Modelling Demand for Low Skilled/Low Paid Labour: Exploring the Employment Trade-Offs of a Living Wage

This paper analyses labour demand for low skill/low pay labour in order to explore the potential employment trade-offs associated with moving to a Living Wage. Using industry sector panel data we model demand for labour classified into 5 groups defined by age and highest educational qualification. Low pay is most prevalent amongst the less skilled and the young. Amongst the 11 market sector industry groups we consider, the three sectors that would face the largest rise in their wage bill were all employers to sign up to the Living Wage are: Wholesale & Retail, Hotels & Catering; Other Community, Social & Personal Services; and less skill intensive manufacturing industries. Our calculations suggest that, conditional on the level of output and worker effort, these cost increases would reduce employers’ demand for young low-skilled employees in the private sector by approximately 300,000. The analysis highlights the importance of allowing for labour substitution in considering the employment demand effects of exogenous shifts in wages. We find that in aggregate the reduction in conditional labour demand with the Living Wage is around 160,000; this is around half the reduction in the demand for young lower-skilled employees because employers substitute younger with more experienced workers. The number of employees who would see their earnings rise with a Living Wage far outweighs the estimated reduction in labour demand.