The minimum wage in the U.K.

By Paul Walker 25/02/2013

The Gunderson report referred to in the previous posting on the effects of the minimum wage in Canada also has a short section on the effects in the U.K. The interesting point about the U.K. experience is that British studies of the effect of minimum wages are effectively divided into two periods. Prior to 1993, minimum wages in the U.K. were set at the industry level by Wage Councils.

A limited number of studies evaluated their effects and found no negative effect on employment and occasionally a positive effect, albeit not statistically significant (Machin and Manning 1994, Dickens, Machin and Manning 1999). Even though this evidence is consistent with that found by Card and Kruger in the U.S., Card and Kruger (1995, p. 271) raise the concern that this lack of effect may reflect the possibility that “Wage Councils might have set rates strategically, raising them in industries that were expected to grow, and lowering them in industries that were expected to shrink.”

The second period started in 1999 when Britain adopted its first-ever national minimum wage.

The Low Pay Commission (2000) reported that its background studies did not find negative effects. However, these were essentially case studies or surveys indicating perceptions of the effect at the time the law was passed. More rigorous econometric evaluations, however, generally (but not always) come to a similar conclusion. More specifically:

  • Overall, there does not appear to be an adverse employment effect economy-wide (Stewart 2004).
  • There was a conventional adverse employment effect, however, in the low-wage sector where minimum wages would be expected to have an impact. The elasticity of employment with respect to the minimum wage increase ranged from about -0.01 to -0.03 in the low-wage nursing home care sector, indicating that a 10% increase in the minimum wage would reduce employment by about 1% to 3%. This is exactly the “consensus” range of estimates based on earlier US studies.
  • There is no evidence of spillover effects on wages near the minimum nor of any impact on wage inequality (Dickens and Manning 2004)
  • There is no evidence of a negative impact on training; if anything, the effects are positive (Arulampalam, Booth and Bryan 2004).

Thus the U.K. experience suggests that their more recent national minimum wage did not have negative effects except in the low-wage sector. Which is many ways is what you would expect. But Gunderson notes that there are four qualifications that should be kept in mind when looking at the recent British experience:

  • The case studies and surveys are based on perceptions at the time of the policy.
  • The econometric studies, while solid, were done shortly after the minimum wage came into effect so that longer-run effects are not observed.
  • The policy was anticipated and some adjustments may have occurred prior, making the before-and-after comparisons appear small.
  • The minimum wage increases were very small and were based on “what we believed the economy and business could manage” (Low Pay Commission, 2000, p. vii). In other words the wage increases were instituted at a time when they could more easily be absorbed.

So again, in the U.K., you see negative employment effects in the low-wage sectors of the economy.

[EC: Editor’s note: Further, Australia’s high standard minimum wage comes with a host of lower minimum wages for youths, trainees, apprentices, and the disabled: the groups most expected to be adversely affected by high overall minimum wages. It is entirely disingenuous for NZ advocates of high minimum wages to point to Australian evidence while ignoring that the minimum wage for 16 year olds in Oz is $7.55. See also John Cochrane (of the right) and Chris Dillow (of the left).]