Berlin They work in bars, deliver parcels or clear the shelves in the supermarket: employees whose gross hourly wage is less than two thirds of the median wage and who work in the low-wage sector according to this definition. From the perspective of the trade unions, they are trapped in a poverty trap.
The SPD and the Greens therefore want to increase the minimum wage to twelve euros and had campaigned for an extensive abolition of mini-jobs. Employers’ associations, on the other hand, see the low-wage sector as an opportunity for employment for the low-skilled or the unemployed.
And both sides have very good arguments, as a new analysis by the employer-related Institute of the German Economy (IW), which is available to the Handelsblatt, shows.
On the one hand, low-wage workers are more often confronted with social problems than normal wage earners – even if they are usually still better off than the unemployed. On the other hand, accepting a low-wage job increases the labor market and income prospects for the previously unemployed or inactive.
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Around a fifth of employees work in the low-wage sector
From 1997 to 2007, the share of the low-wage sector in total dependent employment rose from 16 to almost 23 percent and then did not follow a clear trend. An interim high of just under 24 percent was reached in 2013, after which the proportion has largely fallen continuously to almost 21 percent.
IW economist Holger Schäfer analyzed the employment histories of low-wage workers from 2011 to 2019 with the help of the “Socio-Economic Panel” (SOEP). This annual survey of around 30,000 people not only provides detailed information on wages, but also on personal characteristics and the household in which the respondents live.
The data show that the at-risk-of-poverty rate for low-wage workers, at 22 percent, is higher than for normal earners, but significantly lower than that of the inactive (28 percent) or the unemployed (69 percent).
“A strategy against low incomes would therefore have to focus primarily on the group of inactive people and develop instruments with which they can be better integrated into the labor market,” concludes Schäfer. According to his study, the low-wage sector can certainly make a contribution.
The IW economist took a look at which people entered the low-wage sector during the study period and what employment status they had before. It shows that at 44 percent, the largest group of new low-wage employees were previously normal wage earners. This certainly indicates “considerable downward mobility,” as the study says. Previously, 39 percent of the new low-wage workers were professionally inactive, including 14 percent unemployed.
Low-wage sector as an opportunity for the low-skilled
Of the people who entered the low-wage sector from inactivity, an above-average number of 37 percent had no completed vocational training. Of the previously unemployed, this applies to 24 percent, of the previous normal wage earners only 16 percent. The low-wage sector definitely plays a role in the labor market integration of the low-skilled, writes Schäfer.
And for the majority of the new low-wage employees, the job improves their social situation. On average, the mean net income weighted by household size increases by 15 percent. A good third, however, also has to accept a loss of income.
Criticism of the low-wage sector is less justified if the workers there are not caught in the “trap” but also have the chance of social advancement. The study shows that 24 percent of low-income earners make the leap into the group of normal earners in the following year. After five years, 36 percent succeed in doing this.
However, there are also recurring changes from low to normal wage earners and back. In the course of time, however, it applies that every year as a normal wage earner improves the prospect of being employed as a normal wage earner in the future, while every year as a low wage earner reduces the chance of social advancement.
“Taking up employment in the low-wage sector is linked to the chance of higher-paid employment and social advancement – even if one can be divided about whether this chance is sufficient and sustainable enough,” says the study. For example, 28 percent of low-wage earners fail to switch to normal-wage status in at least one year, even for three consecutive years.
Accepting a job in the low-wage sector pays off for the unemployed
The unanswered question, however, is whether it is more worthwhile for the future career to accept a low-wage job or rather to wait for a better-paid job offer. Here Schäfer shows that the unemployed and inactive people who took up a low-wage job spent around five months less unemployed after five years than people who had initially waited for a better-paid job.
Their earnings prospects are also better. Five years after entering the low-wage sector, they had earned an average of EUR 12,000 more over the years than those who initially remained unemployed in the hope of a better job. However, the earned income in the fifth year was about the same for both groups. Entry into the low-wage sector does not mean permanently improved income prospects, writes Schäfer.
Instead of restricting the low-wage sector and thus depriving the unemployed of an opportunity to participate in society, the legislature should rather encourage upward mobility, for example through training, advises the IW economist.
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