Low Pay Commission Research Projects

Overview

1 We commissioned thirteen research projects to expand our knowledge of the impact of the minimum wage. This section provides an overview of the main findings. Further information on the projects is included in Table A2.1.

2 Evidence is accumulating that the minimum wage is now having a widespread influence in the labour market. Incomes Data Services (IDS) (2004b and 2004c) examined the impact of the 2003 and 2004 upratings and found that, in addition to setting the pay agenda for the main low-paying sectors, the minimum wage also exerted an important influence in parts of the economy where most pay rates were well above the minimum wage. An increasing number of companies had moved their pay review dates to October and the minimum wage now functioned as the key rate for many low-paying firms, as well as a benchmark for higher-paying firms to rise above.

3 Despite the expanded influence of the minimum wage in the labour market, there are few signs that employment or hours worked have been adversely affected. Galindo-Rueda and Pereira (2004) found evidence 'of employment growth being significantly lower in the 1998-1999 period for service sector firms which are expected to be more affected by the NMW as a result of them being part of a given industry sector and region'. As an indication of the magnitudes involved, the authors reported that employment growth in firms belonging to a sector and region with a share of 10 per cent of workers in 1998 paid below the 1999 minimum wage level, was 0.12 per cent lower than for firms with 9 per cent of workers paid below the 1999 minimum wage. No significant effects were found in the manufacturing sector.

4 Stewart and Swaffield (2004) also found some adverse effects. They attempted to gauge whether hours worked by the low-paid had changed in response to the introduction and subsequent upratings of the minimum wage. They found that while the initial effects were insignificant, the longer-term adjustments were slightly more significant. Taking lagged-effects into account, the evidence suggested that the introduction of the minimum wage had resulted in a reduction of between one and two hours per week in basic working hours for both men and women. They were unable, however, to determine whether this reduction was a result of employee choice or imposed by employers.

5 If the minimum wage boosts take-home pay then individuals may no longer need to have more than one job in order to maintain income levels. Conversely, if hours worked decline in response to upratings of the minimum wage, then individuals may take second jobs in order to earn enough money. Robinson and Wadsworth (2004) considered this issue but statistical analysis revealed no discernible influence of the minimum wage on the probability of individuals holding second jobs.

6 Dickens and Draca (2005) examined whether there were any employment effects arising from the 2003 minimum wage upratings. They found no statistically significant effects (either positive or negative) on employment, although they found that the 2003 upratings affected fewer workers than previously and the lower coverage reduced the probability of observing significant disemployment effects.

7 Research by Ram, Edwards and Jones (2004) suggested a less benign interpretation of the data showing a reduction in working hours: some firms lowered reported hours worked in order to appear compliant with the minimum wage. The authors examined the experiences of small firms in two sectors noted for low pay and informal working: catering and clothing. In some instances even the highest paid members of staff, and sometimes the owners, were earning less than the minimum wage. For the majority of the firms in the study, the reasons given for non-compliance were disadvantageous business conditions and a perception that the business could not afford to pay the minimum wage.

8 Croucher and White (2004) studied the enforcement process and found it was working reasonably well, with both employers and workers generally satisfied with the process and the role of the Inland Revenue's compliance officers. There were, however, some important caveats. There was some criticism about the length of time taken to complete investigations and, in a few cases, the complainant had concerns about the confidentiality of the process. The research also highlighted a need for greater attention to be paid to the post-investigation period to ensure that the worker received the correct amount owed promptly and in full.

9 Machin, Draca and Van Reenen (2005) examined the impact of changes in the minimum wage on profits and prices. They noted that if employment effects were small '... this does beg the question as to how firms are able to sustain the higher wage costs induced by minimum wages. It is evident that, if employment effects are small, then something else has to give. One possibility is that the minimum wage eats into profit margins, or raises prices.' They did find some support for the hypothesis that profit margins were squeezed in firms that were more affected by the introduction of the minimum wage, although it was hard to find evidence that a significant proportion of these low-wage firms were forced out of business. Furthermore, they were unable to detect significant price effects.

10 The impact of minimum wage upratings on small, formal sector firms was also investigated. Cronin and Thewlis (2004) found concern about the current level of the minimum wage, with some employers claiming that the latest increases had been 'arbitrary'. Adjustments made by firms in response to the upratings included reducing hours by sending staff home during quiet times and consolidating bonuses into hourly rates. Firms operating in consumer markets could partly offset their costs by raising prices, but those serving other businesses felt they lacked the pricing power to enable them to follow suit. Cronin and Thewlis also reported the tendency of those in the hairdressing sector to take on fewer young staff, trainees and inexperienced staff.

11 Indeed the position of young people in the labour market has been a special focus of attention for the Low Pay Commission . Neathey, Ritchie and Silverman (2004) focused on the position of young people in the two largest low-paying sectors of the economy, namely retail and hospitality. In general, employers exhibited a preference for workers slightly older than 16-17, and the range of opportunities available to workers increased as they reached 18 and above. But employment of young people was generally based on pragmatic considerations, such as the availability of labour.

12 IDS (2005) investigated the changing use of age-related pay for 18-21 year olds since the introduction of the minimum wage. Age-related pay was not widespread, particularly for those aged 18 and above. There were two trends, in opposing directions. First, a move to increase the age at which adult rates were paid to 22 in order to offset the cost of the minimum wage and second, a longer-term trend to reduce the age at which adult rates were paid down to age 18. There was no significant evidence of an overall increase in the number of employers using age-related pay.

13 Bryan and Taylor (2004) studied the characteristics of households containing at least one minimum wage worker. They found that the minimum wage recipient tended to be the spouse of the head of the household or another adult member of the household, rather than the head of the household. Moreover, some young workers earning the minimum wage still live in the family home. Minimum wage households were not the poorest households (these consisted mainly of pension and benefit recipient households) but were concentrated in the bottom 30 per cent of the income distribution of working-age households.

14 Whether beneficiaries of the minimum wage remain in low-paid work, or whether it is a temporary staging post from which they quickly move up the earnings distribution is a matter of some interest. Sloane, Murphy, Jones and Jones (2004) examined this issue and found that minimum wage employment was indeed characterised by high levels of 'churning', with 40 per cent moving into higher-paid employment a year later, 4 per cent exiting into unemployment and 12 per cent becoming economically inactive.

Table A2.1 Low Pay Commission Research Projects
(This will open a PDF file)