Research and analysis

Headlines from the review of the National Living Wage

Updated 21 June 2022

1. The National Living Wage raised wages and did not reduce employment…

• During a ‘lost decade’ of pay for most, the NLW delivered higher increases. It rose by 26 per cent between April 2015 and April 2019, more than twice the increase in median hourly pay for NLW eligible workers (12 per cent), and much faster than CPI inflation (around 8 per cent).
• Econometric evidence consistently found only muted effects on employment. Where negative effects are found they are small and transitory.
• Employers told us throughout that reducing recruitment would be preferable to making redundancies. A study we commissioned found that lower-paying firms saw lower job growth than similar but higher-paying firms.

2. …but the increase in earnings did not lead to higher incomes.

• Increases in hourly pay did translate into weekly pay increases on average.
• But while households with an NLW worker saw earnings increase faster than for other households (30 per cent compared to 20 per cent from 2015/16 to 2019/20), their overall income levels increased at the same rate. This is likely because of both freezes to benefit levels and their tapering away as incomes rise.
• NLW workers are the main earner in around 35 per cent of households with an NLW worker. Just under half are secondary earners, which means in many cases the overall household income is largely determined by another higher earner.

3. We can find no evidence that the National Living Wage increased productivity.

• The NLW was part of Government aims to “encourage a model of higher pay and higher productivity”.
• Our new analysis fails to find a positive effect on productivity of the NLW. The NLW did not increase productivity growth in the industries and regions most affected by the NLW. Our research and stakeholder evidence helps explain why.
• Improving productivity often requires investment, which is costly. While larger businesses were more likely to expand their investment in response to the NLW, smaller employers were increasingly likely to tell us they were cutting investment to pay for NLW increases.
• Even those who had the resources to invest tell us that there is no guarantee that it will ‘pay off’, they viewed it as uncertain and risky. Technological changes are not always liked by customers, and they can be inflexible.
• This may be why some have fallen back on ‘work intensification’ – making staff work harder – to improve productivity. A significant minority of firms have opted to give staff more tasks, require more flexibility on hours, tighten restrictions on absenteeism, increase the pace of work or raise performance standards. Work intensification may boost productivity for some firms, but we can find no evidence of it increasing productivity for the industries and regions most affected by the introduction of the NLW.

4. Minimum wage workers were less likely to move employers but continued to progress onto higher pay.

• For all workers, there’s a wage growth premium for moving jobs. This is highest for low-paid workers, but the NLW narrowed the gap and made staying in the same job more attractive.
• The share of minimum wage workers moving jobs fell faster than that for other workers
• This brought some benefits (lower staff turnover related costs) but also concerns that minimum wage workers might not progress into higher-paying jobs (especially as the pay differentials to those better-paid roles were shrinking).
• Each year around 40-50 per cent of minimum wage workers see a pay increase that moves them off the wage floor, whether with the same employer/job or a different one. The NLW temporarily reduced the share of workers progressing off the minimum wage in 2016 but progression rates returned to normal levels from 2017 to 2019.

5. Increasing earnings for the lowest-paid helped reduce inequality.

• As acknowledged in the Levelling Up white paper, geographical inequality is ‘a striking feature of the UK’ with minimum wage workers continuing to make up a greater share of workers in rural and coastal areas.
• The NLW reduced hourly wage inequality between and within regions and nations. In each nation and region of the UK, pay at the bottom end of the distribution grew faster than the average. Within regions, it was areas with the lowest pay levels that saw the largest increases.

6. The National Living Wage reduced gender and ethnicity wage gaps at bottom of pay distribution.

• Women are more likely to be paid the NLW, so the strong increases in the NLW and the accompanying spillover effects have increased pay more for women than men.
• The gender pay gap at the 20th percentile fell from 9 per cent in the first quarter of 2016 to 7 per cent in the first quarter of 2020.
• In the first quarter of 2020 the range of hourly pay at the second decile by ethnicity was 8.7 per cent, compared with 15.1 per cent in the first quarter of 2016.
• The Bank of England in 2020 investigated gender and ethnic pay gaps in the UK. They found clear evidence of reduced gender and ethnicity pay gaps over the past 25 years. They attributed this in large part to the introduction of minimum wage legislation appearing to significantly shrink the gender pay gap among lower-wage workers.