Issues on Living Wages in the UK

Stephen Machin

March 2003

Subjects of Relevance and Structure of Talk

• History of minimum wages in the UK

• Experience of minimum wage introduction • Discussion of arguments on scope for

Living Wage policies in UK (comparison with US)

History of UK Minimum Wages 1

• Wages Council system, introduced 1909. Industry based system. Traditionally variations by occupation, age, gender within sectors to produce myriad of minimum wage rates. Standardised more in later years. Abolished in 1993 (except for agriculture).

• Not liked by many due to complicated nature of variations – same issue may apply to Living Wages that vary across workers, and geographical units.

History of UK Minimum Wages 2

• National minimum wage, introduced 1999.

Adult rate Development rate

April 1999 £3.60 £3.00

June 2000 £3.60 £3.20

October 2000 £3.70 £3.20

October 2001 £4.10 £3.50

October 2002 £4.20 £3.60

History of UK Minimum Wages 3

• Critical question – is level of minimum high enough to provide sufficient income (conditional on benefit generosity) without adverse employment consequences.

Experience of Minimum Wage Introduction 1

• Bulk of discussion concerned level at which minimum was introduced.

• Basic logic (from academic work, LPC report) was that minimum wage need not have bad employment effects if set at appropriate level. But if too high would.

• Also size of ‘spike’ in international context.

Experience of Minimum Wage Introduction 2

• Initial calculations: spike of 9 percent, around 2 million people to benefit, biggest group of beneficiaries being part-time women.

• Substantially revised down subseuqently. Largely due to measurement error in survey data.

• ONS figures, Dickens and Manning study (forthcoming Journal of Royal Statistical Society).

Experience of Minimum Wage Introduction 3

• ONS revised figures:

• 1998 6.4 percent < NMW, or 1.52 million workers (compares to at the time estimates of around 9 percent)

• Of which 830,000 part-time women.

• LPC recalculate as 1.3 million beneficiaries

Experience of Minimum Wage Introduction 4

• Dickens and Manning – • Due to measurement error in earnings size of

‘spike’ in wage distribution over-estimated. Once corrected see smaller concentration.

• Little evidence of wage spillovers up the wage distribution. Reduced inequality by having effect up to (around 10th percentile), but no impact higher up.

Experience of Minimum Wage Introduction 5

• Care homes study. Machin, Manning and Rahman (2003), forthcoming Journal of European Economic Association.

• Focus on one of lowest paid occupations in economy – Care assistants.

• Should have some relevance for Living Wage discussions if focus is to be on specific low paid groups.

Experience of Minimum Wage Introduction 6

Strong impact on wage distribution – big ‘spike’ at exactly the minimum.

Pre-Minimum Post-Minimum

% paid less 32 1

% paid minimum 8 28

% paid adult 9 30

minimum

Log Real Hourly Wage Distributions

Log Real Hourly Wage.7 1.1 1.28 2 2.5

0

.1.15

.2.25

.3

.4

Log Real Hourly Wage.7 1.1 1.28 2 2.5

0

.1.15

.2.25

.3

.4

Pro

port

ion

of A

ll E

mp

loye

es

Pre-Minimum Wage

Post-Minimum Wage

Percentage Change in Cumulative Real Hourly Wage Distribution

% C

hang

e in

Per

cent

ile

Percentile1 26 50 75 90 99

0

5

10

15

20

25

Employment Impact

• Employment effects negative but very moderate, despite sizable wage effects.

• Follow up study of October 2001 change very similar (Allison, 2002).

• National micro ‘before and after’ studies find no disemployment effects (Stewart papers).

Experience of Minimum Wage Introduction 7

• Implications: minimum wage set at very conservative level.

• Gives some scope for ‘top-ups’ – one possibility being Living Wages.

Scope for Living Wage policies in UK 1

• Compare economic arguments with US situation

• 2 main aspects:

i) logic for Living Wages

ii) level relative to national minimum

Scope for Living Wage policies in UK 2

• Living Wage ordinances set a minimum wage for certain businesses within a municipality at a level significantly higher than the current national minimum wage of $5.15.

• Currently enacted in over 70 localities

Scope for Living Wage policies in UK 3

• Economic logic:i) response to the dramatic fall of the minimum wage in the United States over the past 30 years ii) response to the increased use of government "outsourcing“ (i.e. moving public sector jobs into the private sector, where pay rates are substantially lower).

Scope for Living Wage policies in UK 4

• Magnitudes relative to federal minimum of $5.15 per hour (or state minimum if higher)

• Usually the wage a full-time worker would need to earn to support a family above federal poverty line, ranging from 100% to 130% of the poverty measurement. The wage rates specified by living wage ordinances range from a low of $6.25 in Milwaukee to a high of $12 in Santa Cruz

Scope for Living Wage policies in UK 5

• Key questions on having Living Wage > Minimum Wage

- are they best means to raise income? (cf benefit system)

- are they most suitable way (in outsourcing context) to stop ‘race to bottom’ in cost/quality cutting contracts?

Scope for Living Wage policies in UK 5

• Key questions on having Living Wage > Minimum Wage

- what is impact on costs?

- what is impact on employment of having above minimum wage levels?

What Do We Need To Know?

• Studies of low pay incidence on heavily affected groups, and in specific areas.

• From US context Living Wages very much area based – most Living Wage ordinances in particular cities, with lots of discretion in coverage and in variations above federal/state minima.

• From academic perspective need some means to appraise potential benefits and costs of having wage floors above national minimum wage.