The Impact of the National Minimum Wage on Productivity, Business Performance and Employment - NIESR
The National Minimum Wage (NMW) has increased the earnings of the low paid thereby increasing labour costs among low-paying firms. However, there is no strong evidence to suggest that overall employment was affected or that low paying businesses were more likely to close; rather these low-paying firms responded by increasing the productivity of their workers or, in some cases, by reducing profit margins.
These are the key findings of two new research reports published this week by the National Institute of Economic and Social Research (NIESR), funded by the Low Pay Commission. Both reports analyse the latest available data on businesses and workers to analyse the period since the introduction of the NMW in April 1999, with a focus on recent up-ratings covering the economic downturn and subsequent recovery.
Rebecca Riley and Chiara Rosazza Bondibene compare changes in performance between businesses that pay low wages and businesses that pay higher wages on average. Workers that are paid the NMW tend to work in businesses that pay low wages on average.
They find evidence to suggest that the NMW led to increases in labour costs amongst low-paying firms upon its introduction in 1999, but also following the above average earnings increases in the NMW of the mid-2000s and after the recession when NMW up-ratings were modest but real average wages were falling and some workers experienced nominal pay cuts.
Low-paying firms may have responded to these labour cost increases by increasing labour productivity, the amount of value added by the firm per employee. The authors suggest that these increases in labour productivity arose not because of reductions in employment, but were associated with increases in total factor productivity, the efficiency with which firms convert labour and capital into outputs. The mechanisms for which such productivity increases came about are not explored in the report, but could include increases in training provision or better motivated employees.
The study also finds no evidence that the NMW led low-paying businesses to close, and not much evidence to suggest that profit margins differed substantially between firms that were more or less affected by the NMW. There was, however, some evidence that the NMW may have resulted in lower profit margins amongst small and medium size businesses in the years following the recession.
Helen Bewley and David Wilkinson explore the impacts of the NMW on the employment prospects of low paid employees through the recession and recovery. They find some evidence of a reduced likelihood of female part-time employees being retained in employment from one year to the next, but this was not the case for women working full-time or for younger workers.
There were also some signs that following the recent recession the NMW reduced the likelihood of low-wage male full-time employees staying in work, although this result was sensitive to changes of specification and to the dataset used for the analysis. However, during this period the authors also find an increased likelihood of unemployed men entering work, suggesting greater labour market churn for low paid men.
Further analysis indicated that that any employment effects of the NMW were generally concentrated among private sector employees and those in large enterprises.
The report also examined the impact of the NMW on hours worked. Employees eligible for the youth development rate experienced a fall in hours following the recession. There was no consistent evidence about the impact of the NMW on hours worked for other workers.
Overall the two reports highlight that the NMW has increased earnings for low-paid employees and increased labour costs for employers. Firms have responded to increased costs by improving the productivity of their workers, whilst total employment appeared not to be affected. However, in terms of employment retention, some groups of employees were more affected than others.
There is little evidence to suggest that the planned rise in the NMW scheduled to take effect from October 2015 will significantly damage overall employment prospects or business performance. However, given the uncertain economic climate, further monitoring of the impact of the NMW is clearly warranted with a focus on the employment prospects of low paid women working in part-time jobs and low-paying businesses.
Notes to editors:
Full copies of the report are available at:
To discuss the research for interviews, please contact:
- Jonathan Portes on firstname.lastname@example.org or 07766 441148
The authors of the report on the impacts of the NMW on UK businesses are Rebecca Riley and Chiara Rosazza Bondibene; the authors of the report on the impacts of the NMW on the employment retention of low paid workers are Helen Bewley and David Wilkinson.
This work was supported by the Low Pay Commission, and (the report on the NMW and UK businesses) by the Economic and Social Research Council, but the views expressed are those of the authors.
NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.
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