About the research
How rigid are wages in the UK? What impact does the national minimum wage have on wage inequality?
How wages are determined is important for both macro- and microeconomics, and the results have an important real-world implication for employers, employees and the general economic activity. On the macro side, economists are concerned with the rigidity of wages, and on a micro level among the key issues is the impact of the minimum wage on wage inequality. Until recently, the data available have not provided the necessary detail to investigate these issues, but thanks to greater access to detailed data on individuals’ wages and incomes, this has changed. Using a previously unstudied dataset, the researchers used the Secure Data Service (now part of the UK Data Service) to access it in their office securely to conduct their research.
This research had two main aims to investigate: the frequency of wage changes (to form some idea of the extent of wage rigidity), and the response of firms to the national minimum wage in terms of wage and employment levels.
The researchers extracted data from the Monthly Wages and Salaries Survey and in particular used information on the average wage per employee and the number of employees at the firm level over different months between January 2000 and May 2010. To measure the impact of the national minimum wage on employment and wage inequality the researchers estimated linear and non-linear models of monthly firm average wage and employment growth. The impact is gauged by interacting the firm’s average wage over time with the monthly change in the national minimum wage over a set time period
The findings indicate that the national minimum wage had only a contemporaneous effect on firm wage growth increasing wages by more in low-wage firms but no significant change on the employment of affected firms. These findings suggest that the national minimum wage decreases wage inequality by increasing pay in low-wage firms without detriment to the employment of these firms.These findings can provide policy makers with more evidence, using different data, on the effect of the minimum wage rates set by the Low Pay Commission on the distribution of firm wages and on firm employment rates.