- Low-wage workers in Germany underestimated how much money they could earn elsewhere, a new article reveals.
- If they had accurate information, 10-17% of low-wage jobs in Germany could not exist at their current wages.
- These findings may help explain the mass exodus of low-wage workers in America.
If low-wage workers knew how much they could earn elsewhere, many jobs would be unsustainable – because workers would simply 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 at Berkeley. They set out to test a long-held economic hypothesis: that workers know what they could earn elsewhere and what similar jobs pay. But that doesn’t seem to be quite the case in the real world.
Researchers surveyed 516 German part-time and full-time workers in 2019 and 2020. The result: Workers, especially the low-paid or underpaid, believe wages elsewhere are much closer (and lower) to what they are currently earning than they actually are. are.
In Germany, 10 to 17% of low-wage jobs would not be viable at their current wages if workers understood precisely how much they could earn elsewhere, the study concluded. The findings highlight the current job situation in the United States, where the post-vaccine economy sees hiring booming – and anecdotal reports of labor shortages and departures abound.
“Workers would quit or demand large increases if workers had perceptions or accurate information about wages with other employers,” Benjamin Schoefer, an economist at UC Berkeley and one of the authors of the report, told Insider ‘article.
Better knowledge fueled an abandonment boom in the United States
A near record number of Americans have quit their jobs for eight consecutive months. In November 2021, the most recent month for which the Bureau of Labor Statistics released data, 4.5 million workers quit. The departures were led by low-wage workers, with a record one million leisure and hospitality workers resigning.
The new study by Schoefer and colleagues presents an “intriguing argument,” according to Nick Bunker, director of economic research at the job site Indeed. In 2021, workers became aware of their external options in other companies or industries and this has “fueled part of this resignation”.
“It’s something to speculatively watch out for, if there is perhaps right, for a given level of demand, maybe people are more likely to quit their jobs,” Bunker told Insider.
One potential implication of the researchers’ findings, according to Schoefer, is that if workers are better informed about what they could earn elsewhere – say, for example, in the constant media coverage of companies paying more in the face of labor shortages – labor force – they could ask for raises or quit.
“One way to read the current economy is that maybe a lot of workers who were stuck in low-paying jobs are realizing that there could be other jobs – which potentially pay more,” Schoefer said.
Of course, the survey includes German workers, not Americans. But Schoefer said the German and American economies share a lot in common, and in both countries it makes a big difference whether you work in a high-paying or low-paying company. Therefore, Schoefer, “we could reasonably extrapolate” that similar ideas might apply to low-wage American workers under normal circumstances.
One big difference, according to Schoefer: During the pandemic, many American workers lost their jobs completely, with the country relying on unemployment insurance for laid-off workers. Perhaps this would have led to more turnover. Meanwhile, countries like Germany have seen people stay in their jobs as the government subsidizes wages.
Anecdotally, some Americans who received improved unemployment benefits said it caused a big overhaul on their part. They used the benefits to change their lives or just get paid more than before. But even so, research has consistently shown that increasing unemployment benefits has little or no effect on overall employment levels.
Transparency could lead to more equal wages
The document leaves “open questions” on what could improve workers’ information on wages. Things like pay transparency laws, which are on the rise, could help. Online employment platforms where you can easily see how much others are making can help workers determine if they are underpaid.
So what if everyone realizes exactly how much more they could earn?
“This is exactly the experiment we would like to have in reality,” Schoefer said with a laugh. While we can’t know for sure at this time, their theoretical model showed two key effects.
“The first effect is that workers who are underpaid now realize that they are underpaid and leave,” he said. “The second effect is a little more subtle, which is that companies also realize that they can’t get away with underpaying those workers who might not realize they are underpaid.”
“And what you would see are higher wages, more similar wages, less wage differences between companies in the smaller, lower wage sector.”