This question is fundamental to the LPC’s work and is at the centre of our research programme each year. In 2019, we commissioned an econometric project from the Institute for Employment Studies (IES)[1] to look at just this.
This work builds on the difference-in-difference approach used in previous UK minimum wage studies. Its aim was to identify whether the introduction of the National Living Wage (NLW) in 2016 and subsequent upratings in 2017 and 2018 had any effects on employment and hours. Research to date has shown few adverse impacts, with the exception of some evidence of negative employment retention for women working part-time.
How does this analysis work?
This analysis divided workers into a ‘treatment’ group – those directly affected by the NLW change – and compared them to a separate ‘comparison’ group – those paid slightly (up to 10 per cent) above the incoming NLW. To check the robustness of their results, researchers used two additional specifications to look at a slightly higher-paid comparison group, 10-20 per cent above the incoming NLW, and also weighted the treatment group according to the gap between their wage and the incoming NLW.
Pay information was taken from two datasets: the Annual Survey of Hours and Earnings (ASHE) and the Longitudinal Labour Force Survey (LFS). Researchers used these to estimate effects across all workers, but also to divide workers by gender and whether they worked full or part-time. IES used the rich information on worker characteristics available in the LFS (and, to a lesser extent, ASHE) to create a series of control variables to attempt to isolate the effect of the NLW from other factors.
What did the results show?
The researchers’ conclusions covered pay, retention and hours of work.
For pay, the NLW’s introduction at £7.20 meant real pay increased faster for the treatment than the comparison group. These results held across all the sub-groups examined, with the exception of part-time men (for whom real pay increases were similar to other workers). For subsequent upratings, the results suggested that for most subgroups pay grew by the same amount for both the comparison and treatment groups. This suggests that to deal with the new rate in 2016, employers narrowed the pay differentials between NLW workers and those paid just above; but that in 2017 and 2018 they were able to maintain those differentials.
Employment retention is defined as the proportion of employees in work prior to the increase in the minimum wage who were still employed after the increase. IES found that the NLW’s introduction in 2016 appeared to reduce the likelihood of male and female part-time minimum wage workers being retained in employment.
In one alternative specification (where the treatment group was weighted by the individual’s wage-gap to the incoming NLW), researchers found employment retention effects for these groups in 2016. Using the LFS, they also found weak evidence of negative employment retention effects for women working part-time. But there was no clear evidence of similar effects for any group in 2017 or 2018.
Additional retention findings included that women working part-time in the public sector suffered most following the NLW’s introduction; whereas the 2018 uprating had a positive effect on retention for those working part-time in the private sector; and after the 2018 uprating, men working part-time in medium-sized or larger firms were more likely to be retained than those working in smaller businesses.
There was little evidence found of effects on average hours worked from the introduction of the NLW (except for limited evidence of falling hours for men working full-time) or the subsequent upratings.
Conclusions
Overall, it appears that the NLW has raised pay for the lowest hourly-paid workers, with only a limited impact on employment and hours worked. However, due to the lag in accessing data, this research could only examine impacts up to and including the 2018 uprating.
We recently issued an invitation to tender for our research programme for 2020, which includes a major evaluation of the NLW’s impacts from 2016 all the way through to reaching its 60 per cent target (which will be achieved when it rises to £8.72 this April). The deadline for receipt of tenders is 14.00 on Monday 2 March 2020.
As well as looking at impacts on employment, hours and income, we’ll also investigate its impacts on young people and family incomes. We will also supplement this work with more in-house econometric analysis, using tried and tested methodologies similar to those undertaken here by IES.
[1] Stella Capuano, James Cockett, Helen Gray and Dafni Papoutsaki