MINIMUM WAGE

What effect has the introduction of a national minimum wage in the UK had on employment, poverty and gender pay gap?

What effect has the introduction of a national minimum wage in the UK had on employment, poverty and gender pay gap?

Employment

The UK has had a marked rise in wage inequality over the last 20 years. Figure 1 shows the evolution of inequality in the bottom half of the wage distribution using hourly earnings information from the New Earnings Survey 1975-991. The most striking feature is the rapid rise in the 50th/10th hourly wage ratio in the 1980s. Trends in the 1990s are less marked but have not reversed the earlier rise.

This is also confirmed by Figure 2. This figure presents the same measures of inequality between 1993 and 2001 using data from the source that will be used in this paper, the Quarterly Labour Force Survey. In April 1999, a National Minimum Wage (NMW) was introduced into the UK, motivated at least in part by a desire to reverse this trend in wage inequality. Initially the rate was set at £3.60 per hour for those aged 22+ and £3.00 for those aged 18-21 inclusive. The adult rate was raised to £3.70 in October 2000 and to £4.10 in October 2001.

This paper is about estimating the effect that the NMW has had on UK wage inequality among adults. One reason why one might have been optimistic about the ability of the NMW to reduce wage inequality is that there is empirical evidence to suggest that the minimum wage in the United States has had a powerful influence on wage inequality in the bottom half of the earnings distribution, where trends in wage inequality have been somewhat similar to those in the UK (see diNardo, Fortin and Lemieux, 1996; Lee, 1999; Teulings, 2000).

In the 1980s, when the federal minimum wage was kept at a fixed nominal level and consequently declined in relation to average earnings, wage inequality in the bottom half of the distribution rose dramatically. And, in the 1990s when the federal minimum was raised 3 times, this trend was stopped and even partially reversed. In the UK, the changes in wage inequality in the past 20 years cannot plausibly be blamed on the minimum wage since the UK had no minimum wage prior to 1999 except for the rather ineffective Wages Councils, which set minimum wages for a number of low-paying sectors prior to their abolition in 1993.

However, other institutions may have been declining in their effectiveness to provide a floor to wages e.g. welfare bene fits have been indexed to prices and not wages since 1983 and the fraction of workers who have their wages determined by collective bargaining is much lower than 20 years ago. It may be that the NMW is a substitute for these.

The impact of the NMW on wage inequality will depend on the numbers of workers affected both directly and indirectly by the NMW, the level of the NMW ...