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Impact of the National Minimum Wage on earnings, employment and hours through the recession

This research project has been completed. Please contact a team member for further information.

An analysis of the impact of the National Minimum Wage (NMW) on earnings, employment and hours through the recession is a project funded by the Low Pay Commission to investigate the impact of the National Minimum Wage on the unemployed.

The project updates and extends earlier research at ISER which found that the NMW increases of 2008-10 had no adverse effects on job retention and only small negative effects on hours worked.

The earlier research also found no differences in the effects of the NMW increases before and during the recession and provided the first evidence on the effect of the NMW on the job finding probability of the unemployed.

It concluded that there was no evidence that the NMW significantly altered the chances of potentially low-paid unemployed finding a job, either before or during the recession.

Background

Between the second quarter of 2008 and the second quarter of 2009, the UK experienced its deepest recession since the 1930s, in which output contracted by around 7%. The four most recent increases of the National Minimum Wage (NMW, unlike the preceding nine, have taken place in an environment lacking sustained economic growth.

The weakness of the economic recovery and the fragile state of the labour market, make identifying any possible adverse effects of the NMW a key issue for policymakers. The NMW has been raised every year since the onset of the recession, and it is crucial to monitor the ongoing impact of these interventions.

Recent research at ISER has found tentative evidence that the 2010 increase reduced both men’s and women’s weekly hours by around 2-4 hours and this new project is investigating this effect further to see whether there was any continuing impact in 2011.

Project aims and questions

Making use of new data, the project’s main aims are to examine:

  • the effect of the NMW on employment and hours
  • the implications for weekly earnings based on any effects of the NMW on hours
  • the effect of the NMW on entry to employment

The project team expects to make more reliable estimates of the impact of the 2010 increase and obtain preliminary estimates for the 2011 increase. They will verify the robustness of their earlier results by testing whether subgroups of the unemployed are affected in different ways by the NMW by:

  • testing whether the introduction of the NMW has made it more difficult for the unemployed most likely to be hired at the bottom of the wage distribution to enter employment
  • testing whether unemployed who live in areas where the NMW is higher relative to the median wage are less likely to find a job.

Data and methods

The project team is making use of the Quarterly Special Licence Labour Force Survey (LFS) to identify hours and employment changes among employees during the recession both in between and straddling the annual increases of the NMW. This is crucial in identifying the impacts on changes in hours and employment.

The Annual Survey of Hours and Earnings (ASHE) will be used to compute aggregate statistics for different geographical areas. These indices will be merged with data from the LFS in the analysis on the unemployed.

Project website

https://www.gov.uk/government/publications/national-minimum-wage-effect-on-hours-job-retention-and-entry

Team members

Dr Mark Bryan

Reader in Economics - University of Sheffield


Dr Andrea Salvatori

Labour Economist - OECD


Mark P. Taylor

Professor (retired) - ISER - University of Essex


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Photo credit: the_whatsit