National Minimum Wage

Research on Earnings and Pay
Chapter 2: The Impact of the National Minimum Wage
2.57 We have commissioned many research studies over the years that have investigated the pay
setting behaviour of employers. Much of that research has been conducted by IDS using its
database on pay settlements augmented by a series of surveys of low-paying sector
employers. IDS (2011a) summarised this research. It concluded that there had been three
phases of changed firm behaviour as a result of the minimum wage. Prior to the introduction
of the minimum wage, many employers had anticipated its introduction and had already
begun making changes to their pay structures. Many employers reduced the number of pay
rates across geography and occupation. This limited the adjustments that needed to be made
when the NMW was introduced.
2.58 Employers in the low-paying sectors increasingly adopted the minimum wage as the lowest
wage rate and squeezed differentials between starter rates and established rates during the
period of relatively high minimum wage increases between 2001 and 2006. Throughout that
period, employers also removed allowances and premia (such as unsocial hours payments,
overtime, shift premia and bonuses), particularly for new workers, as a way of absorbing
increased wage costs. Non-wage benefits, such as holiday entitlement, pension provision,
perks and staff discounts were also made less generous. These findings generally confirmed
those of earlier studies of employer behaviour, such as Grimshaw and Carroll (2002) and
Cronin and Thewlis (2004). In the years covering the recession and when minimum wage
increases had been more moderate, 2007-2010, IDS (2011a) found evidence of some
restoration of differentials and a widening in the gap between the lowest pay rates and the
minimum wage in some, mainly large retailing, employers.
2.59 Econometric analysis has also been conducted to assess the impact of the minimum wage
on earnings. It has chiefly looked at whether the minimum wage affects the wages of those
paid above the minimum wage. These effects are known in the literature as spill-over effects.
In the most comprehensive econometric study of spill-over effects conducted so far, covering
the period up to 2007, Stewart (2009) explored three different methods to identify whether
the minimum wage affected wages higher up the earnings distribution. His analysis of
individual wage changes found little evidence of any effects. However, he found some
evidence of more significant spill-overs when estimating wage distribution functions or using
wage quantile regression analysis. He noted, however, that his findings were sensitive to the
assumptions about how wages changed in the absence of a minimum wage (or a minimum
wage increase). He concluded that spill-over effects were generally small and limited,
typically reaching no further up the earnings distribution than the 5th percentile.
2.60 Using both individual and spatial data, Dickens, Riley and Wilkinson (2012) investigated the
impact of the minimum wage on the earnings distribution. In their analysis of individuals
using data from 1994-2010, they found that the minimum wage had led to significantly
higher wage growth for low-paid workers and that this effect was particularly large upon
introduction. They also found that wage differentials between minimum wage workers and
those paid just above the NMW were restored somewhat during the recent recession years
(2008-2010). Their spatial analysis found a large effect of the minimum wage on pay
inequality across areas, as the minimum wage compressed wages at the bottom of the
distribution, particularly in the period before the recession. Those areas with the lowest
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