Low-wage work and labour market policies: a European cross-country study

We study the incidence, sources, and dynamics of low-wage employment using harmonised linked employer-employee administrative data from Denmark, France, Germany, the Netherlands, Portugal, and the United Kingdom. We define low-wage employment relative to the country-specific median hourly wage and examine how worker characteristics, firm-specific wage premia, wage progression, and labour market institutions shape outcomes at different parts of the lower wage distribution. Three main findings emerge. First, worker characteristics account for most of the wage gap facing low-wage workers, though firm-specific wage premia matter too, especially at the very bottom, where they are around half as large as the worker component. These firm premia reflect both sorting across industries and pay differences across firms within industries. Second, low-wage employment is at least partly transitory, as workers at the bottom see faster subsequent wage growth and change firms more often. Third, minimum wages and marginal effective tax rates show limited systematic association with wage growth or job-to-job mobility, though higher minimum wages are linked to a smaller share of workers below 70% of the median. These patterns are broadly similar across countries and point to the joint importance of worker skills and access to higher-paying firms for improving low-wage workers’ prospects.