Higher employment rates mean higher wages for low-wage workers

Low-wage jobs pay better when the local labor market is tight. This is because an employer who can’t easily replace one worker with another will tend to pay current workers more to incentivize them to stay and also will tend to invest more in equipment and training that make workers more productive and grows the economy.

One way to see this relationship is to look at what percent of people living in an area have a job and the wages near the bottom of the area’s wage distribution. For example, for workers between the ages of 25 and 54 in the ~100 largest metro areas, a one percentage point increase in the share of the age group with a job results in $0.13 an hour in additional wages for the first decile full-time wage earner in the metro area, equivalent to more than $200 extra per worker per year (in November 2018 dollars).

Employment rates (the share of the age group with a job) have been rapidly increasing since 2012 and show no sign of slowing (and perhaps even show signs of accelerating, as higher wages pull more people off the sidelines). If the trend is allowed to continue until the employment rate returns to its late 1990s rate, the employment-rate-related real wage boost for low-wage full-time workers would be between $500 and $600 a year.


Data source

This relationship has been pointed out countless times, for example by Dean Baker, but it worth reiterating, using the latest data. I’ve calculated these figures from the Current Population Survey public use microdata, using the latest two years of monthly data (December 2016-November 2018). The results are stored here in csv file, for those curious about which dot is which metro area. I’ve also added the union membership rate and the unemployment rate for the area to the file. Wages are in November 2018 dollars, adjusted for inflation within the 2-year period by the regional CPI-U. The largest metro areas are the 97 center-based statistical areas (CBSAs) with at least 300 valid wage observations during the 2-year period. The python code that generates the results is available here. I use a set of programs called the bd CPS to standardize the CPS data from 1994 to present, which are available as a GitHub repo.



Sawing off the top of a step ladder

Policymakers may have accidentally demonstrated that they have the skills needed to curb the pay of the top earners in a profession. Unfortunately, these problem solving skills were not applied to CEOs, who regularly get paid a thousand times what their middle-paid worker makes. Instead, some state lawmakers have tackled the non-existent problem of teachers making too much money.

In 2016, public school teachers in the states with recent strikes or large scale protests (West Virginia, Oklahoma, Arizona, Kentucky, North Carolina, and Colorado) are paid about three dollars per hour less than other teachers nationwide. This is not new. After adjusting for prices, the gap was about the same in 2006. What has changed is teacher pay near the “top”. In 2006 a public school teacher making $40.93 per hour (in 2016 dollars) makes more than 90 percent of public school teachers nationwide, while it takes an hourly wage of $37.95 to make more than 90 percent of teachers in states with strikes and protests. The nationwide 90th percentile wage ticked up to $43.27 by 2016, but fell to $34.98 for the states that have subsequently organized strikes and protests.


The top half of the public school teacher wage distribution is already low compared to other occupations. But after state efforts to curb teacher pay, 90 percent of the public school teachers in states with strikes and protests make less than $35 an hour, and more than a quarter of the group is paid less than $16 an hour. These hourly wage figures are based on annual earnings in the March CPS, so they already account for differences in weeks worked per year and hours worked per week, and are therefore more comparable to the hourly wages of other occupations. Using these wage values, teachers, relative to other occupations, have the additional burden of being paid, on average, for fewer hours per year, making it harder for them to make ends meet.

Policymakers should reverse the misguided efforts to cut teacher pay. If anything, teachers should be better rewarded for their contribution to society. It shouldn’t take strikes and protests to make this point.

Technical note: The box plot above shows the average (green diamond), median (white line), 90th, 75, 25th, and 10th percentile hourly wage. Public school teachers are identified as persons in occupations 2200 to 2340 who are employed by the government. The hourly wage variable is generated as the ERN-VAL / (WKSWORK * HRSWK).