Impact case study database

Minimum wages have long been used as a tool to ensure that workers receive a fair rate of pay for their labour services. The primary policy concern has always been that they might put people out of work. Since the early 1990s, economists have produced a lot of evidence suggesting that these fears are unfounded. However, we know a lot less about the other effects the minimum wage has on the labour market. If employment does not change in response to the minimum wage, what does? Prices, profits, perquisites or productivity? In a series of papers, Papps’s research at University of Bath has looked at the last two of these.

In a 2012 ILR Review article, Papps examined how the minimum wage affected the probability of workers leaving employment in Turkey, by comparing this to the effects of payroll tax changes that were implemented at the same time [Ref 1]. Papps measured the influence of the two policies on a low-wage worker by calculating the amount by which his/her wage would have to be increased when the minimum wage or payroll tax rates were raised. The employment outcomes of these workers were then compared with workers who earned slightly too much to be affected by either policy. The minimum wage was found to have no statistically significant effect on employment, whereas an equal-sized increase in payroll taxes did reduce employment. These results suggested that by increasing workers’ pay, minimum wages act to raise productivity, possibly by reducing quit rates, although it was not possible to test this directly.

Papps, along with Paul Gregg of the Department of Social and Policy Sciences at University of Bath, was commissioned by the Low Pay Commission in 2013 to examine how the National Minimum Wage (NMW) affected aspects of workers’ compensation packages other than their basic hourly wage [Ref 2]. Policy makers were concerned that employers were attempting to circumvent the minimum wage by reducing the fringe benefits they provided their workers, but no previous quantitative research had investigated this issue. Papps and Gregg applied the methodology from Papps’s 2012 research [Ref 1] to data from the Annual Survey of Hours and Earnings (ASHE) and Labour Force Survey (LFS). They examined whether workers whose wages were pushed up by the NMW experienced reductions in the amount of overtime pay or shift pay received, the amount of annual leave provided, or the likelihood of having a pension or being on a permanent contract. No statistically significant evidence was found that the minimum wage affected any of these factors [Ref 2].

Papps was subsequently commissioned to conduct further research into the effects of the NMW on workers [Ref 3], this time with Matt Dickson of the Department of Social and Policy Sciences and Institute for Policy Research at University of Bath. This investigated what effects the minimum wage has on workers’ probabilities of exiting and entering jobs. International research had found evidence that minimum wages reduce job turnover, although there was no agreement on why this was the case. Papps and Dickson used data from ASHE, LFS and Understanding Society and again applied Papps’s (2012) methodology. They found that the minimum wage significantly raised how long workers stayed in their jobs and that this was driven mostly by workers being less likely to quit their job. Hence, minimum wages improve productivity in the labour market by reducing turnover and the costs associated with hiring new staff. Concurrently, unemployed workers were found to be less likely to enter employment when the NMW was raised [Ref 3].

Papps undertook additional research for the Low Pay Commission in 2019, investigating the effectiveness of the apprentice rate of the NMW [Ref 4]. Apprentices are subject to a lower rate of the minimum wage, to account for the fact that they undertake formal training as part of their jobs. The research examined the extent to which employers attempt to reduce their labour costs further, either by failing to comply with the minimum wage and paying less than the apprentice rate or by reducing the amount of training they provide their apprentices. It found a relatively high level of non-compliance, which was concentrated among employers of apprentices aged under 21 who were in the second year of their apprenticeships.