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Changing the structure of minimum wages: firm adjustment and wage spillovers

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  • Giulia Giupponi
  • Stephen Machin

Abstract

This paper analyses the economic impact of a significant change to the structure of a minimum wage setting policy. The context is the United Kingdom where government mandated an unexpected change in the structure of minimum wages and their setting in 2016 by introducing a new minimum wage - the National Living Wage (NLW) - for workers aged 25 and over. The new NLW rate was significantly higher than the minimum wage for those under age 25. The analysis studies the consequences of this change in a sector containing many low wage workers, the care homes industry. The new minimum wage structure and associated higher minimum wage for those aged 25 and above significantly affected wages, but at the same time with little evidence of adverse employment effects, nor firm closure. Rather the margin of adjustment used to offset the sizable wage cost shock was a significant deterioration of the quality of care services. There is also strong evidence of wage spillovers as younger workers wages rose in tandem with the higher adult minimum wage, but with no impact on their employment. Based on further empirical tests, employer preference for fairness seems to offer the most plausible explanation for these results.

Suggested Citation

  • Giulia Giupponi & Stephen Machin, 2018. "Changing the structure of minimum wages: firm adjustment and wage spillovers," CEP Discussion Papers dp1533, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1533
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    Cited by:

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    2. Dami'an Vergara, 2022. "Minimum Wages and Optimal Redistribution in the Presence of Taxes and Transfers," Papers 2202.00839, arXiv.org, revised May 2022.
    3. Biljana Jovanovic & Nikola Naumovski, 2021. "Minimum wage reform and firms’ performance – evidence from North Macedonia," Working Papers 2021-02, National Bank of the Republic of North Macedonia.
    4. Pablo Blanchard & Paula Carrasco & Rodrigo Ceni & Cecilia Parada & Sofía Santín, 2021. "Distributive and displacement effects of a coordinated wage bargaining scheme," Documentos de Trabajo (working papers) 21-26, Instituto de Economia - IECON.
    5. Adams-Prassl, Abigail & Balgova, Maria & Qian, Matthias, 2020. "Flexible Work Arrangements in Low Wage Jobs: Evidence from Job Vacancy Data," IZA Discussion Papers 13691, Institute of Labor Economics (IZA).
    6. Florin Vadean & Stephen Allan, 2021. "The Effects of Minimum Wage Policy on the Long‐Term Care Sector in England," British Journal of Industrial Relations, London School of Economics, vol. 59(2), pages 307-334, June.

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    More about this item

    Keywords

    minimum wage structure; employment; wage spillovers;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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