Is the National Living Wage working?

In July 2015 the UK government announced the introduction of a new statutory ‘National Living Wage’ (NLW) that would apply to those aged 25 and over from April 2016. At a rate of £7.20, this represented a significant increase of 7.5% over the existing National Minimum Wage rate (and a 10.8% increase on the rate prevailing a year previously – in April 2015). In work published today alongside three other reports, which together informed the Low Pay Commission’s 2018 Report, my colleagues and I assess the effects of this intervention in the labour market on employment retention, hours worked, and wages.  

When it comes to setting minimum wage rates the main concern is about jobs, and also hours worked. If workers become more costly, employers might decide to higher fewer workers, or employ the ones they have for fewer hours. These concerns are particularly pertinent following a large increase in a minimum wage, such as the April 2016 introduction of the NLW, and with government plans to raise the NLW to 60% of median earnings by 2020.

Using data from the Annual Survey of Hours and Earnings (ASHE), we find no robust effect on general employment retention or hours worked, despite finding, as expected, significant wage growth for the lowest paid. We split our sample into four demographic groups: women working in part-time jobs, women working in full-time jobs, men working in part-time jobs, and men working in full-time jobs. While we do not find any robust negative effects on employment retention or hours worked for men or for women working in full-time jobs, we do find a reduction in employment retention for  women working in part-time jobs of approximately 2.5 percentage points following the introduction of the NLW in April 2016.

We also examine the effects for various demographic subgroups working in low-paying occupations, low-paying industries, and most regions of the UK (sample sizes permitting), where we expect the ‘bite’ of the minimum wage might be more significant due to average wages being lower in these occupations, industries and regions. Because of the smaller sample sizes these results need to be treated with more caution.

We do find evidence of a reduction in employment retention for women working part-time in retail occupations and in the retail industry. We do not find evidence of reductions in employment retention for any demographic group in the other industries and occupations we examine, including childcare, food processing, non-food processing, storage, transport, social care, cleaning and hospitality occupations, and cleaning, food processing, social care and hospitality industries. Across regions of the UK we generally do not find negative employment retention effects with the exception of women working in part-time jobs in the North East.

Overall we find that the introduction of the NLW has increased wages for the low paid with generally little adverse effect on employment retention. However, consistent with previous research, we do find some evidence of adverse effects on the employment retention rates of women working part-time. This group faces the most risk of losing their job or having their hours reduced following an increase in the wage floor, and therefore as the NLW moves towards 60% of median earnings, the effects on this group need to be closely monitored by policy makers and future research.

Economists understand that a simple model of demand and supply cannot adequately describe markets as complex as the market for labour. It could be, for example that some products are not particularly price sensitive, and that businesses can pass on the costs of higher minimum wages to customers. It also takes time and effort to find a new job, and there are costs to businesses of recruiting people; this means workers may not necessarily lose their job from small variations in wages. These and other reasons may help explain why we do not find significant negative effects on employment retention, but this is an area where research continues.

“The Impact of the Introduction of the National Living Wage on Employment, Hours and Wages” was authored by Andrew Aitken, Peter Dolton and Rebecca Riley