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UK wage underpayment: implications for the minimum wage

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  • Duncan Watson

Abstract

Dynamic monopsony suggests that, due to labour market frictions, workers will be paid below their productivity. This paper uses the stochastic frontier technique to estimate the degree of this underpayment for UK employees. It finds evidence of significant underpayment. The estimates are used to examine whether the predictions of dynamic monopsony are empirically accurate. No conclusive evidence against this theoretical framework is found. The paper also investigates whether payment according to productivity is a sufficient condition for the elimination of the 'working poor' problem. Due to the existence of an unemployment barrier, it finds that the minimum wage is not an effective anti-poverty policy.

Suggested Citation

  • Duncan Watson, 2000. "UK wage underpayment: implications for the minimum wage," Applied Economics, Taylor & Francis Journals, vol. 32(4), pages 429-440.
    • Handle: RePEc:taf:applec:v:32:y:2000:i:4:p:429-440
    DOI: 10.1080/000368400322606
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    References listed on IDEAS

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    1. Lazear, Edward P. & Michael, Robert T., 1988. "Allocation of Income within the Household," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226469669, September.
    2. Kenneth Burdett & Dale T. Mortensen, 1989. "Equilibrium Wage Differentials and Employer Size," Discussion Papers 860, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Stephen Machin & Alan Manning, 1994. "The Effects of Minimum Wages on Wage Dispersion and Employment: Evidence from the U.K. Wages Councils," ILR Review, Cornell University, ILR School, vol. 47(2), pages 319-329, January.
    4. Stephen Machin & Alan Manning & S Woodland, 1993. "Are Workers Paid their Marginal Product? Evidence from a Low Wage Labour Market," CEP Discussion Papers dp0158, Centre for Economic Performance, LSE.
    5. Deepak Lal, 1995. "The Minimum Wage," UCLA Economics Working Papers 723, UCLA Department of Economics.
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    Cited by:

    1. Peter Dawson & Timothy Hinks & Duncan Watson, 2001. "German Wage Underpayment: An Investigation into Labor Market Inefficiency and Discrimination," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(1), pages 107-114.
    2. Ogloblin, Constantin & Brock, Gregory, 2005. "Wage determination in urban Russia: Underpayment and the gender differential," Economic Systems, Elsevier, vol. 29(3), pages 325-343, September.
    3. Christian Ragacs, 2007. "On the empirics of minimum wages and employment: evidence for the Austrian industry," Applied Economics Letters, Taylor & Francis Journals, vol. 15(1), pages 61-64.

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