Protecting low paid workers
Minimum wages have long been used as a tool to ensure that workers receive a fair rate of pay for their labour services. In the UK, the National Minimum Wage was introduced in 1999 to protect low paid workers. Since its introduction, it has been expanded to cover over 2 million workers. However, there have been policy concerns around the possible impact of the National Minimum Wage on the labour market. Some critics highlighted a concern that it may put people out of work. Research at the University of Bath has looked at the effects the minimum wage has had on low-paid workers. The research was focused on two areas:
- Did the minimum wage affect overtime, annual leave entitlements or pension provisions?
- How did minimum wage impact job turnover?
Criticism of the National Minimum Wage
Over time, economists have produced a lot of evidence highlighting that there is no reason to suggest utilising a National Minimum Wage puts people out of work. However, if this is the case, then there must be an impact on another area of the business, whether this be prices, profits, perquisites or productivity. Dr. Kerry Papps of the Department of Economics carried out several research projects looking into the latter two of these areas.
In 2012, Papps examined how the minimum wage affected the probability of workers leaving employment in Turkey. In this case, it was found to have no statistically significant effect on employment, compared to an equal-sized increase in payroll taxes, which did reduce employment. Therefore, findings suggested that by increasing workers’ pay, minimum wages act to raise productivity and possibly reduce quit rates.
Impacts on compensation in the UK
In the UK, policymakers had their suspicions that employers were attempting to offset their increased outgoings due to minimum wage regulations, by reducing other forms of employee compensation. In 2013, Papps, alongside colleague Paul Gregg, was commissioned by the Low Pay Commission to explore this. They employed a similar methodological approach to the one used by Papps in 2012 to examine data from the Annual Survey of Hours and Earnings, and Labour Force Survey. They explored whether workers whose wages had been increased due to the introduction of the National Minimum Wage were penalised in other areas, such as:
- The amount of overtime available
- Amount of shift pay received
- Annual leave entitlement
- Likelihood of having a pension
- Contract type (permanent or other)
They found no statistically significant evidence that minimum wage affected any of these factors.
Reduced quit rates, due to the minimum wage
With the previous findings taken into consideration, Papps and colleague Matt Dickson were commissioned to conduct further research into the impact of the minimum wage on individuals entering and exiting jobs. Through their analysis of the data, they found that workers were less likely to quit their job when the minimum wage was in place. They summarised that minimum wages improve productivity in the labour market by reducing turnover and the associated costs of recruiting replacement staff. At the same time, they found unemployed workers were less likely to enter employment when the national minimum wage was raised.
Increasing the wages of over 1 million people
In 2014 the Low Pay Commission put forward a recommendation to Government that there was no reason for caution when raising the minimum wage. Their recommendations that the National Minimum Wage should be increased for all groups of workers, were accepted in full. This was as a result of the research carried out by Gregg and Papps in 2014. It was cited many times throughout the Low Pay Commission’s annual report and their full research findings were published on the commissions website.
The government estimated that over 1 million people would experience a pay increase, in the largest increase in pay (in real terms) since 2008.
A year later, the Low Pay Commission again cited Gregg and Papps research when making further recommendations to increase the National Minimum Wage. Once again, these were accepted in full by the government. The Irish government also made changes to their minimum wage rates as a result of the research. These represented the first increases in the minimum wage since 2007.
Research into the impact of the minimum wage on employee quit rates led to recommendations that the National Minimum Wage be increased in 2016. The work undertaken by Dickson and Papps, and the earlier work by Gregg and Papps was cited heavily in the 2016 Low Pay Commissions Annual Report. Once again, reccomendations were accepted and implemented on 1 October 2016.