Categories: Office for National Statistics, World of Work, Impact, Policy
13 March 2023
This research used data made available via the Office for National Statistics (ONS)Secure Research Service, which is being expanded and improved with ADR UK funding.
Author: Jonathan Cribb, Giulia Giupponi, Robert Joyce, Attila Lindner, Tom Waters, Thomas Wernham and Xiaowei Xu (Institute for Fiscal Studies)
Date: December 2021
The Minimum Wage is a key policy lever affecting millions of workers across the UK. A research study used secure data to understand how increases to the minimum wage – specifically with the introduction of the National Living Wage (NLW) – affect workers’ wages, employment, and household incomes. It found limited employment effects – however, there were significant ‘spillovers’ to higher paid workers, with middle income households benefiting the most from a minimum wage rise.
This research contributed to the Low Pay Commission’s 2021 recommendations on NLW levels. In their report they cited the findings as a reason to pay the NLW to younger workers, and as evidence that NLW rises were not harming employment.
This research was commissioned by the Low Pay Commission, who sought to fund research for ‘a major evaluation’ of the impacts of the NLW on employment and incomes. Due to methodological limitations, existing studies have left important gaps in what is known about its impact. This is due to minimum wage increases applying to all workers at once, making it hard to know what would have happened if the minimum wage had not risen. The Institute for Fiscal Studies therefore developed a new methodology to address this critical issue and enable more comprehensive research into the impact of NLW increases.
Hear Xiaowei Xu discuss this research as part of the ONS Research Excellence series on Thursday 30 March, 11:00-12:00. Register now.
The project accessed the Annual Population Survey (APS) and the Annual Survey of Hours and Earnings (ASHE) through the ONS Secure Research Service.
The APS is a continuous survey of households in the UK. It uses data combined from two waves of the main Labour Force Survey (LFS) with data collected on a local sample boost. The topics covered in the survey include employment, unemployment, housing, ethnicity, religion, health, and education. The researchers used data from 2012-2019.
The ASHE is completed annually by employers and contains various measures of pay and hours worked. The survey is based on a 1% random sample of employee jobs taken from HM Revenue and Customs’ Pay as you Earn (PAYE) records. The researchers used data from 2012-2019.
The researchers also used Family Resources Survey (FRS) data from 2014-15, provided by the Department for Work and Pensions.
DOIs (Digital Object Identifiers):
- Office for National Statistics, released 31 October 2022, ONS SRS Metadata Catalogue, dataset, Annual Population Survey - UK, 10.57906/0qp1-6k77
- Office for National Statistics, released 26 October 2022, ONS SRS Metadata Catalogue, dataset, Annual Survey of Hours and Earnings - UK, 10.57906/x25d-4j96
The first half of the project focused on analysing the impact of the minimum wage on employment and wages. Researchers used ASHE data together with Mincer equations (a model that explains wage income as a function of schooling and experience) to measure how a similar job done by a similar worker would differ depending on where they lived. This allowed the researchers to group together workers who earn different amounts but would otherwise earn the same if they lived in the same area (‘similar workers’). Because they earn different amounts, they are affected differently by minimum wage changes.
Researchers then studied how employment changed across the wage distribution following the introduction of the NLW and its subsequent upratings. Those who lived in the highest wage regions acted as a control group. The research team compared the outcomes for workers in lower wage regions against similar workers in the highest wage regions. This gave an estimate of the ‘relative’ impact of the NLW, revealing how much more workers in lower wage regions were affected than those in high wage ones. This was applied to the whole wage distribution, including for workers who earned above the NLW but could be affected by ‘spillovers’. With this impact on wage distribution, the researchers were able to estimate the relationship between the change in employment and the change in wages.
For the second half of the project, researchers analysed the effect on household incomes. Researchers used Family Resources Survey data from before the introduction of the NLW. They simulated a change in the NLW using their estimates and calculated what would happen to earnings for different workers. By combining this data with a detailed tax-benefit microsimulation model, researchers could estimate the effect on net household income (after taxes and benefits). From this, they could calculate the distributional effects of the policy: the extent to which it raised poor and rich households’ incomes.
This research project had three key findings.
In line with existing evidence from the UK, the employment impact of the NLW was found to be limited. Similar workers in high and low wage regions were about as likely as one another to remain employed, even though those in low wage regions were more directly affected by the NLW.
There are significant ‘spillovers’ from the NLW: wages went up for workers who earned as much as £1.50 per hour more than the NLW. This is likely because employers increased their wages to maintain pay differentials. In fact, for every 10 employees brought onto the NLW since 2016, another three employees have seen a pay rise above the NLW due to the reform.
The NLW had the greatest impact on middle income households for several reasons. The poorest families often have no one in work, and so cannot benefit from a minimum wage rise. Many minimum wage workers live with higher-earning spouses, putting them further up the household income distribution. Moreover, those who are in poor working families see their benefits withdrawn as their pay rises. This means that their net incomes (after tax and benefits) go up significantly less than their gross incomes (before tax and benefits).
This research fed into the Low Pay Commission’s 2021 recommendations on minimum wage levels, and was featured numerous times in their report. This included specifically citing it as a reason for recommending that the NLW be paid to younger workers. They also cited it as a reason to be confident that NLW rises were not significantly harming employment.
Bryan Sanderson, Chair of the Low Pay Commission, said of the research: “It uses innovative methods to show that, up to the pandemic, the NLW successfully increased pay without damaging employment. The findings on household incomes, in particular, are of great importance and will be the base for further work in the future.”
Publications and reports
- Institute for Fiscal Studies (IFS) Working Paper, December 2021: The distributional and employment impacts of nationwide Minimum Wage changes
Blogs, news posts, and videos
- IFS press release, December 2021: For every 10 employees brought onto the National Living Wage since 2016, another 3 employees have seen a pay rise above the NLW because of the reform
Presentations and awards
- Commended for Methodology, ONS Research Excellence Awards 2022
- Low Pay Commission, September 2020
- IFS, September 2020
- IAB-LISER workshop, May 2021
- Milan Labour Lunch, May 2021
- European Labor Symposium for Early Career Economists, March 2022
- CESifo, May 2022
- fRDB Annual Workshop, September 2022
- IZA Workshop on Labor Market Institutions, September 2022
About the ONS Secure Research Service
The ONS Secure Reseach Service (SRS) is an accredited trusted research environment, using the Five Safes Framework to provide secure access to de-identified, unpublished data. If you use ONS SRS data and would like to discuss writing a future case study with us, please ensure you have reported your outputs here: Outputs Reporting Form