Why has the British National Minimum Wage had Little or No Impact on Employment?

Abstract

A century has passed since the first call for a British national minimum wage (NMW). That remarkable Fabian tract discussed wage setting, coverage, monopsony, international labour standards, inspection and compliance and the interaction between the NMW and the social security system. The NMW was finally introduced in 1999. It has raised the real and relative pay of low wage workers, narrowed the gender pay gap and now covers around 1-worker-in-10. The consequences for employment have been extensively analysed using information on individuals, areas and firms. There is little or no evidence of any employment effects. The reasons for this include: an impact on hours rather than workers; employer wage setting and labour market frictions; offsets via the tax credit system; incomplete compliance; improvements in productivity; an increase in the relative price of minimum wage-produced consumer services; and a reduction in the relative profits of firms employing low paid workers.Key words: national minimum wage, employment, compliance. JEL Classifications: J31, J38, J42. This paper was produced as part of the Centre's Labour Markets Programme. The Centre for Economic Performance is financed by the Economic and Social Research Council. AcknowledgementsFrom 1997 to 2007 I was a member of the Low Pay Commission (LPC) which recommends the National Minimum Wage. I am writing here in a personal capacity: any views expressed should not be taken as representative of the LPC or its secretariat. My thoughts on this topic have been greatly helped by discussions with LSE, LPC and other colleagues including Orley Ashenfelter, Willy Brown, Tim Butcher, Chris Dee, Sue Fernie, Hazel Hector, Alan Manning, Steve Machin, Mark Stewart and Jonathan Wadsworth. I am very grateful to Junmin Tang for her help in gaining access to Chinese employers and workers in London and for translation (section 5).Published by Centre for Economic Performance London School of Economics and Political Science Houghton Street London WC2A 2AE All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. IntroductionBritish workers were covered for the first time ever by a national minimum wage (NMW) for the last nine months of the twentieth century. In order to recommend the rate of NMW the Low Pay Commission (LPC) was established in 1997. The LPC is a form of social partnership with three employer representatives, three worker representatives and three independent members (Brown 2002(Brown , 2006. Its recommendations have always been unanimous and the government has always implemented the proposed NMW. Since its introduction in April 1999 the NMW has been uprated on seven occasions.Two issues dominat...

Adjustments to Minimum Wages in China: Cost-Neutral Offsets

“…Employers' profit-maximizing coping strategies in China accord with much of the research in the UK informal sector (e.g. Edward , 2004;Lam et al, 2006;Low Pay Commission, 2011, 2012Metcalf, 2008). That research emphasized the wide array of adjustment strate-gies that can exist in addition to (or instead of) the conventional reduction in employment emphasized in basic economics.…”

“…Research, however, does not find consistent evidence on this adjustment mechanism (Card and Krueger, 1995;Neumark and Wascher, 2008). Metcalf (2008) in his review article shows that the lack of evidence on this effect is due to other mechanisms, which can vary across employers, and that can also be at work to alter the effectiveness of minimum wages. The discussion here will outline those mechanisms sequentially, beginning with non-compliance and cost-offsets such as cutting back on fringe benefits, working conditions, overtime work and overtime pay, and training hours.…”

“…On the one hand, minimum wage increases may induce employers to enhance training so as to increase the productivity of the worker to be commensurate with their higher pay (Bertola, 2009;Metcalf, 2008). Also, minimum wage increases would disproportionately increase the wages of less experienced workers.…”

“…A further adjustment may also occur in the form of "shock effects" on management whereby the cost increase associated with the minimum wage may shock management into changing work and other practices to improve efficiency and organizational capabilities and in order to grow or develop the business (Cooke, 2005;Hyslop et al, 2012;Lee and McCann, 2011;Metcalf, 2008;Sai and Yin, 1995). Economists tend to downplay such an adjustment mechanism since it implies that the firm was not behaving optimally in the first place.…”

“…The adjustments may also help explain the contradictory evidence that prevails in this area with many studies finding no adverse employment effect or even a positive employment effect, while others find adverse employment effects. For example, reviews by Card and Krueger (1995), Metcalf (2008) and others tend to find no effect and occasionally even a small positive effect. Studies by Neumark and Wascher (2008) find adverse employment effects.…”