National Minimum Wage

National Minimum Wage
Project title and
researchers
The Impact of the
National Minimum
Wage on Earnings,
Employment and
Hours Through the
Recession
Mark Bryan, Andrea
Salvatori and Mark
Taylor (Institute for
Social and Economic
Research, University of
Essex)
Econometric
Modelling of Pay
Settlements and
Earnings by Industry
1977-2011
Peter Dolton
(University of
Sussex and Centre
for Economic
Performance, LSE),
Gerry Makepeace
(Cardiff University) and
Andrew Tremayne
(University of New
South Wales)
166
Aims and methodology Key findings and results
The project aimed to address three main areas:
1. the effect of the minimum wage on employment and
hours;
2. the effect of the minimum wage on earnings; and
3. the effect of the minimum wage on entry to
employment.
The analysis built on previous work by Dickens, Riley
and Wilkinson (2009) and Stewart (2004a). It used DID
methods similar to previous studies of the impacts
of the NMW. The DID method involved comparing
outcomes for a treatment group of individuals that
was directly affected by the NMW with those for a
control group of similar individuals earning just above
the NMW. Using two variants of the DID method, they
examined:
(i) changes over time in the outcomes of the treatment
and control group (horizontal DID); and
(ii) differences between the treatment and control
groups with respect to two additional groups further
up the wage distribution (vertical DID).
The two methods embodied different assumptions about
the effects of macroeconomic trends on the treatment
and control groups, and provided a sensitivity check on
these assumptions.
The research covered adults (those aged 22 and over)
and youths (those aged 18-21) and used the periods
2003-2007 and 2008-2010 to discern recessionary
effects.
They used their results from this first part to address the
impact on earnings.
This project extended their previous analysis (Dolton,
Lin, Makepeace, and Tremayne 2011) that had
looked at how recessions affected the distribution
of pay settlements and earnings. The period under
consideration was extended from 2009 to 2011 and used
quarterly data as well as annual data.
Raw data on settlements from the CBI, Incomes Data
Services (IDS) and XpertHR were merged with data
from the LFS and relevant Office for National Statistics
aggregates to create a data set covering the period from
1977-2011. This was then disaggregated by industry
(splitting the data into 14 and 28 industry groupings).
The forces that drive pay settlements were examined:
productivity changes; the state of the labour market; and
the extent and effectiveness of trade union activity and
bargaining with management.
They used a modified Panel Instrumental Variable
estimation method to assess the dynamic relationships
between the variables.
The findings were subjected to a number of robustness
checks including different estimation methods; levels of
industrial disaggregation; and definitions of recession.
They also looked at the dynamic structure of key
variables and restricted their analysis to using just one
settlement series.
The findings showed little evidence of NMW upratings
adversely affecting employment retention either before
or during the recession.
There was some evidence of upratings having a
negative impact on hours, particularly among young
workers. They found that hours were reduced by 3-4
a week. There was some evidence of the impact on
hours being greater during the recession than it was
previously. It should be noted that these results for
young workers were based on relatively small samples.
The effect of upratings on the weekly earnings of
minimum wage workers depended on the extent to
which the magnitude of the uprating was offset by
any negative effect of the NMW on hours. The impact
was greatest for young workers who may have seen
reductions in weekly income.
The NMW was found to have had no impact on the jobfinding
probabilities of unemployed adults in any year.
They concluded that there was little evidence that the
recession had increased the sensitivity of employment
or hours to the NMW but that their results added to
existing evidence that the minimum wage may have
adversely affected hours. They believed that hours
should be the focus of future research.
The main estimation results from this project were:
●● The effect of the NMW on wage settlement levels
was not statistically different from zero. This
contrasted with the significant positive finding in
their previous research.
●● The driving force of settlement levels was the past
level of settlements. This finding demonstrated
the importance of the dynamic modelling of the
settlements process.
●● The macro variables had a strong and consistent
effect on settlements.
●● There was a negative effect of unemployment
on wage settlements. This was consistent with
previous literature on the Phillips Curve and the
Wage Curve.
●● Counter to earlier findings (in the previous year’s
report by the authors) the effect of growth on pay
settlements was not counterintuitive and now
appeared to be positive but of variable impact when
the dynamic structure was taken into account.
●● There was a clear positive effect of price inflation
on wage settlements. This result was unsurprising
given the importance of inflation in current and
previous time periods in wage negotiations.
Their estimation was subjected to extensive robustness
checks but the results generally remained unchanged,
although weighting the data by number of employees
did make some differences to their conclusions.