Minimum Wage

THE NATIONAL MINIMUM WAGE: A SUCCESS STORY

The UK’s National Minimum Wage has been instrumental in reducing the pay gap between the low and high paid.

While it only directly raised the pay of 5% of workers, ‘spillover’ effects on wages above the minimum mean that up to 25% of workers benefited from the minimum wage.

The National Minimum Wage is responsible for almost a half of the fall in the wage gap between the lowest paid and the average worker in the UK over the past decade.

These are among the findings of research by Richard Dickens and colleagues, presented at the Royal Economic Society’s 2013 annual conference. They conclude:

‘Given there is little evidence of any job loss associated with the minimum wage, we believe this makes it one of the most successful labour market policies of recent times.’

When the National Minimum Wage was introduced in the UK in 1999, many thought it had been set too low to make any real difference to the relative wages of the low paid since it only directly affected 5% of workers. This research shows that the minimum wage has in fact been a very successful policy resulting in a substantial fall in the pay gap between the rich and poor in the UK.

The impact of the minimum wage has gone way beyond the bottom 5% of workers, with up to 25% of workers benefiting from pay increases. The study presents evidence for wage ‘spillovers’, whereby the wages of those above the minimum wage are also pushed up.

These spillovers explain why the minimum wage has had more far reaching effects beyond those directly affected workers – with effects extending to 40% above the minimum. As a consequence, the minimum wage is responsible for almost a half of the fall in the wage gap between the lowest paid and the average worker in the UK over the past decade.

In the 1980s and 1990s, the pay gap between the low and high paid increased sharply in the UK. In 1999 as part of a package of reforms to ‘make work pay’ the government introduced the country’s first National Minimum Wage.

Since its introduction, pay gaps have fallen for low paid workers relative to the median or average worker. This fall has occurred all the way up to the 25th percentile wage – that is, the bottom 25% of workers have experienced pay increases relative to the average worker.

Here lies a paradox. If the minimum wage only directly affects the pay of 5% of workers, how can it be responsible for raising the pay of up to 25% of workers?

The researchers believe that wage ‘spillovers’ provide the answer. Here the minimum wage has a direct effect on pay by raising the wages of those who would otherwise have been paid below the minimum. But it also has an indirect effect on the wages of those workers whose pay is somewhat above the minimum rate.

The researchers present a theoretical model of employment where firms are competing with each other for available workers and in which the implementation of a minimum wage can result in wage spillovers.

They then examine the evidence for spillovers by splitting the labour market into segments; women/men, young/old and low paid and high paid regions. They show that the decline in pay inequality since the late 1990s has been most marked in the low wage segments of the workforce.

Using insights from the theoretical model, the researchers present direct evidence of spillover effects on wages. They show that the impact of the National Minimum Wage extends up to 40% above the rate at which it is set.

Among workers under the age of 30, there have been substantial falls in the wage gap between the bottom 10% of workers and the average (median) worker. The National Minimum Wage explains almost half of this fall.

ENDS


Notes for editors:

‘Minimum Wages and Wage Inequality: Some Theory and an Application to the UK’ by T Butcher, Richard Dickens and Alan Manning, University of Sussex Discussion Paper.
https://www.sussex.ac.uk/webteam/gateway/file.php?name=wps-45-2012-dickens.pdf&site=24

Contact:

Professor Richard Dickens
Department of Economics, University of Sussex, Brighton, BN1 9SL
r.f.dickens@sussex.ac.uk
01273 678461

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

Page Options