Do Scarring Effects of Low‐Wage Employment and Non‐Employment Differ BETWEEN Levels of Qualification?
| DOI | http://doi.org/10.1111/sjpe.12039 |
| Date | 01 May 2014 |
| Published date | 01 May 2014 |
| Author | Alexander Mosthaf |
DO SCARRING EFFECTS OF
LOW-WAGE EMPLOYMENT AND
NON-EMPLOYMENT DIFFER BETWEEN
LEVELS OF QUALIFICATION?
Alexander Mosthaf*
ABSTRACT
This study investigates how the effects of low-wage employment and non-employ-
ment on wage prospects vary depending on qualification. Based on theories on
signalling effects, human capital and job search, we discuss why there may be
heterogeneity in state dependence in both labour market states. We find that epi-
sodes of low-wage employment incur a significantly lower risk of future non-
employment than episodes of non-employment for low-qualified workers. In con-
trast, for workers with a middle or high level of qualification the risk of non-
employment is not significantly different when being low-paid instead of not
employed.
1I
NTRODUCTION
The current economic crisis in several OECD countries lends a special interest
to the question whether it is beneficial to take up a low-paid interim job.
1
Ljungqvist and Sargent (1998) argue that European labour markets are more
vulnerable to recessions than the United States because generous unemploy-
ment benefits reduce incentives for laid-off workers to quickly accept jobs with
lower wages than those of their previous jobs. In times of economic crisis the
number of ‘good jobs’ with high wages is limited and high reservation wages
of laid-off workers lead to long-term unemployment, a factor producing a sig-
nificant loss of human capital. By taking up a low-paid job instead of waiting
for a ‘good job’, unemployed individuals could shorten unemployment dura-
tion, thereby averting scarring effects associated with unemployment. On the
other hand, Layard et al. (1991, p. 249) argue that scarring effects of low-
wage jobs may even be worse than those of non-employment because low-
wage jobs may go along with more negative signals. This is consistent with
*University of Mainz
1
McCormick (1990, p. 300) focusses in his study on interim jobs and defines them as jobs
which are ‘acceptable by certain workers as an interim position while searching on-the-job
for a preferred, but costly to locate, job type’.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12039, Vol. 61, No. 2, May 2014
©2014 Scottish Economic Society.
154
Burdett (1979) and Marimon and Zilibotti (1999) who point out that search-
ing for the right job match during unemployment may have positive returns.
Scarring effects of non-employment and low-wage employment lead to state
dependence in labour market dynamics. Recent studies examine transitions
between non-employment, low-wage employment and high-wage employment
and provide convincing evidence for the existence of state dependence in both
non-employment and low-wage employment (Uhlendorff, 2006; Stewart, 2007;
Cappellari and Jenkins, 2008; Mosthaf et al., 2009; Buddelmeyer et al., 2010).
That is, the incidence of non-employment leads to a higher probability to be
not employed or low-paid in the future. Similarly, taking up a low-paid job
increases the future risk of non-employment and low-wage employment.
In this study we are interested in the question how state dependence of
non-employment and low-wage employment varies with respect to qualifica-
tion. This question is particularly important for countries that face adverse
shocks on the labour market. Whereas in times of moderate economic devel-
opment mainly low-qualified workers are affected by non-employment, the
current low demand for labour in some OECD countries leads to a higher risk
of non-employment also for better-qualified individuals. For instance, in the
United States, the unemployment rate of individuals with upper secondary
education was 11.2% in 2010 (OECD, 2012).
It is a stylized fact that transition rates from non-employment to employ-
ment are higher for individuals with good qualifications. Riddell and Song
(2011b) show that there is a causal positive impact of education on the proba-
bility to find a job. Similarly, the probability of moving from low-wage
employment to high-wage employment is positively associated with high quali-
fication levels (e.g. Cappellari, 2002). Nevertheless, while these transition rates
are higher for well-qualified workers, the penalty of entering non-employment
and low-wage employment concerning future employment prospects (i.e. state
dependence) may be stronger for individuals with good qualifications.
Higher state dependence of high-qualified workers may be explained, for
instance, by theories on signalling effects. McCormick (1990) states that if
employers interpret the job search behaviour of workers as a signal for their
future productivity, taking up a low-paid interim job as well as being unem-
ployed is associated with negative signalling effects. As the incidence of non-
employment and low-wage employment is more typical for workers with lower
qualifications, we argue that negative signals may be stronger for workers
with high levels of qualification.
This study uses a large German administrative data set which allows us to
estimate the heterogeneity of state dependence in non-employment and low-
wage employment with respect to qualification. We apply dynamic multino-
mial logit models with random effects and follow Mundlak (1978), Chamber-
lain (1984) and Wooldridge (2005) to control for selection into the distinct
labour market states. We find that low-wage jobs clearly incur a weaker risk
of future non-employment than non-employment for workers with a low level
of qualification. For workers with a middle or high level of qualification,
SCARRING EFFECTS OF LOW-WAGE EMPLOYMENT 155
Scottish Journal of Political Economy
©2014 Scottish Economic Society
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