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The National Minimum Wage: The Evidence of its Impact on Jobs and Inequality

September 2008
Paper No' CEPPA006: | Full paper

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This Paper is published under the following series: CEP Policy Analysis

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Abstract:

• The National Minimum Wage is one of the most significant labour market interventions that the Labour government has made, raising the pay of well over one million low paid workers by about 15% overnight at the point of introduction. • Since 1999, the minimum wage has been increased by 30% after adjusting for increases in the retail price index, well above the increase in average earnings over this period. • Prior to its introduction, there were claims that it would not only destroy up to two million jobs but also push up inflation and interest rates as better paid workers sought similar pay increases to their low paid colleagues. • None of these fears have materialised. So far, there is no evidence of significant job losses for the workers most affected by the minimum wage and there have been no obvious knock-on effects on the wages of better paid workers.

• The political controversy surrounding the minimum wage in the 1990s has now been transformed into a consensus. In the 2005 General Election campaign, the Conservative Party promised that, if elected, it would implement the government’s recommendation for a minimum wage of £5.35 an hour by 2006. • Wage inequality has not fallen since 1997, but it almost certainly would have risen by more without the introduction of the minimum wage as wages of high paid workers continue to rise strongly. • Many of the poorest households will not be affected by the minimum wage because they do not have anyone in work. In addition, many of those who benefit, such as second earners and teenagers living at home, do not live in poor households. So the minimum wage is a very blunt tool for reducing poverty. • The minimum wage is part of a wider package of welfare to work reforms designed to ‘make work pay’. The centrepiece of these reforms is a tax credit that boosts low wage workers’ take-home pay. The minimum wage is an integral part of these reforms because it stops employers from cutting wages knowing that workers will not be any worse off.