If the minimum wage goes up, do people’s chances of moving to a better-paid job go down?
The National Minimum Wage is 26 this year, having been introduced in April 1999. In that time, a lot of research has shown that minimum wages reduce wage inequality – and can close wage gaps between men and women, for example, or between different ethnic and racial groups.
However, economic theory suggests that companies pay their workers based on what they contribute to the company’s value – and that wages grow when the company wants to invest in employees, or when people move to another job. A high minimum wage might mean workers don’t see the need to get training or change job in order to earn more – and employers might try to save money by taking on fewer people, offering them fewer hours, or reducing training budgets.
We wanted to test the idea that the minimum wage reduces people’s chances of moving to a better paid job, using Understanding Society data from 2009 to 2019. During that time, there were increases in the minimum wage in the UK, and the National Living Wage was introduced, too. By 2019, the UK had one of the highest minimum wage levels in the OECD.
Why Understanding Society?
Research in this area typically uses the Annual Survey of Hours and Earnings (ASHE), which surveys employers and covers 1% of the employed workforce. That’s a bigger sample size than Understanding Society, but Understanding Society tells us more about people, and other aspects of their lives. That means we can take factors such as education, health, and family background into account – because they can all influence people’s careers and income. Also, if someone’s details disappear from ASHE, it may be because they’ve dropped out of the survey, not because they’ve changed jobs.
Using the data
We looked at 2,738 people in minimum wage jobs over a ten-year period, and saw:
- 1,656 move to a job which was better paid than the minimum, but was still classed as ‘low-paid’, paying less than two-thirds of median hourly earnings
- 5,748 move to higher paid work – paid more than two-thirds of median hourly earnings
- 345 become unemployed.
We also brought in ASHE data to test how wage progression varied by area. ASHE has a sample size large enough to allow us to calculate area wage levels, and see whether minimum wage workers in lower wage areas have similar levels of wage growth as their peers in richer areas.
Findings
Firstly, we saw clear trends in minimum wage pay. The share of workers paid at or below the minimum has climbed from around 4% in 2009 to 8% in 2018. On the map below, the darker colours show TTWAs with a higher share of people receiving minimum wages. The share of minimum wage workers increased throughout Great Britain, but was higher in parts of the northeast, Cornwall, Wales, and Scotland, and much lower around London and the southeast.
When we looked at how likely people were to move out of these jobs, we found that minimum wage workers are generally able to progress, but most remain low paid. Every year, around half of minimum wage workers move to a better-paid job, but four-fifths are still low-paid – that is, they are still earning less than two-thirds of median wages.
Looking at the probabilities for two- or three-year periods, we found that the chance of moving to a job paid above the minimum wage over longer periods was five percentage points higher compared to one-year probability. The patterns we found suggest that there may be some churning in and out of minimum wage jobs among the low paid.
If a high minimum wage had a negative effect on wage progression, we would expect to see this most in areas with higher shares of minimum wage workers. In other words, when minimum wages increase, we should see the chance of getting a better-paid job fall most in areas where the share of minimum wage workers is highest. In fact, minimum wage workers in areas with a higher exposure to minimum wage increases experienced similar pay increases to those in areas with lower exposure.
We did see a short-lived negative effect on wage progression around the time the National Living Wage was introduced in 2016, when the chance of staying in a minimum wage job increased by around 10%. However, this disappeared in subsequent years.
One factor which may be significant in explaining the lack of negative effects is that previous research has shown that minimum wage hikes increased not only the wages of workers previously paid below the minimum, but also those of people paid above the minimum.
What this means for policy
Our results show that less educated workers and those with large families are less likely to get higher-paid jobs – and that those in large firms and in the public sector are more likely to progress. It may be that these employers offer a structure that makes moving up the lay ladder easier. We also saw that minimum wage workers were more likely to get better-paid jobs if they switched employers: 14% of those who progressed had changed employer, compared to 5% of those remaining on minimum pay.
Training is important, too – 21% of those who progressed had had some form of training vs. 17% of those who stayed on the minimum wage.
We need point out that – although the longitudinal data allows us to see change over time – the biggest increases in minimum wages happened in the later years of the time period we looked at, so we are only seeing short to medium term changes. There’s some longer term evidence from the USA of lower wage growth among minimum wage workers compared to their better paid peers, and we would like to see research consider long-term changes in the UK. For now, though, it seems that this useful tool governments can use to influence wage inequality is not having negative effects so far.
Read the full blog here