Essays on low-wage work: Causes, consequences and policy

Low-wage work is a pressing concern for policymakers around the globe. During the COVID-19 pandemic, for example, key workers in retail and care were celebrated while representatives of these workers pointed out that their relatively low pay does not reflect the service they deliver to society. In response to such debates, election campaigns frequently feature pledges to increase the minimum wage and support collective bargaining. To inform the policy debate, it is important to understand the causes and consequences of low-wage work. The main body of this dissertation is composed of three empirical essays (Chapters 2 to 4) that each present new evidence in this regard. Chapter 1 introduces the context of low-wage work in Germany, which is an interesting case to study because the share of people on low pay increased sharply between 1995 and 2015 but decreased again thereafter as a national minimum wage was introduced for the first time. The chapter argues that this dynamic development was facilitated by profound changes in labor market institutions. It focuses on three aspects: the decline in collective bargaining, the deregulation of temporary employment, and the introduction of a national minimum wage. Chapter 2 presents new evidence that, on the flipside of the decline in collective bargaining, employers may have gained labor market power, i.e., the ability to suppress wages below worker productivity due to market frictions. The chapter is co-authored with Uta Schönberg and Ines Helm. Labor market power is potentially an important cause of low wages. The evidence is gathered from analyzing sudden and sizable expansions of medium sized firms in social security data. In a frictionless labor market, firms would be able to expand while keeping wages constant because workers are paid the market prize of their skills and at this prize infinitely many workers are available to the single firm for hire. Under imperfect competition, however, theory predicts that wages would increase as firms expand, suggesting that individual firms are supply constrained because wages are marked down from productivity prior to the expansion. The empirical part of the chapter tests these competing predictions directly. To do so, we combine matching with an event study approach to trace wages in expanding firms relative to those in suitable control firms that do not expand. We find that in response to an average increase in firm size of 35 percent, wages at expanding firms rise by 2 percent net of observable characteristics. We do not find any indication of spillover effects on total local labor demand. Therefore, the positive wage effects appear to reflect a movement along the labor supply curve faced by the firm. Interpreted according to a simple model of imperfect competition, these estimates imply an inverse labor supply elasticity to the firm of 0.07, which is approximately equal to the markdown in wages from their level in a perfectly competitive equilibrium. We validate this monopsony interpretation by further showing that (1) the commuting times of hired workers increase following firm expansion, (2) markdowns are higher for workers with fewer outside options, (3) markdowns are higher in local industries with more concentrated employment, and (4) markdowns are smaller in firms covered by collective bargaining. We further show that incumbent workers experience larger wage increases than newly hired workers, proportionate to the effects on separations and hires, respectively. Therefore, the wage elasticity of separations appears to be substantially smaller than the recruitment elasticity. This is at odds with a standard assumption used in the extant literature. Finally, we document that the estimated wage markdowns have increased over time, which suggests that the German labor market has become more monopsonistic. All in all, Chapter 1 shows that imperfect competition is an important cause of low wages that appears to have gained in relevance over time. This time trend coincides with the decline in collective bargaining, which is typically understood as an institution that can limit the extent to which employers are able to exercise labor market power. Chapter 3 focuses on temporary contracts among low-income workers and compares their association with material hardship relative to permanent employment contracts. The chapter is co-authored with Nils Teichler. Material hardship is an outcome, which has never been analyzed in the literature about temporary employment contracts before. Based on the economics of precautionary saving, we argue that low-income workers may forgo basic material and social needs in response to job insecurity because they may cut expenses to provide for the risk of future unemployment. We test this idea using panel data from Germany, finding that temporary employment is positively associated with a comprehensive index of material hardship. This association is robust to our controlling for important variables such as household income and composition. We also show that intra-household transitions of main earners from temporary to permanent employment contracts (or vice versa) are associated with reduced (increased) hardship. Temporary contracts among main earners are further associated with higher savings rates, suggesting that precautionary saving may explain their association with hardship. We find particularly strong associations of temporary employment and hardship among low educated and single parent households. Temporary employment is associated mostly with dimensions of hardship, however, that relate to social exclusion rather than the most basic material necessities. The chapter highlights that material hardship is potentially an important outcome to study in the context of temporary work. Further research is needed, however, to establish whether the estimated association deserve a causal interpretation because time-varying omitted variables may bias the analysis. Chapter 4 focuses on the introduction of a national minimum wage in Germany and analyzes the reform’s employment effects. Many observers were concerned that the policy would cause unemployment because standard economic reasoning predicts that the imposition of a wage floor into a competitive labor market would create unemployment. Chapter 2 shows that the assumption of perfect labor market competition is unlikely to hold. In line with this view, Chapter 4 shows that the employment effects of the reform were limited. The effect of the policy is recovered from variation in the “bite” of the minimum wage, i.e., the share of workers affected, across occupations using a difference-in-differences estimator. The analysis reveals that the reform only had a small impact on employment and highlights the importance of regional effect heterogeneity. In East Germany, marginal employment decreased by about 18,000 jobs in the short run and 52,000 jobs in the medium run, respectively, due to the minimum wage. In West Germany, no negative employment effects are detectable, but regular employment increased temporarily because of the reform. The medium run estimates include the impact of the first marginal increase of the wage floor from €8.50 to €8.84 in 2017. All in all, this dissertation informs about the causes and consequences of low-wage work as well as policy options to address the issue. It highlights that the introduction of a national minimum wage at a moderate level appears to have been a reasonable governmental response to the expansion of low-wage work in Germany. It rationalizes this finding by showing that imperfect competition was an important factor in generating low wages shortly before the reform.