The High Cost of Losing a Minimum Wage Job

Contrary to assumptions, low-wage workers lose substantial income in years after layoff

The financial consequences of losing a long-term professional or skilled-labor job to a layoff are well-documented in economic research, with multiple studies describing depressing long-term effects. Unintended unemployment among these workers often results in lower incomes that persist years beyond landing the next job.

Earnings for laid-off dishwashers, janitors, drivers, sales clerks and others earning at or near minimum wage are less studied. People working at these mostly hard-labor jobs, often with irregular or erratic hours, are usually in demand in multiple industries. Dishwashers can cross over to security guard work. Restaurant hostesses take openings for sales clerks. 

With jobs available and little difference in hourly pay, there is a widespread assumption that earnings losses are minimal when a low-wage worker faces unintended unemployment. An abundance of help-wanted signs suggests the dispatched worker could quickly find a new job at an equivalent wage.

Replacement Jobs After Layoffs Don’t Curb Losses

So much for assumptions. A new working paper shows that job cuts lead to substantial losses in income for low-wage workers. University of Chicago’s Evan K. Rose and UCLA’s Yotam Shem-Tov suggest that layoffs reduce average pay for workers earning $15 an hour or less by 13% after six years and cumulatively by a total of $40,000.

In actuality, most dishwashing jobs pay far less. Dishwashing is often a minimum wage job, and the federal minimum wage is $7.25 (in 30 states the minimum wage is higher).

Nearly a third of the entire U.S. workforce earns less than $15 an hour, according to a recent Oxfam report. Earnings also are restricted by the common practice of giving minimum wage workers no more than 30 hours a week in order to avoid benefits requirements. 

Loss of steady work, rather than significant decreases in pay rates, is the biggest factor in the lingering financial strain for low-wage workers who lose jobs to layoffs, according to the study. While these workers attract a relatively high number of job offers, 95% of those jobs would result in earnings below $32,000 a year, according to the analysis. Over a year, those replacement jobs average about a month fewer days of work than the previous jobs.

Similar Replacement Jobs But Less Pay

The researchers also looked at displaced workers earning $15 to $30 an hour for comparison. This group experienced earnings losses of 17% after six years. In these cases, the findings suggest workers were replacing their previous employment with jobs that have similar hours but lower pay rates. 

The study differs from conventional wage research both in focus and analysis. Classical studies of mass layoffs typically look at workers in higher-paying jobs and only those that have been in their positions for three years or more. Tenured employees at that level are considered more likely to lose jobs to layoff than to be fired for cause.

Rose and Shem-Tov note that job-switching is much more common in low-wage jobs for many reasons. A sample limited to workers that had been in their jobs for years would not be representative, and not particularly useful, in isolating the victims of layoffs. Instead, they compared all workers in firms that had large employment reductions to workers in similar firms that did not.  

The study relied on Census Bureau earnings records and surveys and examined a sample of  full-time, full-year workers, earning $15 or less when losing their job. The analysis focused on the period between 2001 and 2008. They tracked 230,000 workers at about 100,000 firms for three years before, and six years after, separating from jobs.

The findings highlight the value of, and perhaps the scarcity of, a full-time, $15 an hour job.