ISER researchers are to examine the effects of the National Minimum Wage (NMW) on employment during the recent recession.
The Low Pay Commission project aims to understand the effects of the NMW during the latest recession and its immediate aftermath on job retention, hours and earnings of the employed, and on the job finding probability of the unemployed.
The NMW was introduced in 1999 in the middle of a long period of economic growth and research undertaken during that time inevitably documented its effects in the context of economic expansion, finding little evidence that either the introduction of the NMW or its upratings had an adverse effect on employment (Stewart 2004b, Dickens and Draca 2005), although there was some evidence of a small effect on hours worked (Stewart and Swaffield 2008).
Andrea Salvatori, who is leading the project, with Mark Taylor and Mark Bryan, commented:
“Simple economic intuition suggests that the effects of the NMW and its upratings may depend on the general economic climate. The 2010 Low Pay Commission Report documents that, following the onset of the recession in 2009, the distribution of pay settlements in the UK exhibited a clear spike around zero, indicating that more than a quarter of such settlements were pay freezes. Even moderate upratings of the NMW during the recession might have been a tight constraint on low-paying firms and induced them to adjust hours and employment.”
The main questions that the research team will be addressing are:
- Do employers react to NMW upratings during a recession by reducing hours or employment more than they otherwise would have?
- What are the implications of the NMW upratings and any resulting hours changes for workers’ earnings?
- What are the effects of the NMW upratings during the recession on the probability of the non-employed entering work?
Dr Salvatori added:
“There is also evidence that the wages of new entrants to the labour market are more sensitive to business cycle effects than the wages of those already in work. This implies that the NMW may be more binding for firms seeking to recruit employees during a recession, as they would prefer to pay a wage below the NMW. The NMW and its upratings may reduce the chances of the low skilled unemployed entering work during a recession.”