Department of Economics

Tracking changes in employment and compensation patterns in response to the national minimum wage

In a poll of political experts by the Institute of Government, the minimum wage was voted the most successful UK government policy of the past 30 years

 

Key facts

  • The UK national minimum wage was introduced in 1999.
  • Since 1999, the national minimum wage has been progressively raised from £3.60 to £6.31.
  • New rates have been established for apprentices and those aged 18.
  • The Low Pay Commission is responsible for making recommendations to government each year on the appropriate level to set the minimum wage.
 

Despite being credited with being responsible for 40-50% of the reduction in wage inequality observed in the bottom half of the wage distribution this century (Butcher, Dickens and Manning 2012), the UK national minimum wage has remained controversial with some economists.

Many economists worldwide are concerned that the national minimum wage contributes to unemployment or may lead employers to cut back on training opportunities or fringe benefits.

Investigating the benefits of the minimum wage

Dr Kerry L. Papps (Department of Economics) and Professor Paul Gregg (Department of Social & Policy Sciences) conducted a study commissioned by the Low Pay Commission for its 2014 report to the Government.

The study examined whether the national minimum wage had changed aspects of individuals’ work arrangements, such as the provision of pensions or overtime pay, and drew on panel data from the Annual Survey of Hours and Earnings (ASHE) and the Labour Force Survey (LFS).

For each worker, a ‘wage gap’ was calculated, equal to the difference between the worker’s current wage and the next year’s minimum wage (or zero if the worker earns more than the minimum). The effect of the ‘wage gap’ on how much a worker’s employment outcomes change from year to year was then examined.

In contrast to earlier UK studies, the analysis included worker fixed effects, thereby controlling for all time-invariant factors that influence outcomes. Little evidence was found that the minimum wage had any effect on workers' employment or compensation arrangements.

Supporting the largest annual increase in the minimum wage in six years

The findings of this study contributed to the final recommendations made by the Commission, that all rates of the national minimum wage be increased from 1 October 2014:

  • the adult rate rises to £6.50 from £6.31
  • the 18-20 rate rises to £5.13 from £5.03
  • the 16-17 rates rises to £3.79 from £3.72
  • the apprentice rate rises to £2.73 from £2.68

This constituted the largest annual increase in the minimum wage since 2008.

On 12 March 2014, the government accepted these recommendations in full.