Last reviewed 10 January 2022
According to the Institute for Fiscal Studies (IFS) the introduction of the National Living Wage (NLW) has affected numbers of employees well beyond those who have directly benefitted.
“The distributional and employment impacts of nationwide Minimum Wage changes”, which can be found here, shows that, for every 10 employees brought onto the NLW since 2016, another three have seen a pay rise above the NLW because of the reform.
While the increases in the NLW from 2016 to 2019 led to an additional 1.2 million people aged 25+ earning at the NLW, it also led to a further 370,000 earning more than the NLW (compared with a baseline of the minimum wage only rising in line with average wages).
There is evidence of wage rises up to £1.50 above the NLW (up to £9.71 in 2019), due to factors such as firms wanting to maintain pay differentials between occupations. This means that the NLW affected wages up to a fifth of the way up the wage distribution.
In addition, the IFS found, because of factors such as firms’ reluctance to differentiate wages by age, around 250,000 workers under the age of 25, who were not legally bound by the NLW, saw their pay rise to at least the NLW.
It also emphasises that there is no clear evidence of reductions in overall employment as a result of the NLW.
The report shows that the four increases in the NLW between 2016 and 2019 increased the pre-tax earnings of minimum wage workers by £33 per week.
After accounting for taxes paid and reductions in income-related benefits resulting from higher earnings, this translated into a change in average net household incomes of £23 a week, or around 4%, for those minimum wage workers.
Xiaowei Xu, a Senior Research Economist at IFS and an author of the research, said: “It was always predictable that those earning under the NLW would see significant wage rises. What is striking is the extent of the positive ‘spillovers’ onto groups not legally affected”.