Escaping low pay: do male labour market entrants stand a chance?

The purpose of this paper is to investigate the extent and the human‐capital determinants of low‐wage mobility for labour market entrants in the UK and Germany.

Using panel data for the UK (BHPS) and Germany (GSOEP), a competing‐risks duration model is applied that allows the study of transitions from low pay to competing destination states: higher pay, self‐employment, unemployment and inactivity. Unobserved heterogeneity is tackled by a non‐parametric mass‐point approach.

It is found that low pay is only a temporary state for most young job starters. However, there is a small group of job starters that is caught in a trap of low pay, unemployment or inactivity. In the UK, job starters escape from low pay mainly by developing firm‐specific skills. In Germany, involvement in formal vocational training and the attainment of apprenticeship qualifications account for low pay exits.

Over the past decades, unemployment and low‐wage employment have emerged as major challenges facing young labour market entrants. While most empirical studies focus exclusively on the transition from low pay to high pay, the paper shows that a significant percentage of young entrants are caught in a low‐pay‐non‐employment trap. Moreover, it is shown that, depending on the institutional context, different types of human capital investments can account for a successful low‐pay exit.