hourly earnings distribution before and after the National Minimum Wage, The

Labour Market Trends, Oct 2005 by Butcher, Tim

Key points

* The National Minimum Wage was introduced in 1999.

* Between 1992 and 1997 the hourly earnings of employees at the bottom of the hourly earnings distribution grew more slowly than the median. The hourly earnings of those at the top of the distribution grew fastest.

* By October 2003 the adult minimum wage had increased by 25 per cent.

* The hourly earnings of the lowest paid grew faster than the median between 1998 and 2003. Those at the upper end of the hourly earnings distribution continued to have higher wage increases than the median.

* Similar findings are observed for all employees, male and female, full-time and part-time.

Introduction

The Low Pay Commission, in its 2005 Report, used the Annual Survey of Hours and Earnings (ASHE) to look at changes in the UK hourly earnings distribution since the introduction of the National Minimum Wage. This article extends this analysis by comparing wage increases prior to, and following, the introduction and subsequent upratings of the National Minimum Wage. In order to make before and after comparisons, this article uses the New Earnings Survey.

First, the National Minimum Wage and the available data are discussed. The economic background is then set out.

Next, the overall changes in the hourly earnings of those aged 22 and over are analysed, before a more detailed look is taken at any differences by gender. Whether an employee works full-time or part-time is then considered. This article concludes by examining the implications of changes in the hourly earnings distribution for the gender pay gap.

The National Minimum Wage

The National Minimum Wage was introduced in April 1999. The initial level was set at £3.60 an hour (the adult rate) for those aged 22 and over, with a lower level, £3.00 an hour (the Youth Development Rate), being set for those aged 18 to 21. Those under 18 were not covered until October 2004.

Table 1 shows how the minimum wage has evolved since its introduction. Between April 1999 and October 2004 the adult minimum wage increased by nearly 35 per cent.

The data

It is useful to be able to compare a period just before the introduction of the minimum wage with the period that encompasses its introduction. Although the Office for National Statistics intends to extend the back series of the Annual Survey of Hours and Earnings (ASHE)1 to 1992, it is currently only available back to 1998. This means that it is not possible, at the moment, to compare the period just before the introduction of the minimum wage with the period that encompasses its introduction, using ASHE data.

The most appropriate dataset for this purpose is therefore the New Earnings Survey (NES), which is available from 1970 to 2003. This provides a dataset which allows a comparison between a period before the introduction of the minimum wage and one that starts from the announcement of the minimum wage and covers its introduction and initial upratings.

The introduction of the National Minimum Wage was announced in 1998 but not implemented until April 1999. As employers would have started to adjust their wages following the announcement of the introduction of the minimum wage, 1998 has been chosen as the start date for the period that encompasses the introduction of the minimum wage. NES data are only available up to 2003, so this was chosen as the end date. For a comparative period, the five years ending in 1997 were chosen. There are arguments for using slightly different periods from 1992 to 1997. For example, the old Wages Councils still existed in 1992 and that year also marked the end of the early 1990s recession. However, using a slightly different period - 1993 to 1998 - does not materially affect the conclusions. Similarly, the picture remains the same if the years 1999 to 2003 rather than 1998 to 2003 are used for the latter period.

It should be noted that the NES is not available for 2004 and will thus not capture the effects of the large minimum wage upratings in October 2003 and October 2004. Although the NES data are unweighted and include no imputation, they do cover a random one per cent sample of employees. Comparisons can be made between the NES and ASHE for 1998 to 2003.2 Indeed, similar conclusions are shown using ASHE data for 1998 to 2000 and 2000 to 2004 in Figure 2.11 of the Low Pay Commission Report (2005).

Background

The periods 1992 to 1997 and 1998 to 2003 were similar in terms of price and wage inflation as shown in Table 2. Between April 1992 and April 1997 retail prices, as measured by the Retail Price Index, rose by 12.6 per cent compared with an increase of 11.4 per cent between April 1998 and April 2003. In contrast, average earnings (as measured by the Average Earnings Index including bonuses) grew slightly faster in the latter period (22.1 per cent) compared with the earlier one (19.0 per cent).

Table 2 also shows changes in hourly earnings for various percentiles along the earnings distribution and the mean. The earnings in each year are ranked from the lowest paid to the highest paid and then divided into hundredths (percentiles). The median is the percentile that is in the middle ot the ranking and the lowest decile is the tenth lowest percentile. The lowest quartile is the 25th percentile. The growth in earnings can be compared at each percentile point.