The Impact of the National Living Wage on Wages, Employment and Household Incomes – Institute For Fiscal Studies
The National Living Wage (NLW) is currently the government’s flagship policy to help low earners in the UK. It was introduced in 2016 and has been increased every year since. In its first four years, it led to an increase in the minimum wage “bite” (defined as its level as a fraction of the median wage) for people aged 25 and over that was above the increase over the entire 16 year period prior to this, since the national minimum wage was introduced in 1999. This brings the UK closer to the international boundary of minimum wage levels. The UK government has set itself the goal of going further, reaching two-thirds of the median wage by 2024, while gradually extending the NLW to workers aged 21-24. In this research, we examine the effects that the NLW has had on wages, employment and household incomes after accounting for taxes and benefits. Our analysis covers the period between the introduction of the NLW and the last pre-pandemic upgrade, i.e. 2015-2019.
To study the impacts of NLW on the wages and employment of individuals, we develop a new approach that combines the main features of the previous methods. We estimate the impacts of NLW on the number of paid jobs in each wage bracket, which means that we jointly capture the employment and wage effects in a single, internally consistent framework. This follows the ‘clustering’ approach recently pioneered outside the UK by Harasztosi and Lindner (2019) and Cengiz et al. (2019). To identify these impacts, we draw on a long line of empirical research on the minimum wage, going back to Card (1992), who exploited the differences in wage levels between different regions of the country. These create different degrees of minimum wage exposure for otherwise similar groups of workers living in different locations, even with a nationally set minimum wage. No area is totally spared by the minimum wage. Thus, as with all studies that exploit regional wage variations, this provides estimates of the effect of the minimum wage in low-wage areas relative to higher-wage areas. We report these effects in this summary. As we explain in the accompanying working paper (Cribb et al., 2021), with additional assumptions, one can use the relative estimates to extrapolate an estimated “absolute” or “total” effect on the set from the country. This turns out to be slightly larger, but very similar, to the relative effects, reflecting the relatively low exposure of the highest earning areas to the minimum wage.
To study the impacts of NLW on household income distribution, we apply another new approach. We exploit the detailed estimates of labor market impacts described above, taking into account both employment effects and spillover effects on those with higher wages. We simulate these effects in household survey data combined with the IFS tax and benefit microsimulation model, TAXBEN, to account for the interactions between wages, taxes paid, and benefits and tax credits received.
We find that the National Living Wage and its increases have had substantial effects on wages down the distribution. By averaging the four minimum wage increases for people aged 25 and over that we consider (i.e. in April 2016, 2017, 2018 and 2019), we estimate that each increase resulted in a reduction the number of people paid below the new NLW by a magnitude equivalent to around 5.4% of employees. We see statistically significant increases in employment not only in the new NLW but also up to around £1.50 per hour above (around the 20and percentile of hourly wages) – indicating “trickle down” effects on the wages of some workers slightly above the minimum.
Consistent with previous research in the UK, we estimate that any impact on employment of the introduction of the NLW and its upgrades was small and not statistically significantly different from zero. Our central estimate of the average effect of each of the four minimum wage increases for people aged 25 and over between April 2016 and April 2019 is that each increase reduced employment by 0.1% of the workforce. work before politics in low-wage regions versus higher-wage regions, with a 95% confidence interval ranging from –0.4% to +0.2%. Therefore, we can exclude important effects with high confidence. The absence of a statistically significant effect on employment is consistent across all alternative specifications. This is also true if we consider each of the four increases in isolation, or if we look at the “long difference” between 2015 and 2019, although the statistical precision is greatly reduced in these cases. The “elasticity of employment with respect to own wages” implied by our estimates (the ratio of the percentage change in the employment of the workers concerned, divided by the percentage change in the average wages of the workers concerned) is – 0.17, which is within the typical range found by studies of other minimum wage increases.
To examine whether there is evidence for adjustment in working hours, we estimated the effect on the number of full-time and part-time jobs separately, and neither is statistically significant. The effect of the NLW on wages stemmed mainly from its effect on part-time workers, particularly female part-timers, reflecting their relatively high probability of being on low wages. Part-time female employees accounted for almost half of the reduction in jobs paid below the new NER and the corresponding increase in jobs paid above.
We find evidence of more negative impacts on women’s employment than on men’s. In our baseline specification, we estimate that female employment in low-wage regions fell by 0.44% relative to high-wage regions; the 95% confidence interval extends from -0.85% to -0.03%, which makes it just statistically significant at the 5% level. In the alternative specifications, this effect consistently oscillates near the 5% (arbitrary) statistical significance level, but is sometimes a little below and sometimes a little above.
We also examine the effects of the NLW on workers under 25, who are not legally affected by it. Our estimates show substantial and statistically significant positive impacts on their wages. Our central estimate of the effect of employment on the group is positive but not statistically significant, with relatively wide confidence intervals due to the much smaller sample size available. Overall, therefore, the evidence we produce suggests that wages for this group have been significantly increased and it is more likely than not that the impact on their employment rates has been positive or neutral.
We then take estimates of the effect of NLW on employment and wages (including spillover effects) and use them to calculate impacts on household net incomes – taking into account household composition, taxes and benefits. An important caveat of this analysis is that given the increase in corporate payrolls, unless there is a fully offsetting increase in productivity, there must be other adjustments – for example, product prices or profits – and these would reduce real incomes for some. households. It is therefore likely that the total effect on household incomes will be smaller than what we show, with ambiguous distributional implications.
Of all households with someone aged 25-64, the largest cash gains are in the middle of the household income distribution, which sees a growth of £1.50 per week in net income from each increase in NLW on average. The picture is quite symmetrical around this, with the bottom and top earning similar amounts (the top and bottom 10% both see a gain of less than 35p per week). In proportional terms, the middle of the distribution still gains the most, although the bottom clearly gains more than the top measured in this way. One of the reasons why the effects are not more progressive is that poorer families see their means-tested benefits reduced (and pay higher taxes) as their incomes rise. In the second and third deciles of the distribution of household income, almost half of the increase in income is recovered in this form.
Another reason why the effects according to household income are not more progressive is that some of the poorest households have no one in paid work. When comparing the distributional effect of the minimum wage with that of other policies targeting different populations, this is an important feature to consider. From the perspective of the Low Pay Commission, however, the population concerned is arguably only those who work – particularly if the minimum wage itself does not have much impact on working and non-working households. are not. If we only look at households with someone in paid work before the introduction of the NLW, the impact is somewhat more gradual: each increase in the NLW has increased the incomes of the bottom 30% of working households on average. about 0.35%, with effects decreasing steadily above this.
Our simulation approach to estimate the effect on household income also allows us to demonstrate that the results are sensitive to the employment effect, the magnitude of which is of course estimated with uncertainty, underlining the interest of our approach which attempts to incorporate these effects into the analysis. That said, it also allows us to demonstrate that it is very unlikely that a disemployment effect was large enough to extinguish all gains in household income.