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NLW has “compressed” pay distribution, according to new research 

The Low Pay Commission (LPC) has published a new blog about research discussing how the National Living Wage (NLW) relates to inequality and job progression.

Wage inequality has decreased since the introduction of the NLW
Wage inequality has decreased since the introduction of the NLW

Two major questions were introduced by the LPC. They addressed whether the minimum wage had an impact on wage inequality and if increases to the minimum wage aided or impeded people when trying to make the transition into a better-paid job.


The LPC provides recommendations to the government in relation to the future of the minimum wage within the UK and carries out research in order to reinforce those proposals, exploring the effects of the increasing minimum wage on not only individuals but also on businesses.


This particular research was a two-year project, commissioned in 2018 and carried out by Silvia Avram from the University of Essex and Susan Harkness from the University of Bristol.


As part of the study, Avram and Harkness examined the NLW’s effects on wage “spillovers”. This term refers to how an increase to the minimum wage benefits not only those directly affected by it but those who earn slightly above the minimum wage rate, who also end up receiving a pay rise.


The extent of spillovers was assessed by examining wage distribution across regions. Researchers looked at variations across different “travel-to-work” areas and controlled for other differences between areas.


Findings implied that only about seven percent of the workforce are paid the NLW, and in the period to 2018, workers in the bottom 30 percent of the pay distribution benefited either directly or indirectly from it.


Research also indicated that wages increased faster in areas with more minimum wage workers. A one percent increase to minimum wage is associated with a two to 2.5 percent increase in wages at the fifth percentile, a 1.5 to two percent increase at the tenth percentile and one to -1.5 percent at the 20th percentile.


The second section of the research studied how the first two years of the NLW being implemented affected the ability of minimum wage workers to move into higher-paying jobs. Jobs were divided into three groups based on pay – they were minimum wage jobs, low-paid jobs (more than NLW but less than 2/3 of average wage) and high-paid jobs (paying more than 2/3 of the average wage).


The research again utilised the variation in minimum wage coverage across areas to explore the NLW’s effect on moves out of minimum wage employment.


The findings demonstrated that roughly half of minimum wage workers moved into jobs that paid above the minimum wage each year but that around 80 percent of those moves were into low-paid employment, with only 20 percent securing high-paid jobs.


Over three years, moves to high-paid jobs occurred only slightly more frequently than over a year. There was minimal proof to suggest that the higher NLW made it more difficult for minimum wage workers to move into higher-paid jobs.


The overarching findings were that the NLW has “compressed” pay distribution and that wage inequality has decreased since its introduction. Workers earning above the minimum received faster increases than they would have done ordinarily, but this compression has not led to more minimum wage workers becoming “stuck” in lower-paid jobs and the rising minimum wage has had no negative impact on the number of minimum wage workers moving into higher-paid jobs.


The parting message is that the LPC will continue to explore this topic and that the project has now been expanded to investigate the effects on progression of the 2018 uplift to £7.83.

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