National Minimum Wage

National Minimum Wage
Project title and
researchers
The Impact of the
Minimum Wage
Regime on the
Labour Market
Choices of Young
People
Claire Crawford,
Ellen Greaves,
Wenchao Jin
(Institute for Fiscal
Studies), Joanna
Swaffield (University
of York) and Anna
Vignoles (Institute of
Education)
An Examination
of the Trends in
Earnings Growth for
Young Workers
Laura James, Anna
Mayhew and Louisa
Withers (Incomes
Data Services (IDS))
168
Aims and methodology Key findings and results
The aim of this report was to provide evidence on
the impact of local labour market conditions and the
NMW on the education and labour market choices of
young people in the UK. The researchers drew together
five strands of evidence using LFS, ASHE and the
Longitudinal Study of Young People in England.
First, they provided a detailed picture of how education
participation, employment, earnings and hours have
changed among young people aged 16-17 and 18-21
over the last 10 years but with a particular focus on
the more recent period that included the 2008-2009
recession.
Second, building on previous work by De Coulon,
Meschi, Swaffield, Vignoles and Wadsworth (2010), they
investigated the role of local wage and unemployment
rates in determining the labour market outcomes of 16-
18 year olds, including the proportion not in education,
employment or training (NEET). They looked at how the
results varied by age, region, sector and other individual
background characteristics.
Third, they assessed the impact of the introduction of
the 16-17 Year Old Rate on these outcomes using a DID
methodology and spatial analysis, taking advantage of
the geographical pay variation.
Fourth, they studied the impact of the entitlement to the
Youth Development Rate among 18 year olds using a
regression discontinuity approach, similar to that used
by Dickens, Riley and Wilkinson (2010). They also looked
at whether the impact changed during the recession.
Finally, they looked at the impact of changing the age of
entitlement to the adult rate from 22 to 21. They used
DID techniques to compare outcomes with 20 year olds
over time.
In our 2011 Report, we noted that the median earnings
for young workers increased more slowly in the period
2007-2010 than those for adults, compared to the
previous period from 1999-2006 when the earnings of
young people and adults grew more or less in line.
This IDS report explored the possible reasons behind
these recent trends in earnings growth by providing
examples of company practice from its monitoring
of pay.
IDS examined pay practice in a range of private sector
organisations drawn largely from the retail and fast
food, pubs and restaurant sectors.
It examined different employer approaches to the pay
of young workers and whether changes to pay differed
between young and older workers.
As possible explanations for the slower pay growth
among young workers, it looked at differentiated pay
rises for young workers; the introduction of youth rates;
pay cuts; changes to progression arrangements; and the
influence of company performance on pay strategy.
It also investigated youth rates in retail and hospitality;
the gaps between company rates and the relevant
NMW minima; and the movements in these differentials
over time.
They noted that the proportion of all young people going
into full-time education had increased substantially
since 2000. The proportion of 16-17 year olds in
work had fallen by about the same amount but the
proportions of 18-20 year olds in work had fallen more.
NEET rates had therefore risen for 18-20 year olds but
not for 16-17 year olds.
The research generally confirmed the findings of
previous work, that a young person’s academic ability
and family background were the most important
determinants of their education and labour market
participation decisions rather than the role of local
labour market conditions.
In terms of the impact of the minimum wage specifically,
the research found little evidence that it affected the
main activity choices made by young people, although it
did seem to play some role in their decision of whether
or not to work while in full-time education.
They also found that extending the adult rate of the
minimum wage to 21 year olds had no significant effect
on the education or employment choices of 21 year olds
compared with 20 year olds.
They concluded that there was little evidence that the
NMW regime had drawn young people out of education
and into the labour market, or that it had adversely
affected their employment chances.
The researchers found that the picture was complex.
There were different interactions between firms’ pay
policy decisions and the youth labour market during
recession. IDS concluded that the recession may have
simultaneously had upward and downward pressures on
pay for young workers. More specifically, they found:
●● Typically employers pay young people above the
youth rates of the minimum wage and therefore
have some ‘headroom’ to give small pay rises (or
cut pay rates for new entrants) while still complying
with NMW regulations. Some organisations had
only raised rates for workers directly affected by the
NMW, with no increases for young workers above
the relevant statutory minimum.
●● Two contrasting trends existed side by side: some
companies had increased youth pay more slowly than
for adults, while some had sought to narrow (or close)
the gap between youth rates and the adult rate.
●● Similarly, while some companies had introduced
youth rates in recent years, others had abolished
them altogether or reduced the number of youth
rates.
●● Sector was important. There appeared clear
differences between retail and hospitality,
as well as within sectors. IDS found a clear
distinction between the pay strategies adopted by
supermarkets and non-food retailers. There was a
clear link between company performance during the
recession and recovery and approaches to pay.