Investigating the Effects of the UK’s National Minimum Wage

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Increases in the UK national minimum wage since 1999 had no negative employment effects on the overall UK labour market. Some sub-groups did face challenges, though, namely part-time employees. Also, young employees were adversely affected during the 2008 recession, but that may have been due to other factors.

Background

The Low Pay Commission (LPC) is an independent body that provides recommendations on whether and how the UK's National Minimum Wage (NMW) rate should be reviewed. Since its introduction, the impact of the NMW on a range of key indicators has been well documented and the NMW has gained wide political support.

However, the introduction of the National Living Wage, which increased the wage floor for those aged 25 and over to £7.20 an hour from £6.50 in April 2016, represented a significant growth and requires additional insight into effects of such changes on employment and hours outcomes of low-paid workers and firms in low-paying sectors.

A number of empirical studies investigate the employment effect of the NMW, including many commissioned by the LPC. These studies apply a variety of empirical identification strategies and report a variety of minimum wage effect sizes.

Goals

The LPC commissioned RAND Europe to combine the findings of a large number of empirical studies and fill existing gaps in the evidence base. The project team specifically considered the effects of the NMW on different labour market sub-groups.

Methodology

The project team conducted a comprehensive meta-regression analysis, designed to take into account the influence of heterogeneity in study designs and to synthesise the findings from various studies. The analysis contributed to existing evidence on the effect of minimum wages in three ways:

  1. The team not only focused on literature published in peer-reviewed journals or academic working papers, but also extended the scope of the study search to a broader pool of literature.
  2. The team were also in a position to include the most recent evidence that was published or issued within the last three years.
  3. The analytical framework proposed for the study enabled the team to specifically cover the extent to which effects differ across different labour market sub-groups or under different economic conditions.

Findings

  • Increases in the UK national minimum wage since 1999 had no negative employment effects on the overall UK labour market. Many of the effects following these increases were largely positive in terms of reducing pay inequality and improving the standards of living for low-paid workers.
  • However, a further sub-group analysis of the UK labour market found some adverse negative employment effects on certain sub-groups as a result of increases in the national minimum wage. This included part-time employees who have endured some adverse negative employment effects compared to other labour market groups.
  • 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 solely to increases in the national minimum wage, as other factors linked to the recession may have contributed to this decrease.

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