’s one important respect in which these countries are all alike, if these six countries are all alike, if you ask:
“Who does the low wage work in these countries?
Describe the low wage workers, the people themselves”, it’s the same everywhere.
Who are the low wage workers?
Women, young people and immigrants.
Generally speaking, very poorly educated people, but those tend to be in all these countries women, young people and immigrants.
And here’s another lesson for economists out of this.
I think when I tell you that, when I state the fact that I just stated,
it confirms another natural reaction of the economist
which is that low wage work is determined by low productivity which is determined by low human capital.
So that the low wage work is a low human capital phenomenon.
I think that’s only partially true.
And not nearly wholly true and the story that I tell myself to explain this, I will tell to you.
There are jobs in a modern economy that are intrinsically low productivity jobs, has nothing to do with human capital.
The classic case is the making of beds and cleaning of rooms in hotel rooms.
I have a very good PhD in economics from a major university in the United States and I would be no more productive,
maybe less productive, at making beds in hotel rooms than the uneducated immigrant woman who’s doing it now.
That great Jamaican runner who has broken the world record in the 100m and 200m dash in the Olympics
would be no more productive at doing that job than the person who does it now.
It is a low productivity job.
Now, the labour market is very clever.
The labour market sorts into those jobs people with low human capital, because they don’t have much in the way of alternatives.
But those jobs are not low wage jobs because of the low human capital of the people who do it, it’s just the other way round.
The people who do it have low human capital because those are low wage jobs.
So this is not the simple stories that one tends to tell oneself, not always right.
The detailed industry studies in our five volumes, one on each of those countries, will confirm what I have just been telling you.
You will find jobs that are intrinsically low productivity jobs and our societies have to find ways of dealing with those jobs.
Now, let me go on and make a list of the sort of conclusions
that readers of the comparative volume that we are putting out will come to.
First of all, I’ve stated one of them which is very important, there is no simple US versus Europe story.
There are differences between the US and Europe but there are differences within Europe of roughly the same order of magnitude.
Second, this I haven’t mentioned, haven’t come upon during the course of this talk so far,
it appears that the long run structural factors play a very small role.
There is little or no correlation in terms of the quality and quantity of low wage work with GDP per head across these countries.
There are small variations of course with growth rates of GDP per head, with indexes of industrial productivity,
with growth rates of industrial productivity, or with broad demographic differences across the countries.
These differences cannot be explained by the sort of standard long run structural factors,
nor are the characteristics of low wage work correlated across these countries with the share of labour in the national income.
What happens to low wage work is something that happens within the labour share,
not between the labour share and the property income or capital share.
If you have to describe what is the most important influence on the quantity and quality of low wage work in these countries,
it is something that the teams themselves,
the research teams themselves came to call the “inclusiveness of labour market institutions”.
The extent to which the formal and informal institutions of the labour market
tend to be inclusive to try to spread benefits across many people.
This includes the nature of collective bargaining, it includes the possibility that many European countries have
and exercise of extending the results of collective bargaining to weaker sub-sectors of the economy
that did not participate in the collective bargaining.
Depends on, amongst other things, whether there is a minimum wage and what the height, what the size of the minimum wage is.
And it depends in a certain way on what I can only describe as the norms,
the informal norms of business behaviour, trade union behaviour and so on.
The minimum wage can be an important factor, it’s statutory in France.
In Denmark there is no legal minimum wage, but there is an effective minimum wage that is determined by the trade,
the large trade union federations and the employer federations together.
Generally speaking for variations in the minimum wage in the range that these countries have,
the US and all of the five European countries, with the exception of France,
the employment effects of variation in the minimum wage are small.
They may be there but they are not a dominant factor.
Another conclusion that comes from this work is that income supports, unemployment insurance, children’s allowances,
disability payments, early retirement possibilities, all that kind of income support tends,
the bigger they are, the more they strengthen, supply conditions for unskilled workers
and reduce the incidents of low wage work and improve the quality of low wage work.
Those kinds of income supports, welfare state type supports, if they are available,
limit the extent to which the earnings and the working conditions of low wage workers can fall
before the supply of such workers dries up.
We also find in looking at the detailed industry studies that the regulation of product markets
can affect the bargaining power of the unskilled, or if not the bargaining power at least the outcomes for unskilled workers.
Competitive differences in competitive pressure from industry to industry do matter.
If one of the industries we studied comes under intensified competitive pressure –
for instance the internet has increased the competitive pressure on hotels in all of these countries,
because it is easier for people to search for the lowest rate.
It wasn’t so easy before.
The large German retailers have begun to compete in the Dutch retail market
and that increases the competitive pressure on food retailers and electronics retailers,
those are the two that we studied in the Netherlands.
When a narrowly defined industry like that comes under increased competitive pressure,
the natural reaction of every firm in the industry is to try and reduce its costs.
It may also adopt other strategies and that's important, product refinements, product innovations,
differentiating its product in various ways, increasing its capital intensity, all kinds of things like that,
but the immediate reaction is to reduce costs and one of the easiest costs to reduce is the cost of unskilled labour.
Why?
Because unskilled workers are generally easier to replace,
unskilled workers are generally not as much protected by trade unions as skilled workers are.
And so one finds that as any economist would expect, that these local changes in competitive pressure
and in the regulation of product markets does affect the quantity and quality of low wage work.
Employment protection legislation is, as we all know from a lot of literature by now, ambiguous.
There is no particular reason to believe that countries with strong employment protection legislation
help their unskilled workers non-trivially or hurt their non-skilled workers non-trivially.
There are pluses and minuses and they tend to cancel one another out.
Last thing I want to mention in this connection is that immigrants, of course,
play a big role in the unskilled low wage labour market, but when you look at it in detail,
it turns out that the role of immigrant workers is clearly filtered through the country’s standard labour market institutions.
So while immigrant workers are at the end of the queue, at the bottom end of the queue everywhere,
how badly off they are depends on the labour market institutions of the host country.
So an immigrant worker is better off in Denmark than in Germany or the United States, for that matter.
So the last question I want to think about with you is this question:
Why isn’t there a strong trade-off as one would normally expect between the level of low wage wages
and the quality of low wage jobs and the employment of unskilled workers?
I said, if you look across these countries, there is not a strong trade-off and one has to wonder why not?
Why doesn’t it exist?
That of course doesn’t really come in any clear way out of the research,
but the research teams and the group that has planned this whole project had some hypothesis.
First of all, some firms do tend to adopt the high road strategy, they adapt to norms and legislation.
If there are regulations that somehow or other work to improve the quality of low wage work
instead of laying off unskilled workers, many firms do increase the capital intensity, adapt their production processes,
engage in more intense training activities, improve their internal organisation, redesign their products.
They find other ways of adapting to a higher status for the low wage workers,
besides simply laying them off or resisting the improvements in job quality.
So there is some of that.
Secondly, as I mentioned before, and this is really very, very important:
Government provision of health care, holidays, pensions, training, all those things subsidise the high road strategies.
Precisely, well, not precisely, roughly to the extent that governments provide supports to income and standard of living
that in effect is a way in which the taxpayer subsidises the low end of the employment ladder.
Thirdly, it is a fact that in Europe general wage compression,
wage distributions in Europe are generally somewhat more compressed than in the US,
the degree of compression varies from country to country, but wage compression is a way in which more skilled workers,
whether they like it or not or realise it or not, are subsidising the status of low wage workers.
And lastly, I should say that in all these countries of course there are loop holes.
Legislated standards are often evaded, not often evaded but are sometimes evaded.
So that in the worst cases, where there are industries or firms or occupations that simply cannot meet the national standards,
one alternative to the disappearance of those firms or industries or occupations is that the laws are not strictly enforced.
Three more brief remarks and I'm done.
Of course we are very interested, the people doing this research are very interested in the degree of mobility
into and out of low wage work.
Low wage work is not, if you asked me what is an equitable way for society to get the dirty jobs done,
the answer is the young people should do them.
They should rotate in that way, exactly the way boring committee assignments rotate in academic departments and things like that.
But we are interested, very interested in what we could learn about what is the probability
that someone who is a low wage worker in Year T will still be a low wage worker in Year T+1 or Year T+3 or Year T+4.
Information like this is very hard to come by,
because it requires longitudinal studies of which there are very few - there should be more - and are very expensive.
But what bits of information we have been able to find tell us
that another part of the way Americans pat themselves on the back turns out to be false.
And mobility out of low wage work is not greater in the US than it is in European countries.
It varies from country to country within Europe and in many cases in Europe,
the degree of mobility is at least as big as it is in the US.
Secondly, and this is not a result of research, this is a reflection on the research,
it’s probably not easy to imitate policies piecemeal across countries.
It would not be easy for a president of the United States or a Prime Minister of the UK to say:
“Oh, here’s an interesting thing that they do in Denmark, why don’t we try that here”.
When I said that the important factor appears to be what you would call the inclusiveness of labour market institutions,
that comes in large part as a package and picking a piece of it here and picking a piece of it there
is probably not a viable way to proceed.
And the last thing I want to say is a pessimistic thing.
I mentioned that changes in the intensity of competition often end up weakening the status of unskilled workers,
of low wage workers.
And there really is a question whether the relatively generous systems in Europe like the Danish one
and to a certain extent the Dutch one, whether they are sustainable as international competition intensifies.
I don’t’ think one can give an answer to that question right away.
But the thing at the end of the tunnel might not be a light.
And one just doesn’t know about those things.
But why don’t I stop there, I don’t know if we have any time left for questions, but if we do, I would be happy to have them.
(Applause).