The Wage Dynamics of minimum wage workers in Britain

Project: Research project (funded)Research

Project Details


This project uses data from four British longitudinal datasets: the New Earnings Surveys panel dataset, the Annual Survey of Hours and Earnings, the Labour Force Surveys and the British Household Panel Survey. The samples analysed throughout the project are adult (aged 22 and over) male and female employees.

The overall aim of this research project is to investigate how the national minimum wage (NMW) has affected the wage growth of those low-wage employees directly affected by its introduction and first six upratings. This is achieved by: first, providing a detailed statistical description of the wage growth and (short-term) wage mobility of those employees directly affected by the minimum wage introduction and upratings, and modelling the probability of minimum wage employees at t moving up and off the NMW at t+1 (conditional upon employment at both periods). Secondly by using a difference-in-differences estimator to formally test whether the wage growth, and the probability of receiving positive wage growth, of low-wage employees has been significantly altered by the introduction of the NMW and the first six minimum wage upratings. Thirdly, considering to what extent the official upratings of the national minimum wage have become the new annual earnings review for low-wage workers.

Layman's description

The research project investigates the impact of the introduction of the national minimum wage and the first six subsequent minimum wage upratings on the wage dynamics of low-wage workers in Britain. Although the introduction of the minimum wage has provided an undoubted upward shift in the hourly earnings of the lowest paid workers in the British economy, what has yet to be fully investigated is how this new legal wage floor has affected the wage mobility or wage growth of these low-wage employees.

Key findings

The main results of this project can be summarized as follows: Although evidence based on the Labour Force Surveys tends not to be significant, estimates from the New Earnings Survey and Annual Survey of Hours and Earnings (ASHE) show that the introduction of the minimum wage and first six upratings have had more of a significant impact on wage growth. The probability of low-wage employees receiving positive wage growth seems to have been significantly increased by the minimum wage introduction and upratings. However, whether the wage growth of these workers has been significantly raised or not depends (crucially) on the magnitude of the minimum wage uprating considered. This result seems to be consistent with the idea of employers flattening wage growth profiles for low-wage workers during periods of relatively smaller minimum wage increases. More specifically, there is some evidence that the NMW upratings are regulating the annual wage growth afforded to low-wage/minimum wage workers. Difference-in-differences estimates based on the ASHE data describe quite a clear picture of the NMW impact on the probability of low-wage employees receiving a positive real wage increase: five of the six NMW upratings have a significantly increased probability of a real wage increase between t and t+1 for affected low-wage employees. The only exception being the 3rd NMW uprating and this was sensitive to the choice of real rather than nominal wage growth. In terms of the magnitude of the wage growth, difference-in-differences estimates (again from the ASHE) suggest that when the NMW upratings are larger in real terms (such as the 4th and 5th NMW upratings) wage growth is positively and significantly raised above what it would have been in the absence of the NMW uprating (consistent with the employer being legally bound to pay a higher NMW rate). In comparison when the upratings are relatively small (in particular the 3rd NMW uprating) the observed wage growth appears to be smaller than it would have been in the absence of the NMW. This result is argued to be consistent with employers holding down their annual wage increases (or flattening the wage growth profiles) during these periods of low NMW upratings. However, it should be noted that there was some sensitivity of these estimates to the choice of estimator (such as the robust and median regression), the use of a wage gap estimator (where the intensity of minimum wage treatment is controlled for) and, the use of propensity score matching with the difference-in-differences estimator.
Effective start/end date1/01/0531/10/07