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Research Programmes | Labour:

Labour Market Institutions and Policies

Recent work on Labour Market Institutions and Policies

Our extensive work in this area is focused on minimum wages, unions and collective bargaining, and welfare policies.
  • Minimum wages

    Researchers at the CEP have been highly influential in the development and assessment of minimum wage policies. A generation ago the idea of minimum wages prompted fierce resistance from employers and employers' organisations who argued that anything that raised wages must reduce employment. CEP work in this area was fundamental in changing this consensus, showing that at the levels set, they did not reduce employment.

    David Metcalf was one of the founding members of the Low Pay Commission and was succeeded by CEP Research Director Stephen Machin. Alan Manningís influential work is summarised in his book 'Monopsony in Motion' (2003).

    An overview CEPís work in providing the intellectual context for the policy, advising on its implementation and evaluating its impact is to be found in CentrePiece Article (Autumn 2009 part of the Big Ideas series).

    In a more recent CentrePiece article (Spring 2014), Alan Manning discusses the newfound enthusiasm for minimum wages amongst politicians and the public - and the likelihood that it will lead to much higher minimum wages in some parts of the world.

    Minimum wages and wage inequality

    In general, research suggests that, at the levels set in countries like the US and the UK, minimum wages have little effect on employment but do have impacts on wage inequality. Researchers at the CEP have worked on the effects of minimum wages on wage inequality in a number of settings.

    Tim Butcher, Richard Dickens, and Alan Manning (2012) present a model to explain the effects on inequality based on imperfect labour markets, and investigate the impact of the UKís National Minimum Wage on wage inequality finding it can explain a sizeable part of the reduction in wage inequality in the bottom half of the distribution in the period 1998-2010.

    Further reading:
    Minimum Wages and Wage Inequality: Some Theory and an Application to the UK.

    However, another paper by David Autor, Alan Manning and Christopher Smith (2010) reassesses the effect of state and federal minimum wages on U.S. earnings inequality claiming that the effects of minimum wages on wage inequality are not as large as previously estimated. They focus on two issues that appear to bias earlier work: violation of the assumed independence of state wage levels and state wage dispersion, and errors-in-variables that inflate impact estimates via an analogue of the well-known division bias problem. They do find that the minimum wage reduces inequality in the lower tail of the wage distribution (the 50/10 wage ratio), but that the impacts are typically less than half as large as those reported in the literature and are almost negligible for males.

    Further reading:
    The Contribution of the Minimum Wage to U.S. Wage Inequality over Three Decades: A Reassessment.

    Minimum Wages and Firm Performance and Profitability

    Whilst the minimum wage does not seem to have affected overall employment how has it affected firms? Research by Mirko Draca, Stephen Machin, and John Van Reenen (2006) finds that firm profitability was significantly reduced and wages significantly raised by minimum wage introduction but that the profitability reductions did not result in increases in firm exit. This suggests redistribution of quasi-rents towards low wage employees. The analysis is based on two types of firm level panel data (one on firms in a very low wage sector; UK residential care homes, and a second on firms across all sectors).

    Further reading:
    Minimum Wages and Firm Profitability - this was subsequently published in the American Economic Journal: Applied Economics (2011).

  • Unions and collective bargaining

    The CEP has a long tradition of work in the area of trade unions and collective bargaining. In light of their decline in the UK since the 1970s, a five-year research project funded by the Leverhulme Trust was completed in 2005 to assess the current and future role of trade unions.

    Some key papers on these topics are summarised below:

    Union decline in Britain

    David Blanchflower and Alex Bryson (2008) document the collapse in unionization in all sectors of the UK economy and the almost complete erosion of the union wage premium.

    Further reading:
    Union Decline in Britain.

    German Unions

    John Addison, Alex Bryson, André Pahnke and Paulino Teixeira (2011) examine the decline in collective bargaining coverage in Germany. Using repeat cross-section and longitudinal data from the IAB Establishment Panel, they show that how unions behave is more important than changes in workforce composition or establishment characteristics. They document for the first time workplace transitions into and out of collective agreements via firm survival analysis.

    Further reading:
    Change and Persistence in the German Model of Collective Bargaining and Worker Representation.

    Bernd Fitzenberger, Karsten Kohn and Alexander Lembcke (2008) consider how the different forms of collective bargaining in Germany affect wages of different types of workers.

    Further reading:
    Union Density and Varieties of Coverage: The Anatomy of Union Wage Effects in Germany.

  • Welfare

    CEP research has been very influential in the design of UK welfare-to-work programmes, notably the New Deal for Young People. We continue to research into the consequences of these policies for unemployment, employment and inactivity. Amongst our major research findings in this area are:

    Job seekers allowance

    In 1996 the UK introduced its current system of unemployment insurance, the Job-Seekers Allowance. Barbara Petrongolo (2007) investigated the effect of the introduction of JSA finding that, while it did reduce the claimant count, it was much less successful in moving claimants into jobs that paid good wages.

    Further reading:
    What Are the Long-Term Effects of UI? Evidence from the UK JSA Reform - this was subsequently published in the Journal of Public Economics, 2009.

    Income tax credits

    Who gained from the introduction of the Working Families Tax Credit? Ghazala Azmat (2006) finds that although this was intended to benefit low-income families, part of the gain actually went to their employers.

    Further reading:
    The Incidence of an Earned Income Tax Credit: Evaluating the Impact on Wages in the UK.

    Disability Insurance

    How do increases in disability insurance affect employment? Olivier Marie and Judit Vall Castello (2011) analyse the employment effect of a law that provides for a 36 percent increase in the generosity of disability insurance (DI) for claimants who are deemed unlikely to find a job. They find that the policy decreases the employment of those under 55 by 8 percent.

    Further reading:
    Measuring the (Income) Effect of Disability Insurance Generosity on Labour Market Participation.