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The National Minimum Wage and Wage Inequality: An Update

The National Minimum Wage and Wage Inequality: An Update. Richard Dickens and Alan Manning. Why is an update needed?. Some interesting things have been happening to wage inequality in the UK

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The National Minimum Wage and Wage Inequality: An Update

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  1. The National Minimum Wage and Wage Inequality: An Update Richard Dickens and Alan Manning

  2. Why is an update needed? • Some interesting things have been happening to wage inequality in the UK • Used to it always getting worse but bottom-end wage inequality has been declining for some considerable time • Tempting to put this down to the NMW • But perhaps not all of it…

  3. Recent Trends in UK Wage Inequality

  4. Where in distribution is change happening?

  5. Change up to 25th percentile

  6. What Could Be Going On Here? • Impact of Minimum wage from 1999 • Other factors causing changes in wage inequality • Strong labour market • Rise in educational attainment • Lovely vs. lousy jobs • Immigration

  7. Our Earlier Findings on Impact of NMW • Dickens and Manning (JRSS, 2004) • Used LFS • Found effect of NMW and zero spill-over • No effect on 10th percentile, only on 5th • Dickens and Manning (EJ, 2004) • Care homes data • Minimum wage much more important (40% affected) • Still no spill-over effect • Reduction in wage inequality seems much larger than we would expect from these results • Contrast with US • Lee (QJE, 1998) implies quite large spill-overs

  8. What might be happening? • NMW has been increasing faster than median earnings • NMW has spill-over effects over long period – earlier studies were impact effect • Measurement Error Problems • Other factors at work

  9. The Kaitz Index(NMW/Median Hourly Earnings)

  10. But Measures of Spike Do Not Seem To Show Big Increase

  11. Relationship between Kaitz Index and Spike

  12. Other estimates of spike • ONS only seems to provide estimates of those paid below the NMW based on ASHE • More or less in line with LFS • LPC Report suggests 3.2% were beneficiaries of Oct 05 increase • Can’t seem to explain powerful reduction in wage inequality.

  13. Measurement Error Problems • Would expect the pattern we see – a simple example • Underlying wage dist log normal • Perfect compliance with minimum wage – approx 5% affected • But observed wage distribution true + classical error

  14. What Would We See?

  15. Can Use Hourly Rate Measure • LFS has collected hourly rate since March 1999 • Only available for 38% of people • Have to impute for others • ONS and Dickens/Manning describe methodologies for doing this

  16. Propensity Score Re-weighting • Assumption: conditional on covariates, the distribution of hourly rate is independent of whether it is observed or not • Estimate probit model for whether hourly rate observed • A strong assumption – probably leads to over-estimate of impact of NMW

  17. Details • Hourly rate only collected from March 1999 i.e. only one month prior to NMW • Routing of question then different from subsequently • We will compare 2001q1 with 2006q1 (2001q1 – NMW low in real terms)

  18. Comparison of Changes in Hourly Rate and Hourly Pay Measures

  19. Changes reach too far up wage distribution to be direct effect of NMW • Do not seem able to explain them by measurement problems • What about spill-overs?

  20. The Lee Model of Spill-Overs • Latent log wage distribution w*(F) – assume normal • Only direct effect of NMW • Lee adds possibility of spill-over • Spill-over parameter β – high value, big spill-over • This model works well

  21. Estimate Lee Model for 2001q1-2006q1

  22. Goodness-of-fit for 2006q1

  23. Implied Impact of NMW on Average Log Hourly Wages

  24. Conclusions • Fall in wage inequality can be explained using direct effect of NMW and modest spill-over effect • Implies other factors not so important • Can this really be true?

  25. The Impact of Immigration

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