Can Low-Wage Employment Help People Escape from the No-Pay – Low-Income Trap?

Abstract

The experience of unemployment itself increases the risk of staying unemployed, and the unemployed face a high poverty risk. Moreover, experiencing poverty reduces the chances of reemployment. As wage inequality has expanded in recent decades, low-paid employment and in-work poverty have both risen. This study analyzes whether low-pay employment helps people escape the no-pay – low-income trap. Survey data from the German Socio-Economic Panel for the period 1995–2012 are used to estimate correlated random-effects probit models on the labor-market and income dynamics. The findings suggest that low-paid employment is especially helpful to exit the no-pay – low-income trap for persons who are long-term unemployed, as well as for those over 40 who have been unemployed for a short period of time. No indications of a low-pay – low-income trap are found.