How to weather a recession: UK firms, labour hoarding and the national minimum wage

Author: Wenchao Jin
Institution: Institute for Fiscal Studies
Type of case study: Research

About the research

In 2008–2009, the UK experienced its deepest recession since World War II. One notable feature of this recession was the resilience of employment, which fell by just 2.1 per cent at a time when national output  (GDP) fell by 6.3 per cent. This suggests that firms may have been trying to weather the recession by holding on to their workers and reducing their hours and/or pay, rather than making them redundant. Such behaviour is sometimes thought to indicate ‘labour hoarding’.

This report uses detailed business data to document what happened to a variety of indicators of labour hoarding, as well as investment and training, over the course of the 2008–2009 recession. This involves a simple regression-based analysis of the extent of labour hoarding and, more specifically, whether labour hoarding appears to be a response to the national minimum wage.

The study also considers whether, in addition to labour hoarding, there is any evidence that firms adjusted to the recession in other ways, such as reducing investments in capital or people (in the form of training).

The findings show that there is no strong evidence that the minimum wage hindered firms’ ability to respond to the recession by reducing hours or cutting real wages. However, there was some weak suggestive evidence that, at least in the longer term, the minimum wage may have reduced investment in firms that were most affected by its introduction. This calls for future research.

Methodology

To measure labour hoarding, the researchers used current and past Gross Value Added and employment information at the reporting unit level from the ARD. Moreover, in order to assess the impact of pre-recession skill shortages and vacancies on labour hoarding during the recession, they merged in NESS 2007 data to  the ARD at the region-industry-enterprise-size level. Finally, they  merged in hours and wages information from the Annual Survey of Hours and Earnings at a similar aggregate level.

Publications

The research findings were published in a report commissioned by the Low Pay Commission and a journal article:

Crawford, C., Wenchao, J. and Simpson, H. (2013) Firms’ productivity, investment and training: what happened during the recession and how was it affected by the national minimum wage? (IFS Report No. R76), London: Institute for Fiscal Studies. Retrieved 28 August 2013 from http://www.lowpay.gov.uk/lowpay/research/pdf/r76.pdf

Crawford, C., Wenchao, J., and Simpson, H. (2013) ‘Productivity, investment and profits during the great recession: Evidence from UK firms and workers’, Fiscal Studies, 44(2), June, pp. 153-177. doi: 10.1111/j.1475-5890.2013.12002.x 

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