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An investigation of the impact of the National Living Wage on earnings, with a focus on pay differentials

Since 2016 the minimum wage has been significantly uprated in order to meet the government target of reaching 60% of median earnings by 2020. In 2016 the minimum increased by over 10%, with further increases of over 4% in 2017 and 2018. These changes have far outstripped median wage growth and are expected to extend the share of the workforce covered by the minimum wage from 5 to 14% of the workforce by 2020. In this context, it is important to understand to what extent the recent hikes in the minimum wage have impacted on wage progression and pay differentials. This project will look at two interrelated issues:

  • the impact of the National Minimum Wage (NMW) / National Living Wage (NLW) uprating on the cross-sectional distribution of hourly pay and weekly earnings;
  • patterns and factors impacting on progression out of NMW/NLW jobs.

Evidence from cross-sectional data on the distribution of wages

Previous work found that the minimum wage significantly increased the pay of the lowest paid employees. However, most studies focussed on the period following immediately after the introduction of the National Minimum Wage and cover the early 2000s, a period of strong wage growth. As the bite and coverage of the minimum wage have increased, pay differentials at the bottom of the distribution are squeezed

The proposed research will supplement early analyses on the impact of the NMW/NLW on the wage distribution by using newer data, from the Annual Survey of Hours and Earnings (ASHE), covering the period 2008-2017. We will provide evidence on the impact of the NMW/ NLW on the distribution of earnings in a period of slow wage growth.

Evidence from longitudinal data: wage progression

Wage inequality, and the effect of the NMW on it, is less important if minimum wage jobs are ‘entry’ jobs and workers quickly progress to better paid employment. The second part of this project will take a longitudinal perspective and examine transitions out of minimum wage jobs. On the one hand, reduced differentials lower the incentives for individuals to take on supervisory or more demanding roles. Employers may also react by combining or eliminating some roles, thus potentially increasing the distance between positions at the bottom of their pays scales. On the other hand, there is limited evidence that employers react to an increased minimum wage by attempting to increase productivity either through capital investments or by training and upskilling their labour force . In turn, better skills and/or work reorganization may allow minimum wage workers to progress more easily to better paid jobs.

Understanding wage progression is important from a wider perspective. One in five British workers is low paid (using two thirds of median pay as the low pay threshold) and earnings mobility has declined during the last three decades. The introduction of the higher NLW in April 2016 was justified on the basis of reducing low pay and moving to a higher wage, lower welfare economy. At the same time, it is clear that the NMW/NLW on its own is not enough to tackle low pay. The importance of ensuring individuals are supported to progress, and the way the NMW/NLW might interfere with wage progression, has been highlighted by the Taylor Review of Modern Working Practices.

Team members

Dr Silvia Avram

Research Fellow - ISER, University of Essex

Professor Susan Harkness

Head of Centre for the Study of Poverty and Social Justice - University of Bristol

Avram lpc oct18

Photo credit: Anthony Cullen