Underemployment and rising costs add to income inequality problem

580 200 Leilani Barnett

(Photo Credit: John Guenther/CAFwd)

Elevate CA and the California Economic Summit are exploring some possible solutions to the problem of economic insecurity and the lack of upward mobility in California. Ms. Barnett argues that more full-time jobs is a prescription for success.

Income inequality in the United States has increased significantly in the last four decades. From 1977 to 2007 three-fourths of the income growth in the U.S. economy went to the top 10 percent of households. One factor contributing to this trend is the increase in involuntary part-time workers.

Over six million Americans are currently working part-time involuntarily, meaning these individuals would like to work full-time but are unable to find full-time jobs. The number of people who want to work full-time but are only able to find part-time jobs has increased dramatically over the past decade. The poverty rate was the same for both part-time workers and the unemployed in 2014 at 19 percent. In contrast, the poverty rate for full-time workers was 3.9 percent.

Seeing that part-time workers are just as likely to be living in poverty as those who are unemployed, my colleagues and I at the Federal Reserve Bank of San Francisco (SF Fed) set out to better understand this trend. Through conversations with employers as well as the many non-profits and government agencies that serve these part-time workers, here’s what we learned:

  1. Housing, transportation, and child care play critical roles in allowing workers to secure and retain employment. Barriers to full-time employment lay not only in the availability of full-time jobs, but also in access to affordable housing nearby, transportation, and child care.
  2. Rising business costs (e.g. employee benefits, health care, workers’ compensation insurance, and minimum wage hikes) and increasingly competitive markets are contributing to the increase in part-time jobs. Economists now believe that the steady rate of involuntary part-time employment may have more to do with changes in the way workplaces operate, rather than solely the rise-and-fall of employment dynamics that tend to accompany recessions. As we spoke with employers throughout the western states, many shared they increasingly hired part-time in order to reduce overhead cost—wages (especially in light of minimum wage increases) and employee benefits, such as health care and workers’ compensation insurance. One participant from the public sector in Fresno, California, stated that her agency “chose to hire two part-time employees rather than one full-time employee because they could get a lot more hours of work for cheaper with two part-time employees due to much lower cost of benefits.”

Employers also shared the benefits of added flexibility in hiring part-time, since they can increase and decrease hours as the need for workers waxed and waned. Employers spoke about lean profit margins, global competition, the need to be efficient, uncertainties in their markets, and the automation of work necessitating fewer workers. One of the biggest industries in California’s Central Valley is agriculture, and some employers I spoke with there stated labor costs have increased significantly over the last several decades, driving employers to hire fewer workers and invest in more machines and technology.

  1. Workers are concerned about exceeding income thresholds for social service benefits (the “cliff effect”) which may impact their employment choices. People assume that a part-time job is better than no job at all. But for many, working part-time means receiving less public assistance dollars for critical safety net needs as workers might find themselves financially worse off.
  2. Increasing household expenses are exacerbating financial challenges for low-income individuals, forcing many to take multiple part-time jobs or engage in the “shadow economy.” Locals in all the areas we visited cited stagnant wages, limited opportunities for full-time work, and higher household costs as the forces driving many to take multiple part-time jobs or pursue cash-based or unlicensed businesses in the “shadow economy.”

In discussing potential solutions to address underemployment, voices across the Western states unanimously agree there is no silver-bullet to solve the complex and interrelated nature of the underlying issues. Instead, we heard a call for holistic solutions that integrate across the identified challenges.

  1. Integrated solutions are needed to address the interrelated challenges of housing, jobs, transportation, and child care. People we spoke with shared a desire to see approaches that integrate across land use planning, investment, and state and local policy to expand the availability of affordable housing near major job centers, transit, and child care. Such expansion can help connect low-income workers to regional employment and provide added stability. We also heard about the importance of family-friendly workplace policies to address child care expenses and challenges. Examples include consistent work shifts, on-site child care options, paid maternity and paternity leave, paid sick time to care for a sick child, and improved accommodations for lactating mothers.

Increased partnerships between employers and transit vanpool services may create solutions for employers and workers—and could even create business service opportunities for small businesses.

  1. Examining public assistance programs is needed to mitigate the potential cliff effect. Since underemployed workers may be more likely to be reliant on public assistance, people we spoke with stressed the importance of examining public assistance programs to mitigate unintended consequences, such as disincentives to work. In many regions, locals suggested that income-qualifying programs should not be based on volatile incomes and should allow workers to continue to receive assistance until they are permanently employed full-time and have reached some level of financial security. This subject is particularly relevant in light of recent federal, state, and city minimum wage hikes that may impact households receiving public assistance.

Although many of the solutions that emerged from our conversations were focused on federal and state policies, one local opportunity is the development of cross-sector partnerships. Connecting across sectors that often work in silos—workforce development, affordable housing, transportation, education, child care, and health–leads to greater efficiencies and better outcomes for the people that need it most.

The rise of underemployment necessitates innovative solutions that both strengthen family financial stability in the near term and expand career pathways for the future. If successful, these strategies could help mitigate the trends of income inequality. For more in-depth examination of this topic, see The Rise of Underemployment: Supporting the Needs of Low-Income Workers.

Leilani Barnett is a regional manager for community development at the Federal Reserve Bank of San Francisco and leads multi-sector collaborations to overcome community development problems.Her work includes Healthy Communities initiatives, cross-sector strategies, and innovative investment approaches.

Note: The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.


Leilani Barnett

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