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Company wage policy in a low-wage labor market

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  • Giupponi, Giulia
  • Machin, Stephen

Abstract

The question of how firms set wages for their employees has been of longstanding interest. In this paper, we investigate what models of wage determination are at play in a low-wage labor market. We exploit a sizable and salient age-specific minimum wage change in the United Kingdom - the National Living Wage (NLW) introduction. Starting in April 2016, the NLW raised the minimum wage rate applying to workers aged 25 and over, leaving unchanged the minimum wage rates for younger workers. Using matched employer-employee data on the English residential care home sector, we document positive wage spillovers on workers aged under 25. Younger workers' wages are shown to have risen in tandem with those of older workers, with no differential employment effects by age at both the market level and the firm level. We probe the inter- vs intra-firm nature of wage spillovers and show that they arise within rather than between firms. Based on empirical tests and qualitative evidence from a survey of care homes in the sample, pay-equity concerns offer the most plausible explanation for the emergence of wage spillovers. The wage spillover effects that we document are shown to emerge in other low-paying sectors of the UK labor market.

Suggested Citation

  • Giupponi, Giulia & Machin, Stephen, 2022. "Company wage policy in a low-wage labor market," LSE Research Online Documents on Economics 117983, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:117983
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    References listed on IDEAS

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    More about this item

    Keywords

    wage determination; minimum wage; fairness;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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