Low pay, higher pay and job quality: empirical evidence for Portugal

Abstract

This paper examines to what extent low pay jobs can be considered of low quality. For this purpose, we use three waves (1997-1999) of the European Community Household Panel (ECHP) for Portugal. The results indicate that low pay workers report a lower level of job satisfaction when compared with their higher paid counterparts. Moreover, some of the determinants of job satisfaction differ between these two types of workers. This supports the idea that low wage employment mainly comprises low quality jobs and is consistent with the segmented labour market theory, which claims the existence of good and bad jobs. This is, however, at odds with some empirical evidence recently reported for the British labour market where low pay individuals report a higher level of satisfaction, which is more in line with the notion that these workers obtain compensating differences in the form of non-pecuniary benefits.

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Low pay, higher pay and job
quality: empirical evidence
for Portugal
Jose ´ Cabral Vieira*, Anto ´ nio Menezes and Patrı´cia Gabriel
University of the Azores, Department of Economics and Management,
Rua Ma˜e de Deus, 9500 Ponta Delgada – Portugal
This paper examines to what extent low pay jobs can be considered of low
quality. For this purpose, we use three waves (1997–1999) of the European
Community Household Panel (ECHP) for Portugal. The results indicate
that low pay workers report a lower level of job satisfaction when
compared with their higher paid counterparts. Moreover, some of the
determinants of job satisfaction differ between these two types of workers.
This supports the idea that low wage employment mainly comprises low
quality jobs and is consistent with the segmented labour market theory,
which claims the existence of good and bad jobs. This is, however, at odds
with some empirical evidence recently reported for the British labour
market where low pay individuals report a higher level of satisfaction,
which is more in line with the notion that these workers obtain compensat-
ing differences in the form of non-pecuniary benefits.
I. Introduction
The incidence and the persistence of low-pay work
has become a matter of great concern in many
developed economies as a result of increasing wage
inequality (OECD, 1996, 1997; Asplund et al., 1998;
Lucifora and Salverda, 1998; Stewart and Swaffield,
1999; Cappellari, 2000; Cardoso et al., 2000).
Moreover, low-pay employment and job quality
have become important policy issues, namely in the
European Union (European Commission, 2001,
2002). Also, Salverda et al. (2001) put forward the
idea that policies towards low-wage jobs should
centre on their quality at least as importantly as on
the level of pay which they provide.
Job quality is a relative concept regarding objective
characteristics of the job–worker match. It also
involves the subjective evaluation of these charac-
teristics by the respective worker, on the basis of his
characteristics
Commission (2001) employment report suggests
that in the absence of a single composite indicator
any analysis of job quality must be based on data
on both objective and subjective evaluations of
the worker–job match. In addition, the European
Commission (2002) employment report reinforces
this stance with the suggestion of the inclusion of
job satisfaction in its definition of job quality. We
follow the same type of reasoning in the present
paper.
Indeed, Leontaridi and Sloane (2001) use job satis-
faction as a proxy of job quality in the British labour
market. Furthermore, they attempt to distinguish
between two strands of the literature: the segmented
labour market theory versus compensating wage dif-
ferentialstheories.Thesegmentedlabourmarketview,
or, at least, the dual labour market version, claims
the existence of two distinct labour markets with
andexpectations. The European
*Corresponding author. E-mail: josevieira@notes.uac.pt
Applied Economics Letters ISSN 1350–4851 print/ISSN 1466–4291 online # 2005 Taylor & Francis Group Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/13504850500109907
505
Applied Economics Letters, 2005, 12, 505–511

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strong mobility barriers between them. In addition,
this theory argues that we can classify jobs into good
jobs and bad jobs, with bad jobs being those not only
having worse working conditions, but also lower
wages. As Leontaridi and Sloane (2001) argue, this
contrasts with the compensating wage differentials
theory according to which jobs with poor working
conditions would be expected, ceteris paribus, to
compensate for this with higher pay.
Leontaridi and Sloane (2001) surprisingly conclude
that higher paid workers report lower job satisfaction
than their lower paid counterparts. In their opinion,
this casts doubt on the view that low paid jobs are
bad jobs and that high paid jobs are good jobs. This
is reinforced by their finding that it is by no means
the case that moving from a low paid to a higher paid
job increases job satisfaction. In sum, the results do
not support the view that low paid jobs are inherently
of low quality, at least as far as British evidence
is concerned. This seems in line with a view that
low paid workers likely obtain compensating differ-
ences in the form of non-pecuniary benefits. Jones
and Sloane (2003) and Leontaridi et al. (2004) also
present this type of conclusion. Apparently, there is
a matching process in the labour market as a whole
in which individuals seeking higher pay are allocated
to higher-paying jobs and those seeking for non-
pecuniary benefits are allocated to low-paying jobs.
In such a case, removing low paid jobs, namely
through regulation, would not necessarily improve
worker’s well being.
This paper tries to evaluate to what extent the
aforementioned findings also hold for Portugal. For
this purpose, we use three waves of the European
Community Household Panel (ECHP). The panel
nature of the data allows us to use a random effects
estimator in order to control for unobservable
individual heterogeneity.
The paper is organized as follows. The next section
describes the data and provides evidence on reported
levels of job satisfaction by low and higher paid
workers. Section III evaluates the determinants
of job satisfaction for low and high paid workers
separately. Section IV concludes.
II. Data and Raw Evidence on Job Satisfaction
between Low and Higher Paid Workers
In this paper we use three waves (1997–1999) of the
European Community Household Panel (ECHP)
for Portugal. This is a rich data set, which includes
information about the individuals and their families,
such as gender, education, age, wages and other
income sources, marital status, health status, family
size and social relations, among others. It also
includes information on variables such as the type
of employment contract, employer size and the
number of hours of work in the main activity. With
respect to job satisfaction individuals were asked to
report on a six-point scale how satisfied they were
with their work or main activity. The lowest level of
the scale denotes workers who were not satisfied at all
whereas the highest denotes fully satisfied workers.
Hourly wages were computed as monthly wages
divided by the number of hours worked per month.
As usual in the literature, a low-wage worker is
defined as an individual who earns less than two
thirds of the median hourly wage. Individuals over
65 years, the self-employed and observations with
missing values were deleted from the sample. The
final unbalanced panel contains 12 247 observations
gathered from 5347 individuals.
The table in the appendix presents some sample
descriptive statistics. As we can observe, 13.4% of
the workers in the sample fall into the low pay seg-
ment. Moreover, more than 50% of the low-paid
workers are females and the low-wage group is nearly
two years younger than their higher-wage counter-
parts.Theincidence of
decreases with the level of education and with the
employer’s size. Finally, the share of public sector
workers is much lower in the low wage group (nearly
3%) than among the higher paid group (27%),
indicating that low-wage employment is mainly
concentrated in the private sector.
The information depicted in Fig. 1 indicates that
the mode of the sample is located at level of satisfac-
tion 3, which is valid for both low-wage and higher-
wage workers. However, the same figure indicates
that the proportion of workers reporting one of the
three lowest levels of satisfaction is higher among the
low-paid group. The reverse occurs for the propor-
tion of workers reporting one of the three highest
levels of satisfaction. Thus, low-paid workers are,
overall, unhappier with their work. The same conclu-
sion holds when we pool the sample or when we split
the sample by years (see Figs 2–4).
Indeed, the information included in Table 1 clearly
indicates that the mean value of job satisfaction is
higher in the higher-wage segment. Moreover, the
differences in the mean values of these two types of
workers are statistically different from zero at the
1% level of significance. Contrary to what has been
reported for the British labour market, this finding is
inconsistent with the notion that low paid workers
are compensated with non-pecuniary benefits. It is,
however, consistent with the existence of a two-tier
labour market.
low-wageemployment
506 J. C. Vieira et al.

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III. The Determinants of Job Satisfaction
This section examines the determinants of job
satisfaction for low paid jobs and for higher
paid jobs separately. As we noted in the previous
section, the level of satisfaction is reported on a six-
point ordinal scale. Furthermore, the panel nature
of the data enables us to control for individual
unobserved heterogeneity. We explore this interesting
feature of the data since one may suspect that some
levels of satisfaction are likely to be recorded because
of some underlying unobserved characteristics such
as the emotional state or mood, which may vary
across individuals. Because of this, we chose a
random ordered probit model to carry our empirical
work.
Table 1. t-Tests for the equality of means on reported job satisfaction between low and higher paid workers
Mean Std. dev.N DFt-statisticp-value
(1) Pooled sample
Higher pay
Low pay
(2) Year¼1997
Higher pay
Low pay
(3) Year¼1998
Higher pay
Low pay
(4) Year¼1999
Higher pay
Low pay
3.073
2.666
0.846
0.975
10605
1642
2041 16.010.00
2.990
2.540
0.861
0.993
3364
554
69710.060.00
3.103
2.768
0.850
0.968
3626
521
641 7.51 0.00
3.121
2.697
0.823
0.953
3615
567
70510.030.00
0
10
20
30
40
50
60
012345
Level of satisfaction
%
higher pay
low pay
Fig. 3. Distribution of job satisfaction (1998)
0
10
20
30
40
50
60
70
012345
Level of satisfaction
%
higher pay
low pay
Fig. 1. Distribution of job satisfaction (pooled sample)
0
10
20
30
40
50
60
012345
Level of satisfaction
%
higher pay
low pay
Fig. 2. Distribution of job satisfaction (1997)
0
10
20
30
40
50
60
70
012345
Level of satisfaction
%
higher pay
low pay
Fig. 4. Distribution of job satisfaction (1999)
Low pay, higher pay and job quality 507

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We assume that the propensity of individual i to
report a certain level of satisfaction in period t is
driven by the following structure:
S?
it¼ ?0Xitþ vit
where vit¼"itþui, varðvitÞ ¼ ?2
? ¼ ?2
We assume that "it is distributed N(0,1) and
that the individual time-invariant specific term uiis
N(0,?u).
Note that we do not observe S?
instead an indicator variable of the type:
8
>:
The log-likelihood function reads:
i ¼ 1,...,Nt ¼ 1,...,6
"þ ?2
ð1Þ
u¼ 1 þ ?2
u and
u=ð1 þ ?2
uÞ.
it but observe
Sit¼
0if S?
if ?j?1< S?
if S?
it> ?4
it? ?0
j
it? ?j,j ¼ 1,2,3,4
5
><
ð2Þ
Log L ¼
X
N
i¼1
logPðSi1,...,SiTÞð3Þ
Defining ait¼?j?1??0Xit and bit¼?j??0Xit we
can write Equation 3 as follows:
PðSi1,...,SiTÞ
Zbi1
ai1
Zbi1
ai1
Zþ1
?1
where ? and ? denote the probability distribution
function and the cumulative distribution function of
the normal distribution, respectively.
Therefore, the log-likelihood for this model can be
generalized from the arguments made by Butler and
Moffit (1982). Heterogeneity is handled by using the
Gauss–Hermite quadrature to integrate out the joint
density. As usual in the ordered probit model, we
assume that ?0¼0. All estimations were performed
using the statistical package Limdep 8.0.
In order to identify the determinants of job satis-
faction we relied on available evidence on the issue,
which suggests that wages are important but do not
explain the whole variation in reported levels of
job satisfaction. For instance, Clark (1996) finds
that after controlling for wages and for a large set
of other covariates, females are happier at work than
males. Moreover, it has been found that reported
¼
...
ZbiT
aiT
ZbiT
aiT
?ðvi1,...,viTÞdvi1...dviT
¼
...
Zþ1
?1
Y
?ð"itjuiÞ?ðuiÞduid"iT...d"i1
¼
?ðuiÞ
T
t¼1
?ðbitjuiÞ ? ?ðaitjuiÞ½?dui
ð4Þ
satisfaction depends on variables such as the age of
the worker, comparison wage rates, level of educa-
tion, employer size, industry, union membership
status, region, health status, type of employment
contract, hours of work and educational mismat-
ches, among others (Borjas, 1979; Miller, 1990;
Meng, 1990; Idson, 1990; Clark, 1996, 1997; Clark
and Oswald, 1996; Leontaridi and Sloane, 2001;
Sousa-Poza and Sousa-Poza, 2000; Sloane and
William, 2000; Jones and Sloane, 2003). For the pur-
pose of this work, we use as explanatory variables the
logarithm of hourly wages, logarithm of hours
worked, the individual’s age and its square value.
Furthermore, we also control for gender, education,
marital status, health status, job–worker skill mis-
matches, type of contract, private versus public sec-
tor, employer size, occupations, regions, and whether
the employer provides health care and subsidized
housing.
The estimation results are presented in Table 2. As
in most of the literature, job satisfaction follows a
U-shaped pattern with age. We find however, no sig-
nificant effect for education and gender, which differs
substantially from reports presented in the interna-
tional literature. The fact of being overskilled has
a negative impact on satisfaction for both high and
low paid workers (the reverse is valid for having a
permanent contract which increases satisfaction).
Hourly wages, working in the public sector, and
working full time exert a positive, statistically signi-
ficant, impact on satisfaction for higher-paid work-
ers, while are not statistically different from zero for
low-paid workers. The same holds for the provision
of health care and for subsidized housing by the
employer.
IV. Conclusions and Remarks
This paper examines the relation between low-wage
employment and job quality. We find support for the
European Commission concern that low pay jobs are
inherently of low quality, at least in Portugal.
Our results are at odds with empirical evidence
recently reported for the British labour market.
However, our results are consistent with the existence
of good and bad jobs, as in dual labour markets,
where some workers are involuntarily trapped in
bad jobs (i.e. low-wage) segment.
Furthermore, a regression analysis which controls
for unobserved heterogeneity reveals that the impact
on satisfaction of variables such as hourly wages
and the provision of fringe benefits by the employer,
like subsidized housing and health care, differ
across low-paid and higher-paid segments of the
508J. C. Vieira et al.

Page 5

labour market. This means that the determinants of
job satisfaction differ across the two segments.
The results also suggest that empirical evidence
on job quality can hardly be generalized across the
European labour markets. This is particularly impor-
tant for policy making at the European Union level.
Such a heterogeneity means that if in some countries
removing low employment, namely through regula-
tion, may worsen the workers’ well-being, in other
cases such a policy may lead to a totally different
outcome.
Acknowledgments
The first author is indebted to Instituto Nacional
de Estatı´stica (INE) for providing access to the
European Community Household Panel (ECHP).
Financial support from the Portuguese Science
Table 2. Ordered probit random effects estimation
Higher payLow pay
Coeff.Std. errorCoeff.Std. error
Constant
Log hourly wage
Log hours
Age
Age squared/100
Gender(male)
Education>secondary
Overskilled
Married
Good health
Health care provided by employer
Permanent contract
Employer provides subsidized housing
Full time job
Public sector
Workplace size 5–19
Workplace size 20–49
Workplace size 50–99
Workplace size 100 plus
Services
Professionals
Technicians
Clerks
Service workers and salers
Agriculture and fishing
Craft and related trades workers
Plant and machine operators
Elementary occupations
Madeira
Norte
Centro
Lisboa e Vale do Tejo
Alentejo
Algarve
Year¼1998
Year¼1999
?1
?2
?3
?4
Sigma
Log-L
Chi-squared
N
?3.731
0.651
0.673
?0.033
0.035
?0.044
0.021
?0.129
0.010
0.054
0.090
0.317
0.180
0.370
0.297
0.055
0.058
0.130
0.174
0.078
0.016
0.039
?0.128
?0.047
?0.404
?0.257
?0.159
?0.442
?0.520
?0.691
?0.860
?0.702
?0.763
?0.561
0.178
0.138
0.828
1.986
4.380
6.016
0.920
0.670*
0.048*
0.107*
0.009*
0.010*
0.037
0.047
0.030*
0.036
0.031***
0.041**
0.037*
0.080**
0.107*
0.041*
0.041
0.049
0.055**
0.052*
0.040**
0.129
0.131
0.132
0.133
0.158**
0.133***
0.134
0.134*
0.099*
0.063*
0.062*
0.062*
0.071*
0.068*
0.030*
0.030*
0.040*
0.045*
0.049*
0.058*
0.020*
?1.570
0.207
0.742
?0.050
0.061
?0.074
0.005
?0.353
0.120
0.073
0.273
0.322
?0.015
0.088
0.027
?0.005
?0.125
?0.294
0.280
0.236
0.741
0.754
0.538
0.421
0.236
0.496
0.275
0.056
?0.610
?0.593
?0.532
?0.661
?0.364
?0.365
0.322
0.214
1.198
2.473
4.724
5.539
0.969
?2023
108
1642
1.487
0.130
0.200*
0.020**
0.024*
0.109
0.157
0.084*
0.099
0.092
0.219
0.083*
0.264
0.213
0.253
0.094
0.162
0.190
0.264
0.123***
0.758
0.818
0.690
0.644
0.657
0.652
0.669
0.646
0.254**
0.161*
0.139*
0.149*
0.161**
0.150**
0.081*
0.084**
0.100*
0.115*
0.154*
0.177*
0.066*
?11216
1177
10605
Notes: *Significant at the 1% level, **Significant at the 5% level, ***Significant at the 10% level.
Low pay, higher pay and job quality509