Finding the 'Sweet Spot' in the UK Minimum Wage Debate


Nov 28, 2016

Young barista working in a cafe

Photo by Eva-Katalin/Getty Images

Since its introduction in the UK in 1999, the national minimum wage and subsequent increases have gained wide political support, but also created a number of policy debates.

Increases to the national minimum wage have led to employees having a higher disposable income, which can spur economic growth as workers have more money to spend. This increases demand for consumer goods and services. At the same time, it can be argued that higher wages make employees more engaged with their work, which then has a positive effect on their productivity levels.

However, opponents to further increases in the national minimum wage argue that it has a direct impact on employment levels. Businesses could find ways to offset the higher labour costs due to increases in the national minimum wage, either by not hiring new people, reducing the amount of hours worked by employees or increasing prices for consumers. As a result, this could have a negative impact on the UK economy.

On 1st April 2016, the UK Government's new National Living Wage became law, which represents the next evolution of the national minimum wage within the UK. The National Living Wage means that working individuals aged 25 or over that are not in the first year of an apprenticeship are legally entitled to at least £7.20 per hour. This is 25p more compared to the national minimum wage of £6.95 per hour, which remains in place for those aged between 21 and 24, with special rates for those below the age of 21 and on apprenticeship schemes.

Our own study for the Low Pay Commission, an independent body in the UK that advises the government on the national minimum wage, analysed the effects of the national minimum wage on the labour market in the UK since 1999. The study found no negative employment effects overall. However, there were some negative employment effects on specific sub-groups within the labour market.

The sub-group analysis suggested that part-time employees may have endured some adverse negative employment effects due to increases in the national minimum wage, compared to other labour market groups. This could include less employment opportunities and less hours being available to work. The negative impact on part-time employees is interesting and perhaps requires further research to delve deeper into why this is the case.

Interestingly, young employees have not been adversely affected by national minimum wage increases. Only during the recession in 2008 were young employees adversely affected, with a decrease in employment retention probabilities. However, it is hard to link this to increases in the national minimum wage.

In summary, while it seems that increases in the national minimum wages have not had adverse effects on employment overall, it is important that the new national living wage and minimum wage is not increased to a point where it becomes unsustainable for businesses. It appears that increases in the national minimum wage since 1999 have not reached this threshold, as the general effects have been largely positive in terms of improving the standards of living for low-pay workers and reducing pay inequality.

In setting future increases to the national minimum wage and the new national living wage, the UK government has to find the “sweet spot” between protecting workers and giving businesses the flexibility they need to remain competitive.

Marco Hafner is a research leader and senior economist at RAND Europe. He led the study The Impact of the National Minimum Wage on employment: a Meta-Analysis.