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No. 532: The Employment Effects of the October 2003 Increase in the National Minimum Wage

Richard Dickens , Queen Mary, University of London
Mirko Draca , Centre for Economic Performance, London School of Economics

May 1, 2005

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Abstract

Initial research on the employment impact of the introduction of the National Minimum Wage has shown no evidence of any significant employment loss (Stewart, 2002, 2003, 2004). Against this background the NMW was raised substantially in October 2003 from £4.20 to £4.50 and again in October 2004 to £4.85. These are quite large increases in the NMW and they have been predicted to raise the wages for a substantial proportion of employees in the UK. Some concerns have been raised in the business community about the size of these increases, with some large employers claiming that for the first time the NMW will affect their pay structures. In this report we examine the impact of the October 2003 increase in the NMW on employment. We use a methodology first proposed by Linneman (1982) and used more recently by Stewart (2003, 2004) to examine the introduction of the minimum wage. This essentially examines individual transitions out of employment, comparing a group of workers directly affected by the NMW with a similar but unaffected group.

J.E.L classification codes: J31, J63

Keywords:Minimum wages, Employment transitions, Wages

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