National Living Wage and the UK economy

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Question 1: Do you agree that the new National Living Wage is likely to lead to significantly lower employment?

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Question 2: Do you agree that the new NLW will have a muted effect on wages and prices?

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Summary

A new National Living Wage (NLW) replaces the UK’s National Minimum Wage from April – and so the March 2016 Centre for Macroeconomics survey of experts asked the panel what are likely to be its effects on employment, wages and prices. A majority of respondents believe that the NLW will not lead to significantly lower employment; similarly a majority of respondents believe that the NLW will only have a muted effect on wages and prices.

The key unknown for many in considering the overall economic impact of the NLW is how quickly the UK economy will grow over the coming years.

Background

In July 2015, the Chancellor George Osborne announced that a new National Living Wage (NLW) would replace the National Minimum Wage (NMW) for those aged 25 and over starting from 1 April 2016. The NLW will initially be set at a level of £7.20 per hour – 50 pence higher than the prevailing NMW. By 2020, the Chancellor expects the NLW to reach £9 per hour, which is 13% higher than the £8 previously planned. The new remit of the Low Pay Commission (LPC) asks them to recommend the future path of the NLW, with a target of the total wage reaching 60% of median earnings by 2020. On Office for Budget Responsibility forecasts, a full-time NMW worker will earn over £4,800 more by 2020 from the NLW in cash terms.

Many firms, particularly those in traditionally low-wage sectors such as pubs, restaurants and social care, have expressed concerns about the impact of this significant rise in labour costs. There are a lot of empirical studies that examine the employment effects of minimum wages, and the Royal Economic Society (RES) annual conference in March organised two sessions on this topic.[1]

Schmitt (2013) summarises the academic evidence on the employment effects of minimum wages, starting from the suggestion of the 1977 review by the Minimum Wage Study Commission that the effects of the minimum wage in the United States and Canada were small and almost exclusively limited to teenagers and possibly other young workers. Similar suppositions were also drawn by the ‘New Minimum Wage’ research agenda, most famously when Card and Krueger (1994, 1995) found no evidence of reduced employment at US fast-food restaurants during the ‘natural experiment’ of 1992 when New Jersey increased its minimum wage relative to that in neighbouring Pennsylvania.

Card and Krueger’s work inspired a host of research more critical of the minimum wage, at the forefront of which is Neumark and Wascher’s (2008) book, which argues that ‘the preponderance of evidence supports the view that minimum wages reduce the employment of low-wage workers’

At one of the RES conference sessions, the papers by Aaronson et al (2015) and Harasztosi and Lindner (2015) argue against large employment effects, whereas the papers by Allegretto et al (2015) and Baskaya and Rubinstein claim substantial disemployment effects of minimum wages, at least on teenagers.[2]

Research on the channels by which firms can adjust to the NLW is less developed. Schmitt (2013) identifies 11 possible channels by which firms could adjust to the NLW:

  1. Reduction in hours worked
  2. Reductions in non-wage benefits
  3. Reductions in training
  4. Changes in employment composition (‘upgrading’ the skill level of their workforce)
  5. Higher prices
  6. Improvements in efficiency
  7. ‘Efficiency wage’ responses from workers (workers are motivated to work harder)
  8. Wage compression (cutting earnings of higher-wage workers)
  9. Reduction in profits
  10. Increases in demand (minimum wage as stimulus)
  11. Reduced turnover (of workers)

Of these channels, Schmitt (2013) concludes that reduced labour turnover, improvements in organisational efficiency, wage compression and small price increases are the most important margins of adjustment.

In the papers at the RES conference sessions, Aaronson et al (2015) see increases in the minimum wage driving up both entry and exit rates in the US restaurant market, with labour-intensive restaurants being replaced by capital-intensive ones. Harasztosi and Lindner (2015) find that the costs of the minimum wage in Hungary were passed on to customers such that there was no evidence of lower profitability among low-wage employers. In research on the UK, Bell and Machin (2016) find that the stock market value of companies likely to be constrained by the NLW fell when the policy was first announced, but the reduction was nowhere near big enough to suggest anything other than temporary problems.[3]

The National Living Wage and its impact on employment

The first question in this Centre for Macroeconomics (CFM) survey asked panel members whether the National Living Wage (NLW) is likely to lead to significantly lower employment.

Question 1: Do you agree that the new National Living Wage is likely to lead to significantly lower employment?

Thirty-seven panel members answered this question. A small majority of respondents (57%) either disagree or strongly disagree that the NLW is likely to lead to significantly lower employment. A minority (33%) agree or strongly agree that it would, with 11% of respondents neither agreeing nor disagreeing, or having no opinion. The percentage of respondents disagreeing that the NLW leads to lower employment rises to 61% when the self-reported confidence of participants’ opinions is taken into account.

Many of those participants who disagree that the NLW would lower employment stress that it only covers a small fraction of the labour force, so it is unlikely to have a significant effect on aggregate unemployment. Michael McMahon (Warwick) argues that ‘the total number of employees earning the minimum wage is a relatively small proportion of total employment’. Another significant factor for many of those who disagree is a belief that UK productivity may respond positively to the NLW. While neither agreeing nor disagreeing that the NLW will lower employment, Andrew Mountford (Royal Holloway) summarises the argument by stating that ‘if the National Living Wage causes firms to invest in the productivity of their workforce and workers to invest in themselves, then it will have a significantly positive effect on UK economic performance in the longer run.’

The participants who agree that the NLW would reduce employment highlight the likely effects on specific sectors that have a large number of employees on minimum wages. Two particular examples are the residential and social care sectors, where it may be particularly difficult to pass on higher wage costs into prices that are controlled by government. As Simon Wren-Lewis (Oxford) puts it, ‘I suspect that it will lead to significant reductions in employment in the residential care sector, because here the scope for squeezing profits is small and the government partly fixes the price.’ David Bell (Stirling) agrees, arguing that the social care sector ‘is already subject to considerable financial pressure due to the effects of austerity budgets on local authority funding. There is little room for productivity improvement in this sector, or for firms to cut profits. I would not be surprised if there were significant job losses in this sector.’ Morten Ravn (University College London) is concerned about distributional effects and believes that ‘it would seem rather fairytale-like to believe that a large increase in wages at the bottom of the distribution could be implemented at no cost of employment of the workers concerned.’

Two participants on opposite sides of the argument comment on the relationship between the new policy and the work of the LPC. John Van Reenen (London School of Economics, LSE), who disagrees that the NLW will lower employment, laments ‘The bad thing about the Living Wage Policy is that it over-rode the work of the Low Pay Commission, which was an internationally praised, independent, expert body recommending the level of the minimum wage.’ Patrick Minford (Cardiff), who agrees that the NLW will lower employment, is similarly unhappy and considers it ‘important that a future Conservative government restores the authority of the Low Pay Commission to set the minimum wage according to its original remit.’

The National Living Wage and its impact on wages and prices

The second question in this CFM survey asked panel members whether the new NLW will have a muted effect on wages and prices.

Question 2: Do you agree that the new NLW will have a muted effect on wages and prices?

Thirty-eight panel members answered this question. A large majority of respondents (76%) either agree or strongly agree that the NLW will only have a muted effect on wages and prices. A small minority (11%) disagree. No one strongly disagrees and 14% of respondents neither agree nor disagree, or have no opinion. The percentage of respondents agreeing that the NLW will have a muted effect on wages and prices reaches 78% when the self-reported confidence of participants’ opinions is taken into account.

There is a significant overlap between those participants who agree that the NLW will have a muted effect on wages and prices and those participants who in the first question disagree that the NLW would lead to significantly lower employment. For many this reflects a belief that any pass-through of wage costs into prices would be limited because only a small fraction of firms and workers are directly affected by the NLW. As Christopher Pissarides (LSE) puts it, ‘the main effect will be on prices but given the number of workers on the minimum wage and the overall share of labour in costs the impact will be muted.’ Jonathan Portes (National Institute of Economic and Social Research) points out that while the aggregate effect on wages and prices may be small, ‘It will have a significant impact on wages for some workers and hence some companies.’

Several participants who agree that the response of prices and wage will be muted reason that even if wage costs and inflationary pressures did rise significantly due to the NLW, it is likely that monetary policy will react to limit the overall effects on wages and prices. Nick Oulton (LSE) explains that ‘inflation will be determined by monetary policy and any external shocks which the MPC decides to accommodate, not by domestic shocks like the NLW.’ Similarly, Ray Barrell (Brunel) says that ‘the impact on prices depends on the Bank's reaction. If it is wise, there will be no effect.’

Those participants who disagree that the effect on wages and prices will be muted argue that the NLW would also have an impact on higher paid workers as they seek to maintain their pay differentials. Jagjit Chadha (Kent) states that ‘In order to maintain relativities, firms may reduce both overall labour hours or total employment numbers and the increase in the wage bill may drive up firms’ costs, which may increase the overall price level and lead to temporarily higher inflation.’ The strongest opposition to the NLW is expressed by Patrick Minford, who argues that ‘with such a large rise in low-paid wages, there will be effects right up the wage scale … This will also put upward pressure on prices.’

Michael McMahon (Warwick) echoes the views of some participants that ‘some small upward pressure on inflation is potentially to be welcomed, given how close to deflation we are at a time that interest rates are already low.’ Chris Martin (Bath) takes this further by suggesting that the NLW might get the UK out of what he sees as a low-wage/low-pay trap, because ‘raising the cost of labour gives more incentive for firms to invest in skills, an area where the UK is chronically weak at the bottom end of the wage distribution.’

The key unknown for many participants is how quickly the UK economy will grow in the coming years. Putting both sides of the argument, Wouter Den Haan (LSE) writes that ‘If the UK economy grows rapidly, then the increase in the NLW is unlikely to matter very much for anything except low-wage workers. If the UK economy does not grow rapidly, then the increase in the NLW could have an impact on employment, but inflationary pressure is unlikely in such an environment.’

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References

Aaronson, D., E. French and I. Sorkin (2015) ‘Industry Dynamics and the Minimum Wage: A Putty-Clay Approach’, available at http://events.barcelonagse.eu/live/files/864-sim15-frenchpdf%5D, summarised here: http://www.voxeu.org/article/long-run-employment-effects-minimum-wage

Allegretto, S., A. Dube, M. Reich and B. Zipperer (2015) ‘Credible Research Designs for Minimum Wage Studies: A Response to Neumark, Salas, and Wascher’, available at http://irle.berkeley.edu/workingpapers/116-15.pdf.

Baskaya, Y.S., and Y. Rubinstein ‘Using Federal Minimum Wages to Identify the Impact of Minimum Wages on Employment and Earnings across the U.S. States’, available at https://economics.uchicago.edu/workshops/Rubinstein%20Yona%20Using%20Federal%20Minimum%20Wages%20Paper.pdf.

Bell, B., and S. Machin (2016) ‘Minimum Wages and Firm Value’, available at http://cep.lse.ac.uk/pubs/download/dp1404.pdf.

Card, D., and A. Krueger (1994) ‘Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania’, American Economic Review, 48, 882-793.

Card, D., and A. Krueger (1995) Myth and Measurement: The New Economics of the Minimum Wage, Princeton University Press.

Harasztosi, P., and A. Lindner (2015) ‘Who Pays for the Minimum Wage’, available at file:///C:/Users/DENHAAN/Desktop/WhoPaysForTheMinimumWage_preview.pdf.

Metcalf, D. (2006) ‘On the Impact of the British National Minimum Wage on Pay and Employment’, available at http://cep.lse.ac.uk/research/labour/minimumwage/WP1481c.pdf.

Neumark, D., and W. Wascher (2008) Minimum Wages and Employment, MIT Press.

Schmitt, J. (2013) ‘Why Does the Minimum Wage have no Discernible Effect on Employment’, available at http://dev.takeactionminnesota.org/wp-content/uploads/2013/10/Why-Does-the-Minimum-Wage-Have-No-Discernible-Effect-on-Employment.pdf

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Notes

[1] A video of one session with Alan Krueger, Arin Dube, Stephen Machin and Richard Blundell is available here: http://fsmevents.com/res/2016/session01/ondemand.html

[2] For more information on the second RES conference session, see: https://editorialexpress.com/conference/RESConf2016/program/RESConf2016.html#132

[3] Metcalf (2006) also examines the effect of the minimum wage on the UK economy.

 

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How the experts responded

National Living Wage and UK employment

Participant Answer Confidence level Comment
Sir Christopher... London School of Economics Disagree Confident
I disagree with the word "significantly". Firms will absorb it or find other ways to counter it. But some small effect over and above the one that we have now should be expected
Sean Holly Cambridge University Disagree Not confident
Fabien Postel-Vinay University College London Neither agree nor disagree Confident
In the short run, probably not. In the medium to long run, if the plan to raise it to 60% of the median wage is carried out, then yes. The magnitude of potential disemployment effects of the minimum wage are likely to vary with the level of the minimum wage, and likely to be higher at higher levels of the min wage.
Richard Portes London Business School and CEPR Disagree Very confident
Paolo Surico London Business School Disagree Confident
Simon Wren-Lewis University of Oxford Agree Not confident at all
I suspect that it will lead to significant reductions in employment in the residential care sector, because here the scope for squeezing profits is small and the government partly fixes the price. That implies, of course, that falls in employment could be avoided if the government was not so fixated by the deficit.
David Bell University of Stirling Disagree Not confident
The social care sector is a substantial employer. It is already subject to considerable financial pressure due to the effects of austerity budgets on local authority funding. There is little room for productivity improvement in this sector, or for firms to cut profits. I would not be surprised if there were significant job losses in this sector. I am less convinced about the employment effects elsewhere in the economy.
Akos Valentinyi University of Manchester Agree Very confident
Nicholas Oulton London School of Economics Disagree Not confident
The NMW will be 34% higher in 2020 than is the current minimum wage. Assuming the Bank of England hits its 2% inflation target over 2015 to 2020, that is an increase of 22% in real terms. But if the productivity of minimum wage workers rises at 2% and the Bank hits its target, then the NMW need have no effect on employment. Most observers are pessimistic about productivity but I remain relatively optimistic. Howeverit is possible that while average productivity ries at 2% that of low wage workers will rise more slowly.
Jagjit Chadha National Institute of Economic and Social Research Agree Not confident
The introduction of a national living wage target of 60% of median earnings by 2020 for over 25s is an attractive and eye-catching objective, as the target reflects many social scientists’ views about the threshold definition of poverty, which is 60% of median income. The increases in wages for those people in work at the bottom of the pay ladder and possibly some increases for those nearby in the distribution, in order to maintain relativities, may reduce both overall labour hours or total employment numbers and possibly drive up firms’ costs, which may increase the overall price level and lead to temporarily higher inflation. To the extent that higher wages may provide an incentive for productivity improvements by firms, these negative effects may be offset to some extent.
David Cobham Heriot Watt University Strongly disagree Confident
The rate of increase is really not that high; there are monopsony-type reasons for thinking that employment will not fall; it concerns only a small proportion of most firms' labour-forces; and because most workers likely to receive the increase are in the non-traded goods and services sector we should expect a change in relative prices (think of it as a kind of Balassa-Samuelson effect) rather than a large change in employment (we all get to pay more for our lattes, and this is a small price for living in a decent less unequal society).
Panicos Demetriades University of Leicester Strongly disagree Very confident
If there are any effects on employment, they are likely to be small and will only affect low wage sectors. Paying a decent wage to those employed in these sectors is more likely to increase productivity, which may well lower employment costs, than to reduce employment.
Richard Dennis University of Glasgow Agree Confident
Wouter Den Haan London School of Economics Disagree Not confident
The impact of an increase in the NLW is likely to depend on how the UK economy develops. If economic growth accelerates, then the increase in the NLW is unlikely to matter. On the other hand, if economic growth slows down, then an increase in the NLW could very well have a negative impact. The empirical evidence suggests, however, that the aggregate impact is likely to be small.
Christopher Martin University of Bath Strongly disagree Very confident
A large increase in minimum wage was introduced by a Chancellor who had recently been re-elected on a manifesto that contained no hint of such a bold move. Although this is a substantial hike in the minimum wage, the evidence suggests it will have only a modest direct impact on employment. And it might actually increase employment. The increase in the minimum wage will switch income from low-wage employers to the government (through reductions of in-work benefits paid as wage supplements) and to low paid workers. Both these groups have higher propensities to spend than firms and so we might expect an increase in aggregate demand and, through this, higher employment. In addition, income tax receipts ought to increase income tax receipts, taking pressure off a Chancellor constrained by self-imposed and unnecessary fiscal rules. If these additional receipts were used to fund infrastructure investment, further increases in employment might result.
Jonathan Portes KIng's College, London Agree Confident
In my view, the main thing we have learned from the considerable body of research on the impacts of minimum wages is that ex ante predictions based on theory or prejudice are worth little - those who predicted large negative impacts of the UK NMW now look foolish. Impacts are context dependent - it depends on time and place, as well as of course level. So I think anyone who states with very high confidence that they know what the impacts of the substantial increases now planned will be is mistaken. It will depend crucially on wider economic and labour market developments over the next few years. That said, given current forecasts of relatively sluggish growth (but no recession) I would expect some, significant - but not, I would emphasise, huge or disastrous - negative employment impacts
Ethan Ilzetzki London School of Economics Disagree Not confident
Martin Ellison University of Oxford Disagree Confident
Ray Barrell Brunel University London Agree Confident
An increase in the minimum wage is almost certain to have a negative impact on employment in the UK, although the vast majority of jobs covered will not be affected. Estimates of those to be covered by 2020 vary between 1 million and 3 million, and up to 10% of the jobs covered might disappear. There is an ongoing dispute over the impact of minimum wages on employment, with most of the evidence using US data. It seems likely that there is a small negative effect there. The UK is a more open economy with fewer firms with market power than in the US, and both make the demand for labour more elastic, and hence the effect of minimum wages will be higher. This will be particularly true in sectors such as agriculture where there are many producers in the rest of the EU who compete with no barriers. In addition, some public sector employers are budget constrained, and any rise in wages in social care, for instance, will be fully reflected in reductions in employment.
Patrick Minford Cardiff Business School Strongly agree Extremely confident
The introduction of the NLW goes against the previous policy instituted by Labour for a minimum wage targeted at the lowest paid workers on the grounds that they could suffer from employer monopsony power. In addition the Low Pay Commission was given the task of keepi ng the minimum at a low enough level to ensure it had the smallest possible impact on the demand for low-paid workers. This has meant that the minimum wage has been kept to around the 40% of median earnings level. I considered this policy inadvisable but there is only weak evidence that the minimum had much of an effect on jobs, it seems because the Commission was largely effective. Unfortunately, as I feared would happen, the Low Pay Commission has found it hard to hold the line. Oddly this has been due to a Conservative government introducing the NLW as the new minimum. This will push the UK, if implemented, to the position of high minimum wage countries like France, with its 60% of median earnings target. France has very high unemployment among low-paid workers. I consider it important that a future Conservative government restores the authority of the Low Pay Commission to set the minimum wage according to its original remit.
Charles Nolan University of Glasgow Disagree Confident
Michael McMahon University of Oxford Disagree Confident
The total number of employees earning the minimum wage is a relatively small proportion of total employment (around 5% according to the Low Pay Commission, but possibly lower using other estimates.) Moreover, firms can use price adjustments especially where the low paid jobs are complements to other workers earning more and not affected by the minimum wage change.
Ricardo Reis London School of Economics and Columbia University Agree Not confident
As well summarized in the question, the literature is mixed on this question, so I can only be "not confident". At the same time, while the 2016 increase is modest and likely has no clear effect, the target for 2020 seems more generous and so more likely to have a small negative effect on employment overall.
Jan Eeckhout University College London Strongly disagree Extremely confident
Alan Sutherland University of St. Andrews Disagree Not confident
Michael Wickens Cardiff Business School & University of York Agree Very confident
Employment is likely to fall in the short term but not the long term. If wages are raised without an accompanying rise in productivity labour becomes more expensive and jobs lost. The short term effects are likely to be felt most in the low productivity and low skill jobs. These higher labour costs are likely to be passed on in higher prices which could return average real wages to near their former level. If wages are then raised starting a wage-price spiral the upshot would be a higher rate of inflation. A lower real wage together with capital labour substitution that raises labour productivity could restore employment in the longer term.
Jim Malley University of Glasgow Agree Not confident
David Smith Sunday Times Disagree Confident
The National Living Wage may change the nature of some employment, particularly in certain sectors, and could have an effect at the margin on hours worked, but is unlikely to have a significant negative impact on employment at the macro level.
Paul De Grauwe London School of Economics Disagree Confident
Sir Charles Bean London School of Economics Neither agree nor disagree Not confident
Clearly at some point the minimum wage could be raised to such a level that it must lead to a noticeable reduction in employment. But the empirical evidence relating to past increases (in this country and abroad) is sufficiently ambiguous that it is impossible to be confident about the net impact of the planned increase. My expectation is that it will probably modestly reduce employment below the level it would otherwise have reached, but I have very little confidence in that judgement.
Francesco Caselli London School of Economics No opinion Extremely confident
Costas Milas University of Liverpool Disagree Confident
An increase in the minimum wage should bring into the picture the impact on (un)employment through competitiveness issues. So let us consider some international comparisons using the OECD database. For 2015, UK's real hourly minimum wage (2014 constant prices and 2014 USD Purchasing Power Parities) stood at $8.17. This was higher than OECD's median real minimum wage (which stood at $5.45). In fact, since 2000, UK's real minimum wage has been consistently higher than OECD’s median real minimum wage. This, in my view, has not paused a significant threat to our competitiveness and therefore has not led to a significantly lower employment. I remain cautiously optimistic that the new NLW will not undermine our employment prospects.
Morten Ravn University College London Agree Not confident
The cost of low skilled employment will rise and it is hard to believe in large monopsony power in all the industries concerned. So I think it is likely that employment will fall. One should also be aware of general equilibrium effects increasing costs of production in other industries making the UK less competitive. Of course, one also needs to look at how tax wedges are adjusted to get the full picture. So in the end, it is complicated but it would seem rather fairy-like to believe that a large increase in wages at the bottom of the distribution could be implemented at no cost of employment of the workers concerned.
Andrew Mountford Royal Holloway Neither agree nor disagree Very confident
While the literature on the short run effects of increasing the minimum wage is interesting , I think the longer run implications of the National Living Wage policy are more important. The performance of the UK economy will ultimately depend on the productivity of its workforce. As is well known, the market by itself will not provide the optimal level of investment in training in an economy. Individuals and firms need to be given help and incentives to increase their productivity. A low minimum wage combined with a welfare safety net in effect subsidises low skilled/low productivity jobs, i.e. gives precisely the wrong incentives. The new National Living Wage should end, or at least reduce, these perverse incentives. If the National Living Wage causes firms to invest in the productivity of their workforce and workers to invest in themselves then it will have a significantly positive effect on UK economic performance in the longer run.
Silvana Tenreyro London School of Economics Disagree Confident
The evidence on employment effects is ambiguous at best. At a time in which unemployment is at historical lows, it is worth experimenting the effects of an increase in minimum wages. The redistribution of rents towards workers could be a further stimulus to the economy.
John VanReenen London School of Economics Agree Not confident
There will certainly be an increase in wages/reduction in wage inequality and a fall in profits (see my work on the 1999 introduction of the UK National Minimum Wage) http://cep.lse.ac.uk/pubs/download/dp0715.pdf It's likely at such high levels we will start seeing unemployment effects The bad thing about the Living Wage Policy is that it over-rode the work of the Low Pay Commission which was an internationally praised, independent, expert body recommending the level of the minimum wage.
Kate Barker British Coal Staff Superannuation Scheme Disagree Confident
Difficult question. What is significant? What will the long-term impact be? It may be significant for the younger workers in the short-term.

National Living Wage and UK wages and prices

Participant Answer Confidence level Comment
Sir Christopher... London School of Economics Agree Confident
I agree that the main effect will be on prices but given the number of workers on the minimum wage and the overall share of labour in costs the impact will be "muted"
Sean Holly Cambridge University Agree Confident
Fabien Postel-Vinay University College London Agree Confident
Richard Portes London Business School and CEPR Strongly agree Extremely confident
Paolo Surico London Business School Agree Confident
Simon Wren-Lewis University of Oxford Agree Confident
David Bell University of Stirling Agree Not confident
Akos Valentinyi University of Manchester Neither agree nor disagree Confident
Nicholas Oulton London School of Economics Agree Confident
The rate of inflation will be determined by monetary policy and any external shocks which the MPC decides to accomodate, not by domestic shocks like the NMW.
Jagjit Chadha National Institute of Economic and Social Research Disagree Not confident
I repeat part of my previous comment. In order to maintain relativities, firms may reduce both overall labour hours or total employment numbers and the increase in the wage bill may drive up firms’ costs, which may increase the overall price level and lead to temporarily higher inflation. To the extent that higher wages may provide an incentive for productivity improvements by firms, these negative effects may be offset to some extent. On balance though I would expect unit labour costs to go up somewhat.
David Cobham Heriot Watt University Strongly agree Confident
For reasons outlined in answer to previous question, the rise is unlikely to have a large effect, but insofar as it does this is a good thing - reversing a trend towards inequality which has prevailed over several decades - rather than a bad thing, and economists should say that in public.
Panicos Demetriades University of Leicester Neither agree nor disagree Confident
A muted effect on wages and prices cannot be ruled out, although any such effect will be tempered by possible gains in labour productivity in low wage sectors.
Richard Dennis University of Glasgow Agree Not confident
Wouter Den Haan London School of Economics Agree Not confident
The increase in the NLW will surely have some effect on average wages and prices. It is unlikely to be strong. If the UK economy grows rapidly, then the increase in the NLW is unlikely to matter very much for anything except low-wage workers. If the UK economy does not grow rapidly, then the increase in the NLW could have an impact on employment, but inflationary pressure is unlikely is such an environment.
Christopher Martin University of Bath Disagree Confident
The UK economy has been blighted by low wage growth since before 2008. This has been a significant drag on the public finances and a major reason for the consistent undershoot of inflation below the 2% target. Something important seems to have changed in the labour market, giving rise to suggestions that the UK is caught in a low-wage-low-skills trap. If that is right, might the new minimum wage get us out of this trap? Raising the cost of labour gives more incentive for firms to invest in skills, an area where the UK is chronically weak at the bottom end of the wage distribution. This is all good, but it is not a short-term fix. The direct effect of a minimum wage hike on inflation is muted at best.
Jonathan Portes KIng's College, London Agree Very confident
It will have a significant impact on wages for some workers and hence some companies. But the overall macro-level impact on wages and prices will be relatively small. Firms and sectors will adjust through a variety of mechanisms, one of which may be higher prices, but even in the retail sector the impact on consumer prices will be quite difficult to discern.
Ethan Ilzetzki London School of Economics Agree Not confident
Martin Ellison University of Oxford Agree Confident
Ray Barrell Brunel University London Strongly agree Very confident
Real wages will rise marginally, whilst the impact on prices dpends on the Bank's reaction.If it is wise there will be no effect.
Patrick Minford Cardiff Business School Disagree Confident
With such a large rise in low-paid wages, there will be effects right up the wage scale. It will generally raise wage costs therefore and not merely in low wage industries. This will also put upward pressure on prices. Assessing just how large this effect will be is not easy: and what is 'muted'? But if one roughly assesses the rise in the minimum as around 40% in 2020, then it would be surprising if wages overall were not pushed up around 10% and prices similarly. This is far from 'muted' whatever that may be. It reinforces my view that the effect on employment through general 'competitiveness' in the open economy will reinforce the micro level elasticities found in applied work.
Charles Nolan University of Glasgow Agree Confident
Michael McMahon University of Oxford Agree Confident
Some small upward pressure on inflation is potentially to be welcomed given how close to deflation we are at a time that interest rates are already low.
Ricardo Reis London School of Economics and Columbia University Agree Not confident
Mark Carney's seems about right, allowing again for the uncertainty around any estimate.
Jan Eeckhout University College London Agree Very confident
Alan Sutherland University of St. Andrews Agree Not confident
Michael Wickens Cardiff Business School & University of York Disagree Confident
Higher labour costs where there are no improvements in productivity will lead to price increases. If these are followed by pressure for higher wages, a wage-price spiral could ensue and lead to a higher level of inflation.
David Miles Imperial College Agree Not confident
Jim Malley University of Glasgow Agree Confident
David Smith Sunday Times Agree Very confident
The Bank of England's estimates, which suggest a 0.1% sustained increase in earnings growth as a result of the National Living Wage, would have to be very wildly out for there to be a more significant effect on wages and inflation.
Paul De Grauwe London School of Economics Agree Confident
Sir Charles Bean London School of Economics Agree Confident
Unlike the ambiguous impact on employment, I think it is rather more likely that there will be an upward impact on wages and prices (assuming that it is not fully offset by MPC), though the effects will probably be pretty modest.
Francesco Caselli London School of Economics No opinion Extremely confident
Costas Milas University of Liverpool Agree Confident
In the current environment of "low" unemployment, the rest of the workers (who form the majority as they are not on the minimum wage) will respond to the NLW developments by bargaining more lively in order to restore part of their “wage differentials”. Therefore, the NLW will put upward pressure on wages and prices. Notice, however, that the BoE’s Inflation Report expects CPI inflation to hit the target only in 2018q1! With this in mind, gradual and very mild interest rate hikes will occur in the medium-term. It has been suggested that low interest rates have contributed to over-investment in other risky assets (e.g. stocks and housing) therefore adding to bubble pressures which, of course, are setting the scene for yet another financial crisis. If the increase in the minimum wage is able to put an upward pressure on UK inflation sooner than later, the MPC will be forced to respond by hiking earlier and perhaps more aggressively. Such an increase in the interest rate (in response to stronger price pressures stemming from the very increase in the minimum wage) will be more than welcome as it will also counteract UK bubble risks!
Tony Yates University of Birmingham Neither agree nor disagree Confident
Morten Ravn University College London Agree Confident
I would agree that it might be muted yet still positive. The wage and cost effects, though, might possibly vary over industries. One should also be aware that increases in wages may be associated with decreases in firms' investment in workers. At the end of the day, it would seem hopeful to believe that one can implement higher wages at the bottom of the wage distribution at no costs. This does not mean that the policy may not be right but it does mean that there will be costs.
Andrew Mountford Royal Holloway Neither agree nor disagree Very confident
While the literature on the short run effects of increasing the minimum wage is interesting , I think the longer run implications of the National Living Wage policy are more important. The performance of the UK economy will ultimately depend on the productivity of its workforce. As is well known, the market by itself will not provide the optimal level of investment in training in an economy. Individuals and firms need to be given help and incentives to increase their productivity. A low minimum wage combined with a welfare safety net in effect subsidises low skilled/low productivity jobs, i.e. gives precisely the wrong incentives. The new National Living Wage should end, or at least reduce, these perverse incentives. If the National Living Wage causes firms to invest in the productivity of their workforce and workers to invest in themselves then it will have a significantly positive effect on UK economic performance in the longer run.
Silvana Tenreyro London School of Economics Agree Confident
The new NLW is unlikely to significantly affect other wages. As for prices, part of the increases in NLW might be pass through to prices in labour-intensive sectors, but the effect, again, is unlikely to be significant.
Kate Barker British Coal Staff Superannuation Scheme Agree Confident
Again, depends what muted means. I would expect it to affect wages and prices overall, but not to an extent that set off a long-term wage spiral. The interesting question is whether it helps encourage firms to improve labour productivity.