How does the minimum wage impact on employment and hours?

James CockettJames Cockett, one of our #DataImpactFellows, discusses research he undertook with colleagues at the Institute for Employment Studies to investigate the impact of the introduction of the National Living Wage and its later upratings on employment retention and hours worked.

 

Readers of the Data Impact blog may remember the exciting (and somewhat scary!) day I had presenting interim evidence to the Low Pay Commission last year around the effects of the introduction of the National Living Wage back in April 2016. The Low Pay Commission (LPC) is an independent body that advises the Government about the National Living Wage and the National Minimum Wage. I am honoured to say that our research findings are a key part of the LPC’s decision making.

Since then, we (at IES) have completed the research, presenting again to the LPC at its Annual Research Symposium in September 2019.

Our research focused mainly on the impact of the introduction and upratings (in 2017 and 2018) of the NLW on employees aged 25 and above, along with some additional exploration of the impact on younger employees. Our analysis also explored variations in impact between men and women and part-time and full-time employees, as well as differences by other characteristics, such as the nature of the employer or employment contract.

The data

Our research used the Annual Survey of Hours and Earnings (ASHE), covering the period from 2011 to 2018, and the longitudinal Labour Force Survey (LFS) over the same period. There were different advantages to using each dataset. ASHE – which was the main focus of our analysis – is based on a 1 percent sample of payroll records. This means that it is more likely to provide accurate pay data; it also has the advantage of larger sample sizes than the LFS. The latter, on the other hand, has more detailed information on employee and employer characteristics.

Our approach

We started with a difference-in-difference analysis to investigate how the introduction of the NLW in 2016, as well as its upratings in 2017 and 2018, affected employment retention and basic weekly working hours for part-time and full-time employees of either gender. Our analysis also explored differences arising from organisations being in the public or private sector, from their size and from the type of employment contract employees had.

In additional research, we used difference-in-difference-in-differences (DDD) analysis to corroborate our findings. This element of our work meant we could make use of data around the divergence between the minimum wage rate for 21 to 24 year olds and the NLW rate for those aged 25 and above.

Our findings

We discovered that the introduction of the NLW in April 2016 did cause a reduction in the retention of part-time employees, whether male or female. We found little evidence that the NLW upratings in 2017 and 2018 made any difference to levels of retention for employees, whether male or female, or part-time or full-time. We found that the 2018 uprating appeared to have improved employee retention for women working part-time in the private sector, compared with the public sector. Alongside this, we uncovered evidence that the 2018 uprating also had a positive impact on employment retention for part-time male employees in larger firms (50 employees plus), whereas this was not the case in smaller firms.

We found little evidence that the introduction and uprating of the NLW affected working hours. Our analysis of the LFS showed that the 2017 uprating of the NLW did result in men working full-time on temporary contracts experiencing an increase in working hours relative to those on permanent contracts, but this was not evident in our analysis of the ASHE. Otherwise, we did not find evidence that the working hours of those with other characteristics were affected in terms of working hours.

Our analysis shows that while upratings of the NLW have had limited impact on employment retention and working hours, the initial introduction of the NLW reduced employment retention for part-time workers. This was most clearly the case for women who worked part-time. The increase in the minimum wage (for those aged 25 and above) was unprecedented in magnitude – 7.5% higher than the minimum wage set in October 2015 and 10.8% higher than the level a year earlier (April 2015). Therefore, our analysis suggests caution around future rises of a similar size.

Impact

Our report for the Low Pay Commission has fed into their recommendations for an increase of 6.2% in the NLW from April 2020. The increase was covered by BBC News and The Guardian.

For me personally, it has been really positive to see that research and analysis I have undertaken has been an important part of the considerations by the Low Pay Commission which will have a positive impact on the everyday lives of many of the lowest-paid workers in the UK.

 

Read the case study describing the research by James and his colleagues.


James Cockett is one of our #DataImpactFellows.

James is a Research Economist at the Institute for Employment Studies (IES), a research institute based in Brighton. He joined IES in July 2017 after completing his first degree at the University of Sussex. James’ research interests include barriers facing disadvantaged groups in the labour market and higher education.

James has evaluated the effect of the introduction of the National Living Wage (NLW) and changes in the National Minimum Wage (NMW) on employment and hours. The project involves analysis of the Labour Force Survey and the Annual Survey of Hours and Earnings, funded by the Low Pay Commission. More recently James has worked on a project for the Social Mobility Commission investigating the link between internal migration and social mobility. James undertook analysis of Understanding Society as well as analysis of migration flows.

 

Follow James on Twitter.

 

 

 

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