Working Poor - Risk Factors

Risk Factors

There are five major categories of risk factors that increase a person's likelihood of experiencing working poverty: sectoral factors, demographic factors, economic factors, labor market institutions, and welfare generosity. Working poverty is a phenomenon that affects a very wide range of people, but there are some employment sectors, demographic groups, political factors, and economic factors that are correlated with higher rates of working poverty than others. Sectoral and demographic factors help explain why certain people within a given country are more likely than others to be working poor. Political and economic factors can explain why different countries have different working poverty rates.

Sectoral tendencies
Working poverty is not distributed equally among employment sectors. The service sector has the highest rate of working poverty. In fact, 13.3% of US service sector workers found themselves below the poverty line in 2009. Examples of low-wage service sector workers include fast-food workers, home health aids, waiters/waitresses, and non-unionized retail workers.

Although the service sector has the highest rate of working poverty, a significant portion of the working poor are blue-collar workers in the manufacturing, agriculture, and construction industries. Most manufacturing jobs used to offer generous wages and benefits, but manufacturing job quality has declined over the years. Nowadays, many US manufacturing jobs are located in right to work states, where it is nearly impossible for workers to form a union. This means that manufacturing employers are able to pay lower wages and offer fewer benefits than they used to.

Demographic factors
In her book, No Shame in My Game, Katherine Newman finds that “he nation's young, its single parents, the poorly educated, and minorities are more likely than other workers to be poor” (p. 42). These factors, in addition to being part of a large household, being part of a single-earner household, being female, and having a part-time (instead of a full-time) job have been found to be important working poverty "risk factors." Immigrant workers and self-employed workers are also more likely to be working poor than other kinds of workers.

Economic factors
There is a widespread assumption that economic growth leads to tighter labor markets and higher wages. However, the evidence suggests that economic growth does not always benefit each part of the population equally. For example, the 1980s was a period of economic growth and prosperity in the United States, but most of the economic gains were concentrated at the top of the income spectrum. This means that people near the bottom of the labor market did not benefit from the economic gains of the 1980s. In fact, many have argued that low-skilled workers experienced declining prosperity in the 1980s. Therefore, changing economic conditions do not have as large of an impact on working poverty rates as one might expect.

Labor market institutions
Labor markets can be egalitarian, efficient, or somewhere in the middle. According to Brady, Fullerton, and Cross (2010), “fficient labor markets typically feature flexibility, low unemployment, and higher economic growth, and facilitate the rapid hiring and firing of workers. Egalitarian labor markets are bolstered by strong labor market institutions, higher wages, and greater security” (p562). The United States has an efficient labor market, whereas most European countries have egalitarian labor markets. Each system has its drawbacks, but the egalitarian labor market model is typically associated with lower rates of working poverty. One tradeoff to this is that the “lowest skilled and least employable” people are sometimes excluded from an egalitarian labor market, and must instead rely on government aid in order to survive (p. 563). If the United States switched from an efficient to an egalitarian labor market, it might have to increase its welfare state generosity in order to cope with a higher unemployment rate.

Centralized wage bargaining is a key component of egalitarian labor markets. In a country with centralized wage bargaining institutions, wages for entire industries are negotiated at the regional or national level. This means that similar workers earn similar wages, which reduces income inequality. Lohmann (2009) finds that countries with centralized wage bargaining institutions have lower rates of “pre-transfer” working poverty. The “pre-transfer” working poverty rate is the percentage of workers who fall below the poverty threshold based on their earned wages (not counting government transfers).

Welfare state generosity
Cross-national studies are in agreement that the most important factor affecting working poverty rates is welfare state generosity. A generous welfare state spends a higher proportion of its GDP on things like unemployment insurance, social security, family assistance, childcare subsidies, healthcare subsidies, housing subsidies, transportation subsidies, and food subsidies. Studies on working poverty have found that these kinds of government spending can pull a significant number of people out of poverty, even if they earn low wages. Lohmann's 2009 study shows that welfare state generosity has a significant impact on the “post-transfer” rate of working poverty. The “post-transfer” rate of working poverty is the percentage of working households that fall below the poverty threshold after government aid has been taken into account.

Different types of transfers benefit different kinds of low-wage families. Family benefits will benefit households with children and unemployment benefits will benefit households that include workers with significant work experience. Transfers such as old-age benefits are unlikely to benefit low-wage households unless the elderly are living in in the same household. Sometimes, even when benefits are available, those who qualify do not take advantage of them. Migrants in particular are less likely to take advantage of the available benefits.