How hard is it to replace a minimum-wage job?

The job market in the United States fluctuates greatly. Each month, millions of workers separate from their jobs. These job separations occur disproportionately among low-wage workers. A widespread view among economists is that the labor market for low-wage workers is nearly frictionless, meaning a worker earning near minimum wage should have little trouble finding an identical replacement position. But is this assumption true?

In studying job displacement, researchers have mostly explored its effect on tenured workers earning higher wages. Little research has been done on the effects of job displacement on workers earning near minimum wage, whose hourly pay cannot fall far. Instead of experiencing a large cut in hourly pay, these workers may experience reduced work hours and employment. Several factors may make finding a new job difficult for a worker earning near minimum wage. These factors include skill degradation while workers are unemployed, technologies that prioritize part-time availability, and job rationing, which arises when market wage is below the minimum wage.

In their paper, “How replaceable is a low-wage job?” (National Bureau of Economic Research, Working Paper 31447, July 2023), Evan K. Rose and Yotam Shem-Tov, using household surveys and administrative records, study the results of job loss for low-wage workers. Rose and Shem-Tov find that low-wage earners are more likely to experience long-term earnings losses and employment reductions.

The authors use household responses from the U.S. Census Bureau’s American Community Survey (ACS) and unemployment insurance earnings data from the U.S. Census Bureau’s Longitudinal Employer Household Dynamics (LEHD) program. The ACS collects information on employment status, usual hours, weeks worked, and earnings over the year. The LEHD program produces quarterly unemployment insurance earnings data collected from each state and the District of Columbia. These data cover 96 percent of private sector jobs and state and local government workers. Rose and Shem-Tov create their sample by linking ACS data on low-wage workers employed full time with LEHD program data on unemployment insurance.

The authors’ empirical strategy isolates changes in labor demand by using coworkers’ separation rates and then compares the changes in labor demand by using traditional methods for analyzing the effects of job loss. Their approach allows them to include workers of all tenures while still accounting for job separations. This empirical strategy shows that reduced work hours and employment contribute greatly to earnings loss for low-wage workers in the long term. Rose and Shem-Tov then analyze the effects of job loss on workers earning between $15 and $30 an hour. This analysis tests the effectiveness of their empirical strategy and allows them to compare the impacts of job loss on low-wage and higher wage workers. The authors then assess if the drivers of long-run job loss costs are different for each group.

Rose and Shem-Tov ultimately find that workers earning less than $15 an hour who experience job loss later face reduced employment, labor force participation, and earnings. So, why are earnings from low-wage jobs difficult to replace? Low-wage jobs are largely difficult to replace because workers cannot easily find full-time work again. Other frictions such as job rationing may also contribute to the difficulties of replacing a low-wage job. The authors suggest that determining the importance of these frictions is a topic for future research.