The UK's National Living Wage (NLW) has increased wages not only for those who would otherwise have earned less than that, but also a wider group.
While the increases in the NLW from 2016 to 2019 led to an additional 1.2 million people aged 25+ earning at the NLW, it also led to a further 370,000 earning more than the NLW (compared with a baseline of the minimum wage only rising in line with average wages). There is evidence of wage rises up to 1.50 above the NLW (i.e. up to 9.71 in 2019), due to factors such as firms wanting to maintain pay differentials between occupations. This means that the NLW affected wages up to a fifth of the way up the wage distribution.
In addition, because of factors such as firms' reluctance to differentiate wages by age, around 250,000 workers under the age of 25, who were not legally bound by the NLW, saw their pay rise to at least the NLW.
Meanwhile there is no clear evidence of reductions in overall employment as a result of the NLW.
These are among the findings of new IFS research, published and funded by the Low Pay Commission. The study develops new methods for estimating the impact of the NLW on the number of jobs and on the number of people paid different amounts, and also examines the implications for disposable household incomes (after taxes paid and benefits received).
Other key findings include:
- The four increases in the NLW between 2016 and 2019 increased the pre-tax earnings of minimum wage workers by 33 per week. After accounting for taxes paid and reductions in income-related benefits resulting from higher earnings, this translated into a change in average net household incomes of 23 a week, or around 4%, for those minimum wage workers.
- Looking across all working-age households (including workless households), the biggest net income gains from the NLW on average went to households in the middle of the working-age income distribution, whose net incomes went up by 5.80 a week, or around 1%, from the four NLW increases. This underlines the fact that minimum wage rises - unlike means-tested benefits - are not targeted at those on low household incomes.
- Consistent with previous research from the UK, our results indicate that we can rule out large impacts on employment with high confidence. The central estimate of the impact on the number of jobs for those aged 25+ is that it was small, negative and not statistically significant. There is some evidence that employment effects for women were more negative than for the population as a whole.
- The NLW will rise to 9.50 in April and the government is committed to raising it to two-thirds of the median wage by 2024. The Low Pay Commission expects this to be around 10.60 in 2024, a level which - compared with average earnings - would be amongst the highest in OECD countries. While our results are reassuring, we cannot rule out that increases to this level would result in larger increases in unemployment. Effects should continue to be monitored carefully.
- The impact on household incomes is sensitive to disemployment effects. If future NLW rises generate moderately larger job losses, the overall impact on average incomes for poorer households could be very small or even negative.
Xiaowei Xu, a Senior Research Economist at IFS and an author of the research, said:
It was always predictable that those earning under the NLW would see significant wage rises. What is striking is the extent of the positive spillovers onto groups not legally affected. As a result of the reform, 1.2 million more people were paid the NLW, and another 370,000 were paid more than the NLW. Large numbers of employees aged under 25 have also seen higher wages as a result of the reform, despite the NLW not formally covering them.'
Thomas Wernham, a Research Economist at IFS and another author of the report, said:
Perhaps surprisingly, it is not the poorest, but middle-income households, who have benefited most from the NLW. This is because the poorest families often have no one in work, many minimum wage workers live with higher-earning spouses, and those who are in poor working families lose benefits as their pay rises. But the effects on household incomes are very sensitive to any employment effects from the NLW - something that will become more of a risk as it is pushed to higher levels over the coming years.'
Bryan Sanderson, Chair of the Low Pay Commission, said:
In his review of the international evidence on minimum wages, Professor Arin Dube recommended we undertake larger-scale evaluations every few years. It is over five years since the NLW was introduced and we want to understand its effects over an extended time period. This is the first of those evaluations. 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.'
The impact of the National Living Wage on wages, employment and household incomes
The distributional and employment impacts of nationwide Minimum Wage changes