National Minimum Wage

Project title and
researchers
The Spatial Analysis
of the Employment
Effect of the
Minimum Wage in a
Recession: The Case
of the UK 1999-2010
Peter Dolton
(University of Sussex
and Centre for
Economic Performance,
LSE), Chiara Rosazza
Bondibene (NIESR)
and Michael
Stops (Institut für
Arbeitsmarkt- und
Berufsforschung,
Nurnberg).
Further Investigation
into the Relationship
Between
Productivity,
Earnings and Age in
the Early Years of a
Working Life
Andy Dickerson
and Steve McIntosh
(University of Sheffield)
Appendix 2: Low Pay Commission Research
Aims and methodology Key findings and results
This project assessed the impact of the NMW on
employment in the UK during the period 1999-2010,
with particular emphasis on the effects of the recent
recession, which they defined as covering the period,
2008-2010.
It extended the incremental difference-in-difference
approach used in previous work by Dolton, Rosazza
Bondibene and Wadsworth (2009) to estimate the effect
of the NMW and its uprating on employment. It made
use of the variation of the bite across local labour
markets. The research used ASHE and LFS data to
explore the employment effects.
The authors relaxed their earlier assumption of
independent local labour markets to take account of the
interconnectedness of the different local labour markets
and to explore location spill-over effects.
They noted that much previous work examining the
effect of the NMW on employment had ignored
potential identification problems associated with netting
out the effect of changes in the aggregate economy.
They attempted to solve this problem by using
geographically varying information from gross value
added as an instrumental variable for aggregate demand
at the regional level. Regional gross value added was
used to measure the onset, severity and duration of the
recession in different locations.
Various robustness checks were also carried out,
including different definitions of geography.
This research examined the relationship between age,
wages and productivity. It was an extension to the work
undertaken for our 2011 Report, which had estimated
wage and productivity equations for 1996-2007.
Our 2011 Report noted that between 1999 and 2007,
wages of different age groups had generally grown in
line with each other. Since 2007, the wages of young
workers have grown more slowly than those of older
workers. This research extended their earlier research to
cover the period up to 2010.
They estimated sectoral productivity and wage
equations using Annual Business Inquiry/Survey data
combined with ASHE data for 2003-2010. They created
a dataset consisting of 114 industrial sectors based on
the 2007 SIC.
Productivity was measured using gross value added.
The estimated equations included net capital
expenditure and workforce composition variables,
including age.
Fixed effects equations were estimated to control
for unobservable characteristics that might affect
productivity or age.
Their focus was on examining the wage and productivity
relativities between workers of different ages before
and after the recession. They compared the period
2003-2007 with 2008-2010.
They also investigated low-paying sectors separately.
The main conclusions from the study were:
●● There were very small positive or zero incremental
employment effects of NMW upratings in a year-onyear
context.
●● The years where there were small positive effects
were 2003, 2004, 2005 and 2006 – years when
the NMW increases exceeded the increase in RPI
inflation and were therefore relatively generous.
●● The underlying effect of the presence of the NMW
is captured in the Kaitz Index coefficient. This nearly
always had a negative and significant effect on
employment.
●● The authors suggest that the underlying negative
effect on employment they found was due to the
presence of the NMW rather than its uprating.
●● The positive employment effects of the latter offset
the underlying negative effects – especially when
upratings exceeded RPI inflation.
Their conclusions were robust to different
methodologies and different definitions of geographies.
These results, extending the study period up to 2010,
suggested that the slow growth of wages among young
workers since 2007 was due to slower wage growth in
youth-dominated sectors rather than within industries,
where they found that wage differentials between age
groups had actually narrowed in the recession period.
Therefore, an increase in the proportion of prime-aged
workers (those in their 30s and 40s) relative to young
workers within a sector had a smaller positive effect
on average wages in that sector, compared with the
pre-recession period.
The positive productivity growth differential in favour
of young workers observed pre-recession had however
reversed, so that prime-aged workers were associated
with relatively higher productivity growth in the postrecession
period.
Their finding that the productivity of prime-aged workers
increased relative to younger workers was stronger
when the sample was restricted to the low-paying
sectors.
They also found that there was a large fall in net capital
expenditure in the recession period compared with
before.
They concluded that their results suggested that the
wages of younger workers may have increased relatively
more than their productivity compared with prime-aged
workers in the period since the onset of recession.
This contrasted with the finding in their earlier study
that relative productivity growth had been stronger for
younger workers in the period 1999-2007.
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