Low Pay Commission
Research Reports
1 Since the introduction of the National Minimum Wage, much research effort has focused on establishing the possible effects on the hours and employment prospects of those workers affected by its introduction. A former Commissioner, Metcalf (2006 and 2007a), concluded in recent overviews of the research conducted to date, that the general consensus was that the overall effect on the level of employment in Britain was broadly neutral. Research on other aspects of the impact of the minimum wage on prices, profits and productivity has also generally concluded that the minimum wage has been benign. But most of the research findings so far have concentrated on the introduction of the minimum wage and its initial upratings.
2 As data have become available, we have taken the opportunity in the research programme for this Report to revisit the econometric research on the impact of the minimum wage in light of the recent large upratings (especially those from October 2003 to October 2006). We therefore commissioned three projects that looked at the impact of these upratings on employment, hours, earnings inequality, productivity, profits, and business start-ups and failures.
3 We also commissioned two other studies. One investigates whether the minimum wage has had an impact on staff turnover, retention and recruitment. An increase in wages might be expected to have a beneficial impact on these outcomes. The other research study continues the series of monitoring projects that we have commissioned since the outset of the Commission.
4 In addition to these five projects, we conducted our biennial Survey of Employers and followed this up by commissioning a small scale study of employers’ attitudes to apprenticeships and how their decisions might change if the current apprentice exemptions were amended. The findings from the Survey of Employers are detailed in Appendix 3.
5 Forth, Harris, Rincon-Aznar and Robinson (2009) looked at the impact of the minimum wage on productivity, profits, and business start-ups and failures. Their research built on our previous commissioned research by Forth and O’Mahony (2003) and Galindo-Rueda and Pereira (2004) that looked at the impact on productivity at plant and sector level. They noted the work on profits by Draca, Machin and Van Reenen (2005), but adopted a different approach to identifying effects at the plant and sector levels. They also attempted to identify any impact of the minimum wage on firm entry and exit.
6 Their analysis showed that the bite of the minimum wage was relatively small, except in the most exposed sectors, where average hourly costs were clearly affected by the minimum wage. They found little evidence that the minimum wage and its upratings had affected productivity at the industry level, but there was some evidence that the minimum wage and its upratings led to an increase in unit labour costs.
7 There were some indications that the minimum wage may have reduced profits. They found a negative impact of the minimum wage on the rate of return on capital employed, but their findings on the price-cost margin, although negative, were not as robust and were not statistically significant. They also found some weak evidence that increases in the minimum wage had increased firm exit rates. They concluded that the industry-level analysis indicated a muted impact of the National Minimum Wage on business performance over the period 1999–2006, consistent with its rather modest impact on industry-level wage bills.
8 The plant-level analysis found that plants that were more likely to employ minimum wage workers experienced lower productivity and higher profitability. There is, however, a problem with the identification of minimum wage-affected plants, as information about the distribution of wages within a plant was not known, so estimates based on industry, size of firm and geography were used. These plant-level findings were less robust than the industry estimates, as the latter probably average out the volatility at the plant level.
9 Dickens, Riley and Wilkinson (2009) examined the employment effects of the 2003–2006 upratings to the minimum wage. The researchers built on previous work by Stewart (2002, 2003, 2004a and 2004b) and Dickens and Draca (2005) to investigate the impact on individual employment transitions of the recent large upratings. They also developed the work by Connolly and Gregory (2002) and Stewart and Swaffield (2004) that investigated the impact on hours.
10 They found that the National Minimum Wage had led to strongest wage growth in the lower percentiles of the earnings distribution. Their analysis of job retention found mixed evidence for both men and women that the minimum wage had affected the probability of remaining employed. In some specifications for particular years, there was a negative relationship and in others a positive one. They did, however, find a generally negative impact of the minimum wage on job entry for women, but it was not robust and was not statistically significant. The evidence from the local area analysis also failed to find strong evidence of an adverse employment effect. They did find some weak evidence that increases in the minimum wage may have led to increases in unemployment.
11 They also found some tentative evidence that hours may have reduced in some years and in some specifications but, in general, these findings were not robust. For adult men, however, the 2001 and 2003 upratings were associated with a negative impact on basic hours, and this finding was reasonably consistent across model specifications. In conclusion, they could find no compelling evidence that the recent large minimum wage upratings had led to an adverse impact on employment, but some effects were detected on hours.
12 Dolton, Rosazza-Bondibene and Wadsworth (2009) built on earlier work by Stewart (2002), which pointed out how the minimum wage reaches further up the wage distribution in certain parts of the country than in others, and they used these variations to investigate the impact of the minimum wage on employment growth. They investigated how changes in the local area minimum wage incidence over the nine years of the minimum wage’s existence were correlated with changes in local area performance. They mapped the extent to which the minimum wage affects local areas and investigated the correlation between the local incidence of the minimum wage and measures of local area economic performance other than employment, such as the extent of income inequality in the locality.
13 They found that areas where the minimum wage had greater effect were associated with a significant fall in wage inequality in the bottom half of the wage distribution. Although they found little impact of the minimum wage on employment over its entire operation, examination of yearly effects found a small but significant positive effect of the minimum wage since 2003. Like Dickens, Riley and Wilkinson (2009), however, they also found that areas where the minimum wage bite is greatest experienced higher unemployment, but noted that unemployment rates fell more in these areas in the latter part of the period under study.
14 Experian (2009) examined the impact of both the introduction of the minimum wage and subsequent increases in its level on staff turnover, retention and recruitment. The research focused in particular on the low-paying sectors identified in our 2007 Report, and built on previous studies that investigated the dynamics of individual responses to the minimum wage. It also analysed the impact of the minimum wage on vacancies.
15 The research found some evidence that the introduction of the minimum wage and the early upratings may have been associated with reduced search activity, both general and pay-related, among minimum wage workers. It found no evidence of any effects from the subsequent large upratings. The econometric analysis of hard-to-fill vacancy data suggested a number of statistically significant changes in reported recruitment problems coinciding with minimum wage upratings, but no clear pattern was established. Experian concluded that there was no evidence that the minimum wage has had any significant effect on job-to-job moves among low-paid workers, or on recruitment difficulties among their employers.
16 Allison, Bowring, Chubb, Hatchett, Mulkearn, Warberg, Wiggins and Withers (IDS, 2009) continued the monitoring work of the type we had commissioned for earlier reports. This IDS research was concerned with investigating recent developments in the low-paying sectors, paying particular attention to the impact of the 2007 upratings and the potential impact of the then future increase in October 2008.
17 They found that the minimum wage determined the lowest rate of pay in many low-paying sector organisations, particularly hotels and fast food outlets. The difference between the minimum wage and the established rate had fallen sharply between 1999 and 2006 among their sampled firms; however, the smaller minimum wage increase in 2007 had led to a slight restoration in 2008, especially among retail firms. Similar findings arose for differentials within firms with the pay gap between established rates and supervisors widening in the last year or so.
18 They also continued to find that the use of age-related pay differed markedly between low-paying sectors. Most noticeably, firms in the retail sector generally paid the adult rate from 18 years of age (with some even paying it from age 16), whereas firms in the fast food and pubs sectors were making greater use of the minimum wage age-related pay bands. And many of them did not pay the adult rate until 22 years of age.
19 Cox, Denvir and Pearmain (IES, 2009) carried out a qualitative study of a small sample of employers to explore in detail their perspectives on apprenticeships. The investigation explored why employers take on apprentices; what determines current pay practices; how the current exemptions influence the employment of apprentices; and likely impacts of various changes to the exemptions.
20 They found that most apprentices do a mix of on-the-job and off-the-job training, with the latter typically limited to one day a week or less. On Commission visits around the UK, we regularly met employers, particularly hairdressers, who were not enamoured by the quality of college-based provision. The survey also found some employers supporting this view.
21 Apprentice pay rates varied across sectors but reflected typical economic influences such as the need to recruit and retain good quality trainees, pay in the local labour market, the pay of other staff, and inflation. But the use of the minimum wage apprentice exemption was widespread. Among those who currently employed apprentices, there was little appetite for the exemptions to be abolished or amended. There was a general view that pay should not be based on age and that a minimum apprentice rate, in line with current contractual arrangements in England (£80 a week rising to £95 in August 2009), was reasonable.
Table A2.1 Low Pay Commission Research Projects for the 2009 Report
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The Impact of Recent Upratings of the National Minimum Wage on Competitiveness, Business Performance and Sector Dynamics
John Forth, Ana Rincon-Aznar, Catherine Robinson (National Institute of Economic and Social Research, NIESR) and Richard Harris (University of Glasgow) |
This research considered the variety of impacts that recent upratings to the minimum wage have had on plant and sector competitiveness, dynamics and performance. It built on our previous commissioned research by Forth and O’Mahony (2003) and Galindo-Rueda and Pereira (2004) by first incorporating measures of profitability and entry and exit, then extending the analysis to plant level.
The authors compiled a sectoral panel of 157 industries with measures of labour productivity, unit labour costs, profitability, and entry and exit for the period from 1999 to 2006. They used workers affected and the impact on wage bills to assess the impact of the minimum wage. Using difference-in-difference regression analysis, they investigated the impact of the minimum wage on wage costs, profits and productivity.
Using information from the Annual Respondents Database, they also compiled a panel of plants for the period from 1999 to 2005. They proxied minimum wage exposure using industry, region, age, size and average wage of each plant. They then investigated using Ordinary Least Squares and difference-in-difference methods whether this measure had an impact on plant level productivity, profitability and closure.
They concluded by attempting to bring together the results from the plant and sector data. |
The researchers found that, in terms of the wage bill and the fraction of workers covered, the introduction of the minimum wage was considerable only in the most exposed sectors such as hairdressing and cleaning. In these sectors, they identified an impact of the minimum wage on average hourly wage costs. They also found that the impact of the most recent upratings (2004–2007) was greater than after introduction (2000–2003).
Their industry-level models indicated that the minimum wage and its upratings led to an increase in unit labour costs, but found little evidence of an impact on productivity, profitability or sectoral dynamics. There were some indications of an effect of the minimum wage, most notably on profit (negative) and firm exit rates (positive). But the body of evidence was weak as a whole, even on those measures, as the results were not robust across different specifications and samples.
At the plant level, their findings suggested that the prevalence of the minimum wage was associated with negative productivity in some industries, positive profitability in selected industries and a mixture of probability of closure, depending on the size of the plant.
They noted that the diversity within and between industries, in terms of their experience in relation to the minimum wage, made it difficult to tell a cohesive story and that their results may also have reflected the difficulty in fully identifying the impact of the minimum wage in these data.
In conclusion, their findings provide no strong evidence that the minimum wage upratings have adversely affected business performance. |
The Employment and Hours of Work Effects of the Changing National Minimum Wage
Richard Dickens (Centre for Economic Performance, London School of Economics and University of Sussex), Rebecca Riley and David Wilkinson (National Institute of Economic and Social Research, NIESR) |
Much research has examined the employment impacts of the introduction of the National Minimum Wage in 1999 and its initial upratings. The general conclusion that has emerged is that there was limited, if any, adverse impact of the minimum wage on employment in the first few years following its introduction. Since then, in 2001 and over the period 2003–2006, the minimum wage has risen substantially in excess of the growth in average earnings.
This study investigated the impacts of minimum wage rises on employment and hours of work, in the period 2001–2007.
The analysis used individual Labour Force Survey (LFS) and Annual Survey of Hours and Earnings (ASHE) data together with information on local areas. They used a combination of difference-in-difference methodology and single difference models.
The focus of their analysis was threefold:
- they investigated changes in wages as a response to increases in the minimum wage;
- they analysed employment to determine whether changes in the rates influenced individual job retention and job entry, local area employment and unemployment rates; and
- they explored hours worked to see if employers changed hours worked as a response to changes in the minimum wage.
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They found that, in most years, the strongest wage growth was at the bottom of the wage distribution for those directly affected by increases in the minimum wage. In 2002, the only year when the uprating was below the increase in average earnings, wage growth at the bottom of the distribution was lower than higher up.
They found that the evidence on employment was mixed. Their estimates of the impact on job retention varied. They differed by gender, year, choice of comparison group and data source. The LFS analysis produced some evidence that the minimum wage upratings had a negative impact on job retention for adult women, but there was no systematic pattern. For adult men some evidence of a negative effect was found, but again most results were not statistically significant. The significant results tended to coincide with the larger upratings in 2001 and 2003. There was no strong consistent evidence of a negative impact on job entry.
Their local area analysis also failed to find strong evidence of effects on employment from the increases in the minimum wage. The analysis using ASHE data produced inconclusive results that the researchers found difficult to interpret.
Their analysis of the LFS data produced little evidence of a consistent impact on either basic or total hours of work from the minimum wage upratings. For men, however, there was robust evidence that the large upratings in 2001 and 2003 had led to a reduction in basic hours. This finding was less robust for women. Local area analysis found no evidence of adverse hours effects.
They concluded that overall there is no compelling evidence to indicate that the large minimum wage upratings had an adverse effect on employment, but some hours effects were detected. |
The Geography of the National Minimum Wage Pay
Peter Dolton, Chiara Rosazza-Bondibene and Jonathan Wadsworth (Royal Holloway, University of London) |
This research builds on earlier work by Stewart (2002) that looked at the impact of the minimum wage using geographic wage variation.
They used the Annual Population Survey (APS), the LFS and ASHE to identify the impact of the minimum wage on local area economic performance, including employment and the extent of wage inequality.
They mapped local area performance and the incidence of minimum wage employment. They used difference-in-difference techniques to investigate this issue thoroughly.
In the context of the regional wage debate, they also investigated the extent of within and between-region variation. |
The minimum wage appeared to be associated with a significant fall in wage inequality in the bottom half of the distribution. Areas where the minimum wage ‘bites’ more (those areas where pay was lowest) have experienced larger declines in the 50th–5th and 50th–10th percentile wage ratios than elsewhere.
They found that the overall effects of the introduction of the minimum wage on employment rates over its nine-year existence were neutral. But, examining each year separately, they found a small but significant positive effect on employment in the period beginning in 2003.
Unlike employment, there was some evidence of a significant association between unemployment and the minimum wage. They found that areas where the minimum wage had more bite appeared to have experienced higher unemployment, averaged over the entire period.
This overall average positive effect, however, disguised significant negative effects in later years. Any upward association between the minimum wage and the unemployment rate was confined to the earliest years of the National Minimum Wage. Thereafter, unemployment rates appeared to fall further in areas more affected by the minimum wage. |
Impact of the National Minimum Wage on Staff Turnover, Retention and Recruitment
Tim Lyne and Eric McVittie (Experian) |
Experian attempted to assess the impact of the National Minimum Wage on labour retention and turnover, and firms’ ability to recruit into lower paid occupations. It investigated how the National Minimum Wage affected labour market dynamics among low-paid workers and within low-paying sectors.
It explored the impact on retention and turnover from the employee’s perspective using the LFS and on recruitment from the employer’s perspective using the LSC National Employers Skills Survey (NESS).
Using the LFS, it analysed changes in job search activity and job quit rates among low-paid workers.
Using the NESS, it examined recruitment issues by looking at vacancies and hard-to-fill vacancies among employers of low-paid workers.
Experian compared behaviour before and after the introduction of the National Minimum Wage and the subsequent upratings using measures of the bite in difference-in-difference regressions.
It estimated separate regressions to informally check that any significant effects were related to changes in the National Minimum Wage rather than to other factors. |
It found some evidence that the introduction of the National Minimum Wage and early upratings may have been associated with reduced search activity (particularly pay-related search activity) among minimum wage workers. There is, however, no evidence of effects from subsequent upratings. The research tentatively suggested that this may be due to the earlier National Minimum Wage upratings, over the 1998–2004 period, having had a more profound effect than in later years, compressing the bottom tail of the wage distribution in a way that might be expected to result in reduced search and turnover.
The data used to investigate recruitment difficulties did not provide a reliable way to identify employers of low-paid workers and thus to allocate individual employers to treatment and control groups. Results from this analysis were therefore very tentative. It found that the econometric analysis suggested a number of statistically significant changes in reported recruitment problems coinciding with minimum wage upratings, but the research was unable to detect a clear pattern of these effects in terms of either timing or the occupations involved that could sensibly link them to changes in the National Minimum Wage.
The research concluded that there was no evidence that the minimum wage has had any significant effect on job-to-job moves among low-paid workers, or on recruitment difficulties among employers. |
Monitoring the Impact of the National Minimum Wage
Nicola Allison, Angela Bowring, Catherine Chubb, Alastair Hatchett, Ken Mulkearn, Anna Warberg, Lois Wiggins, and Louisa Withers (Incomes Data Services) |
Incomes Data Services (IDS) monitored the impact of the National Minimum Wage, focusing on employers’ responses to the October 2007 increases. It also looked at employers’ likely responses to the then forthcoming October 2008 increases. The research was carried out in the 12 months prior to August 2008 and builds on similar work conducted by IDS for previous Low Pay Commission reports.
The research encompassed:
- surveys of low-paying sectors – postal surveys of social care, childcare, hotels and leisure; and telephone surveys of retail and fast food firms, pubs and restaurants;
- discussions with HR managers in these sectors;
- analysis of previous IDS Pay Reports to construct a panel of lowest rates of pay across all sectors and pay rates for apprentices; and
- identifying which organisations were affected by the increase in statutory leave in October 2007 as part of the study on hours and holidays that IDS had undertaken independently.
IDS aimed to have broad coverage of the low-paying sectors. It achieved a reasonably good coverage of large firms, while its coverage of small firms was relatively weaker. |
Across 202 organisations within the low-paying sectors covered by this report, around half had to raise rates in order to comply with the National Minimum Wage upratings in October 2007.
Among organisations in the childcare, social care, leisure, fast food and hotels sectors, nearly 40 per cent had to raise pay rates further up the pay scale to restore pay differentials.
Almost a third of respondents used age-related pay (the use of the three minimum wage rates or a variant thereof). The structures of age-related pay and their use varied across sectors. In retail the trend away from age-related pay continued, while in fast food age-related pay had become more widespread, typically with adult rates for employees aged 22 and over.
In many sectors there was less of an impact from the minimum wage upratings in October 2007 than in 2006 (due to the lower increase in the minimum wage of 3.2 per cent in 2007, compared with 5.9 per cent in 2006).
The average pay differential between the established adult rate and the minimum wage for a panel of major companies had fallen from 14.6 per cent to 4.8 per cent between 1999 and 2007, although there was a small reversal in the latest year.
In the fast food sector there was some evidence that the upratings of the minimum wage had led to a reduction in hours worked. However, in childcare, a smaller proportion of respondents reported a knock-on effect on staffing or hours than in the previous year’s survey. |
LPC 2008 Survey of Employers: Apprentice Exemptions
Annette Cox, Ann Denvir and Daniel Pearmain (Institute for Employment Studies) |
The Institute for Employment Studies (IES) carried out a qualitative study of a small sample of employers to explore in detail their perspectives on apprenticeships. The aim was to gather views on issues such as: reasons for participation; current pay practices; the impact of the exemptions on employing apprentices; and likely impacts of various changes to the exemptions.
IES carried out 40 telephone interviews with 28 employers of apprentices and 12 employers that did not employ apprentices, across a range of firm sizes, regions and low-paying sectors. The sample was drawn from employers who had taken part in the 2008 Survey of Employers (see Appendix 3) who actively consented to be contacted for further research on the issue of apprentices.
The self-selected nature of this sample of employers, the self-reported data captured during interview and the limitations of both should be borne in mind when assessing their conclusions. |
They found that good apprentices were perceived as valuable assets and that there was broad satisfaction with their performance, especially in their third or final years when their contribution to organisational performance and profitability increased.
They found that a mixed model of training provision was prevalent – typically on-the-job, which was perceived to be of great importance, with limited release for off-the-job training with external providers. A small number of employers were critical of those with college-only training.
There was diversity in apprentice pay and the influences on pay levels included: current rates for other employees; rates in the local labour market for apprentice and non-apprentice positions; the need to attract and retain good quality apprentices; the importance of rewarding performance; and the cost of living.
They found that the use of apprentice exemptions was widespread but that there were mixed views on proposed changes to these exemptions. In general, they found:
- widespread support for the introduction of a statutory basis for existing contractual arrangements in England, subject to certain flexibilities and limitations;
- little support for exemptions to be abolished and age-related minimum wage rates to be applied;
- greater acceptance of qualification level or performance than age as useful criteria for setting apprentice pay levels; and
- employers without apprentices generally favoured either a separate rate or a statutory basis for the existing contractual arrangements to provide fairness while still promoting apprenticeships.
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Future Research
22 We have commissioned the following projects to inform the recommendations in our next report.
- Investigating the Impact of the Minimum Wage Regime on the Labour Market Behaviour of Young People. Augustin De Coulon, Harry Eckman, Megan Farquharson Roberts, Elena Meschi (Institute of Education), Anna Vignoles (London School of Economics) and Jonathan Wadsworth (Royal Holloway).
- Investigating the Impact of the Minimum Wage Regime on the Labour Market Behaviour of Young Workers: Moving Towards a Structural Dynamic Approach. Haroon Chowdry, Alissa Goodman, Costas Meghir and Jonathan Shaw (Institute of Fiscal Studies).
- The Impact on Employment of the Age-Related Increases in the National Minimum Wage. Richard Dickens (University of Sussex), Rebecca Riley and David Wilkinson (National Institute of Economic and Social Research).
- Connecting and Informing Through Qualitative Research: Examining Apprentice Pay Rates Across the UK. Dalia Ben-Galim, Tony Dolphin, Lucia Durante, Kayte Lawton and Naomi Pollard (Institute for Public Policy Research).
- Monitoring the Impact of the 2008 National Minimum Wage Upratings (and the Anticipated Impact of Any 2009 Upratings). Nicola Allison, Angela Bowring, Alastair Hatchett, Simone Melis, Ken Mulkearn, Anna Warberg, Lois Wiggins and Louisa Withers (Incomes Data Services).
- Taxes, Benefits and the National Minimum Wage. Mike Brewer and David Phillips (Institute of Fiscal Studies).
- Spill-over Effects of the National Minimum Wage. Mark Stewart (University of Warwick).
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