National Minimum Wage

Table A2.1: Low Pay Commission Research Projects for the 2012 Report
Project title and
researchers
The Impact of the
National Minimum
Wage on the Wage
Distribution
Tim Butcher (Low Pay
Commission), Richard
Dickens (University
of Sussex) and Alan
Manning (London
School of Economics
(LSE))
Re-examining
the Impact of the
National Minimum
Wage on Earnings,
Employment
and Hours: the
Importance of
Recession and Firm
Size
Richard Dickens
(University of Sussex),
Rebecca Riley and
David Wilkinson
(National Institute of
Economic and Social
Research (NIESR))
Appendix 2: Low Pay Commission Research
Aims and methodology Key findings and results
After almost two decades of rising wage inequality,
the wages for the bottom quintile of workers have
been catching up with the median since the late 1990s.
While it is tempting to assign this to the minimum
wage, evidence suggests that only about 5 per cent
of employees are directly affected by the National
Minimum Wage (NMW). The researchers hypothesised
that the falls in hourly wage inequality in the bottom
half of the distribution were a combination of the direct
impact of the NMW, plus a spill-over effect whereby
wages further up the distribution were raised to restore
some of the pay differential.
Building on previous research (Butcher, Dickens and
Manning, 2009) they extended this analysis further. They
constructed area-level panel data using both the Annual
Survey of Hours and Earnings (ASHE) and Labour Force
Survey (LFS) in order to examine spill-over effects across
areas that were differentially affected by the minimum
wage.
In addition, they utilised New Earnings Survey (NES)
data from the 1990s, a period before the introduction
of the minimum wage, in order to carry out robustness
checks.
The aims of the report were to re-examine the earnings,
employment and hours impacts of the NMW and shed
light on two issues:
●● What has been the impact of the NMW on the
earnings of low-paid workers and on the demand
for low-paid workers during recession and was this
different from its impact during periods of strong
economic growth?
●● Has the NMW affected differently low-paid jobs in
small, medium and large size firms?
They used standard difference-in-difference (DID)
estimators to examine the labour market impacts of
the NMW.
They used LFS and NES Microdata to analyse the impact
of the NMW on employment retention, changes in
hours worked, and wage growth, distinguishing NMW
‘treatment’ effects by firm size and by time.
To study whether the impact of the NMW depends on
the general state of the economy they examined NMW
labour market impacts over time using both individual
and spatial (local area) data.
They also conducted sensitivity analysis that included
varying the control groups, differencing groups and time
periods, outcome measures, and data sources.
They examined the NMW impacts for adult workers
by gender and by full-time/part-time status. They were
unable to examine young workers due to sample size
restrictions.
Key findings included the following:
●● The NMW was introduced 12 years ago and, at
about the same time, wage inequality at the bottom
of the earnings distribution started to fall, having
risen over the preceding 20 years. The falls relative
to the median went up to the 25th percentile.
●● The direct effect of the minimum wage had not
been enough to explain the observed fall in wage
inequality. However, allowing for modest spill-over
effects, their model fitted the decline in inequality
at the bottom of the labour market reasonably well.
●● They found that the direct effect was largest at the
bottom percentile, raising wages by nearly 30 per
cent. This effect rapidly declined and only reached
up to the 6th percentile. The spill-over effects were
largest at the 6th percentile, raising wages by about
7 per cent more than in the absence of the minimum
wage, and stretched further up the pay distribution.
●● For women, the spill-over effect was greater and
reached further up the distribution.
●● They also found that areas most affected by the
minimum wage, the lowest-paying areas, had the
largest spill-overs with effects evident up to the 25th percentile.
They concluded that spill-over effects may be larger
than previously thought and were much greater than any
purely direct effect.
They found a positive effect of the NMW on wage
growth for all groups considered, which was particularly
large upon introduction. They also found some evidence
that differentials had to some extent been restored
during the recession.
Using NES they found a small negative effect of the
NMW on annual employment retention for low-paid
female part-time workers, associated mainly with
introduction and more recent years. This effect was
not evident using the LFS. They generally found little
evidence to suggest that the NMW had changed
employment retention for full-time workers.
Some evidence suggested that the NMW may have
been associated with a small reduction in weekly hours
for female full-time workers during recession.
The adverse effects of the NMW on employment
retention for female part-time workers tended to be
more significant on average among workers in large
firms. However, the adverse effect on hours worked did
not appear related to firm size.
Their spatial analysis of the impact of the NMW
suggested that it had raised the wages of those at the
bottom of the distribution relative to those higher up.
This had resulted in a fall in inequality in the bottom half
of the wage distribution. In terms of employment and
unemployment outcomes, they found no strong evidence
that the NMW had a harmful effect on individuals’
labour market positions.
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