The UK’s national minimum wage has resulted in a boost in pay for those at
the bottom end of the pay distribution without any adverse effects on
aggregate employment or inflation. Writing in the March 2004 issue of the
Economic Journal, Professor David Metcalf indicates that this is a major
reason why the Low Pay Commission (of which he is a member) is confident
in recommending a gradual ratcheting-up in its real value.
Britain’s first-ever national minimum wage came into force in April 1999. The
adult hourly rate was £3.60 with a slightly lower rate for those aged 18-21.
Coverage was 1.2 million employees.
Between 1999 and 2002, the minimum wage rose roughly in line with average
earnings. But in 2003 and 2004, the hike in the minimum has been double the
predicted rise in average earnings, with the adult rate now standing at £4.85
an hour. What’s more, the Low Pay Commission has recommended that,
subject to economic conditions, the minimum wage should rise faster than
average earnings in 2005 and 2006.
Both the introduction and upratings of the minimum wage permit quasiexperimental
research into its effects. Four papers published in the March
Economic Journal adopt such a method to inform us about major issues – the
effect on the wage distribution, employment and training:
· Between 1998 and 2002, the bottom 10% of the pay distribution
experienced pay rises well above average (with the effect tapering from
a large boost for the bottom percentile down to a similar to average
increase at the 11th percentile), but without leading to wage increases
further up the distribution via ‘spillover effects’.
· This impact of the minimum wage on the overall pay distribution is
confirmed in care homes, the lowest paying sector of the UK labour
market. Before the introduction of the minimum wage, 40% of care
home workers were paid below £3.60; virtually all were paid £3.60 or
more after the minimum wage was introduced.
· Evidence from care homes also confirms the lack of spillover effects
further up the pay distribution. This is a double-edged result. It implies
that the minimum wage had a modest impact on wage inequality. On
the other hand, any inflationary consequences are also limited, with a
more benign effect on interest rates than would have occurred if there
had been wage spillovers much further up the distribution.
· Employment changes arising from the introduction and upratings of the
minimum wage have been studied intensively: in aggregate; by
industry and age shares; by individual characteristics; by region; and in
the low paying care home sector. The evidence suggests no overall
employment effect of the minimum wage but a small negative impact in
the care homes sector.
· Analysis of the 2000 and 2001 upratings in female-intensive sectors of
employment, such as retail, cleaners, child care workers and care
assistants indicates no adverse employment effects.
· The minimum wage has had an effect on the incidence and extent of
training but not the expected one of causing them to fall. The
probability of training incidence and the intensity of training have in fact
increased by 8-11 percentage points for affected workers. Like the lack
of overall employment effects, this finding suggests that the competitive
model may not be a complete description of the low paid labour
market.
Academic research findings like these have been, and continue to be, the vital
input in helping the Low Pay Commission to decide what rates to recommend
in future. Such constructive interactions between the academic community
and policy-makers are a key ingredient in the successful introduction of the
national minimum wage in the UK.
ENDS
Notes for Editors: ‘The Impact of the National Minimum Wage on the Pay
Distribution, Employment and Training’ by David Metcalf is published in the
March 2004 issue of the Economic Journal.
David Metcalf is Professor of Industrial Relations at the London School of
Economics and a member of the Low Pay Commission.
For Further Information: contact David Metcalf on 020-7955-7027 (email:
d.metcalf@lse.ac.uk); or RES Media Consultant Romesh Vaitilingam on 0117-
983-9770 or 07768-661095 (email: romesh@compuserve.com).