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- A new paper finds that low-wage workers in Germany underestimated how much money they could make elsewhere.
- If they had accurate information, 10 to 17% of low-wage jobs in Germany couldn’t exist at their current wage.
- These findings might help explain the mass exodus of low-wage workers in America.
If low-wage workers knew how much they could make elsewhere, a whole lot of jobs would be unsustainable — because the workers would just quit.
That’s according to new research from economists at MIT, the University of Cologne, the London School of Economics, and the University of California, Berkeley. They set out to test a long-held economic assumption: That workers know what they could be making somewhere else, and know what similar jobs pay. But that doesn’t seem to quite be the case in the real world.
The researchers surveyed 516 part-time and full-time German workers in 2019 and 2020. The result: Workers, particularly low-wage or underpaid ones, think that wages elsewhere are much closer (and lower) to what they currently make than they actually are.
In Germany, 10 to 17% of low-wage jobs wouldn’t be viable at their current pay if workers accurately understood how much they could make elsewhere, the study concluded. The findings shed light on the current US labor situation, where the post-vaccine economy sees hiring booming — and anecdotal reports of labor shortages and quitting abound.
“Workers would quit or ask for large raises if workers did have accurate perceptions or information about wages with other employers,” Benjamin Schoefer, an economist at UC Berkeley and one of the paper’s authors, told Insider.
Better knowledge has fueled a quitting boom in the US
A near-record number of Americans have been quitting their jobs for eight months straight. In November 2021, the most recent month for which the Bureau of Labor Statistics released data, 4.5 million workers quit. Quits were led by low-wage workers, with a record-breaking 1 million leisure and hospitality workers quitting.
The new study from Schoefer and his colleagues presents an “intriguing argument” says Nick Bunker, the economic research director at job site Indeed. In 2021, workers have become aware of their outside options at other firms or industries and that has “fueled some of this quitting.”
“That’s something to keep an eye on speculatively moving forward, if maybe there’s just, for a given level of demand, maybe people are more likely to quit their job,” Bunker told Insider.
One potential implication of the researchers’ findings, according to Schoefer, is that if workers become more informed about what they could be making elsewhere — say, for instance, in constant news coverage on firms paying more amidst labor shortages — they might ask for raises or quit.
“One way to read the current economy is that perhaps a lot of workers that used to be stuck in low wage jobs realize that there might be other jobs out there — that are paying potentially more,” Schoefer said.
To be sure, the survey encompasses German workers, not Americans. But Schoefer said that the German and US economies do share a lot of commonalities, and that in both countries it makes a big difference whether you work at a high-paying or low-paying firm. Therefore, Schoefer, “we could reasonably extrapolate” that similar insights could apply to low-wage US workers during normal times.
One big difference, according to Schoefer: During the pandemic, a lot of US workers lost their jobs completely, with the country relying on unemployment insurance for those laid-off workers. That could have perhaps led more to turnover. Meanwhile, countries like Germany saw people stay in their jobs as the government subsidized payrolls.
Anecdotally, some Americans who received enhanced unemployment benefits said it caused a Great Rethink of their own. They used the benefits to change their lives, or simply just get paid more than they had before. But, even so, research continually showed that enhanced unemployment benefits had little to no effect on overall employment levels.
Transparency could lead to more equal wages
The paper leaves “open questions” about what could improve workers’ information around pay. Things like salary transparency laws, which are on the rise, might help. Online job platforms where you can easily see how much others make might help workers figure out if they’re getting underpaid.
So what would happen if everyone realized exactly how much more they could make?
“That’s exactly the experiment we would love to run in reality,” Schoefer said with a laugh. While we can’t know for sure right now, their theoretical model showed two key effects.
“The first effect is workers that are underpaid now realize they’re getting underpaid and they leave,” he said. “The second effect is a bit more subtle, which is firms also realize they can’t get away with underpaying these workers who might not realize that they’re getting underpaid.”
“And what you would see is higher wages, more similar wages, fewer differences in wages between firms in the smaller, low wage sector.”
Read the original article on Business Insider