Research shows National Living Wage has reduced labor mobility across firms, but at what cost?

(Press-News.org) New research led by Bayes Business School (formerly Cass) has revealed the introduction of the National Living Wage (NLW) in the UK in April 2016 significantly decreased labour mobility across firms by minimum wage workers.

While it has delivered a pay boost for many low-paid workers, the rising wage floor could be affecting the fluidity of the job market if it is reducing workers’ incentives to search for new jobs and move between firms.

The National Living Wage was introduced by the UK Government to replace the National Minimum Wage for workers aged 25 and over, initially raising the threshold hourly rate by 50 pence to £7.20. The rise represented the largest single increase in the minimum wage since it was introduced in 1999.

The study, led by John Forth, Professor in Human Resources Management at Bayes, is the first UK evaluation of the impact of a rising wage floor on the rate at which minimum-wage employees move jobs. It examined the effects of introducing NLW and how it affected the likelihood of minimum-wage employees moving between different organisations.

Key findings suggest:

The introduction of the National Living Wage has decreased between-firm movements of the lowest-paid workers by between two and three percentage points compared to those earning just above the threshold. The study found negative effects on job mobility among workers earning up to 25 pence per hour above the National Living Wage, meaning this comparative reduction in job mobility among the lowest paid extended beyond those paid at the threshold. There was no significant difference in mobility between the lowest-paid workers and others within the same firm, suggesting that some firms have kept pay structures intact, and that the main reduction in job mobility has been among low-paid workers whose firms offer limited progression opportunities. The research was carried out using data from the Annual Survey of Hours and Earnings (ASHE), and follows the Low Pay Commission’s definitions of gross hourly earnings including basic pay, bonuses or incentives, but excluding overtime.

Focusing on workers above the age of 25 employed in consecutive years, the researchers used two-year data blocks to estimate job mobility, while observing corresponding wage floor movements before and after the introduction of National Living Wage.

Results suggested workers previously earning below the new minimum rate of pay saw their remuneration sharpy rise, while rising wage floors compressed the lowest wages between firms – making potentially risky job switches less attractive.

The study was carried out with experts from the University of Stirling, University College London, and the University of the West of England.

Professor Forth said:

“The National Living Wage uprated wages for many low-paid workers in the UK labour market. Attention has naturally focused on the effects of National Living Wage on employment rates, but our study is the first to look at how it effects job mobility among the UK’s lowest-paid workers.

“Our findings indicate good news for workers in the short-run, but with potentially damaging long-term effects for the economy.

“Higher wages generally increase employee happiness. They also reduce the need for workers to take risks, by moving to jobs where the non-wage aspects are hard to evaluate before you start work. In the long run, however, lower mobility could mean firms struggling to fill new low-pay vacancies if the rising wage discourages workers to search for new opportunities.

“We urge the Low Pay Commission to continue to monitor the impact of minimum wages on job mobility as the wage floor increases, and as the government considers the extension of the NLW to cover workers aged between 18 and 21.”

‘The impact of a rising wage floor on labour mobility across firms’, Professor John Forth, Dr Carl Singleton, Professor Alex Bryson, Professor Felix Ritchie, Lucy Stokes and Dr Damien Whittard is published in the British Journal of Industrial Relations.

The research forms part of the Wage and Employment Dynamics project (www.wagedynamics.com) and was funded by ADR UK (Administrative Data Research UK) and the Economic and Social Research Council.

Notes to Editors

The sample estimation size comprised more than 3,000 observations in the treated group and 6,000 observations in the control group, across 800 firms per year, covering the period 2011/12 to 2018/19. The total number of data points is approximately 116,000. END