what impact should we expect from the minimum wage? adair turner policy studies institute 2nd...
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WHAT IMPACT SHOULD WE EXPECT FROM THE MINIMUM WAGE?
Adair Turner
Policy Studies Institute
2nd December 2002
2
Expectations and Fears
For
Alleviation of in-workpoverty
Encourage higher value
focus• investment, training,
productivitiy
Against
Loss of competitiveness• destruction of jobs
3
Employment and Unemployment 1992-2002
68
69
70
71
72
73
74
75
76
1992
Q2
1992
Q4
1993
Q2
1993
Q4
1994
Q2
1994
Q4
1995
Q2
1995
Q4
1996
Q2
1996
Q4
1997
Q2
1997
Q4
1998
Q2
1998
Q4
1999
Q2
1999
Q4
2000
Q2
2000
Q4
2001
Q2
2001
Q4
2002
Q2
Em
ploy
men
t ra
te %
0
2
4
6
8
10
12
ILO
Une
mpl
oym
ent
rate
%
Employment rate Unemployment rate
Source: Labour Force Survey
4
Beneficiaries of the NMW: Third Report Estimates
1.30.95
1.4
0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
April 1999 June/October 2000 October 2001
Mill
ions
Source: LPC Third Report
5
Minimum Wage and Average Earnings April 1999-October 2002
16.7
16.0
0 2 4 6 8 10 12 14 16 18
Increase in NMW
Increase in AEIheadline
Percentage increase in adult NMW and average earnings
Source: ONS Average Earnings Index Headline RateNote: Increase in AEI headline is to September 2002
6
Possible Effects
• Redistribution through higher prices
• Redistribution but with reduction in sectoral demand
• Redistribution through lower margins
• Redistribution resisted - differentials restored
• Productivity enhancement– Capital/labour substitution– Training– Work elimination (service redefinition)
• Loss of external competitiveness
7
Conditions for different effects
Redistribution through higher prices Low (nil) price elasticity of demand (forproduct category)Margins at competitive equilibrium level
Redistribution but with reduction insectoral demand
As above but high price elasticity- for overall product- or between formal and informal sector
Redistribution through lower margins Monopsony margins to be squeezedOr - competitive margins squeezed viabarriers to exitOr – temporary squeeze due toprice/wage timing
Redistribution resisted- differentials restored
Conventional wage bargaining structuresor business needs for incentives
Productivity enhancement- Capital/labour substitution- Training- Work elimination (service redefinition)
Inherent characteristics of the job –potential for change
Lost of external competitiveness Traded sector of the economy
8
First and subsequent order employment effects
Redistribution through higher prices Nil effect
Redstribution through lower monopsonymargin
Redistribution resisted- differentials restored
Nil direct effect Overall effect depends on macro
consequences of wage inflation
Redistribution but with reduction insectoral demand
Redistribution though lower margins –provoking exit
Productivity enhanced
Loss of external competitiveness
Negative direct effect Overall effect depends on overal
labour market efficiency – speed ofemergence of alternative jobs
9
Percentage of Adult Jobs Paid Below £4.30 per hour, April 2002
Source: Grossed NES data, 2002
0 5 10 15 20 25 30
All other sectors
Textiles, Clothing
Security
Retail
Social care
Hairdressing
Hospitality
Cleaning
Percentage of adult jobs
10
Number of Adult Jobs Paid Below £4.30 per hour, April 2002
0 100,000 200,000 300,000 400,000 500,000
All other sectors
Security
Hairdressing
Textiles, Clothing
Social care
Cleaning
Retail
Hospitality
Number of adult jobs
Source: Grossed NES data, 2002
Low-paying sectors account for 56 per cent of all adult jobs paid below £4.30
11
Total Employee Jobs in Low-paying Sectors June 2002
0.1
0.1
0.2
0.4
0.4
1.7
2.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Hairdressing
Security
Textiles & clothing
Cleaning
Social Care
Hospitality
Retail
All employee jobs (Millions)
Source: ONS
Low-paying sectors account for 22 per cent of all employee jobs
12
Employee Jobs in Retailing
2,300,000
2,350,000
2,400,000
2,450,000
2,500,000
2,550,000
2,600,000
2,650,000
2,700,000
2,750,000
2,800,000
2,850,000
Ma
r-9
8
Jun
-98
Se
p-9
8
De
c-9
8
Ma
r-9
9
Jun
-99
Se
p-9
9
De
c-9
9
Ma
r-0
0
Jun
-00
Se
p-0
0
De
c-0
0
Ma
r-0
1
Jun
-01
Se
p-0
1
De
c-0
1
Ma
r-0
2
Jun
-02
All
empl
oyee
jobs
Source: ONS
13
Effect, Conditions and Applicability: Retail Sector
Redistribution throughhigher prices
Low price elasticityCompetitive equilibrium
Redistribution but withreductions in demand
Higher price elasticity
For whole sector priceelasticity cannot be high
Redistribution throughlower margins
Monopsony marginsBarriers to exitTransitional effects
?
Redistribution resisted- differentials restored
Conventional bargainingstructure – or incentivesessential
?
Productivity enhancement Inherent job characteristics Significant potential toreduce service levels, e.g.longer queues
Loss of externalcompetitiveness
Traded sector Not applicable
14
Operating Surplus as % of Output by Sector 1998-2000
0
10
20
30
40
50
60
70
Agr
icul
ture
,fo
rest
ry &
fishi
ng
Min
ing
Man
ufac
turin
g
Pow
er
Con
stru
ctio
n
Dis
trib
utio
n &
hosp
italit
y
Tra
nspo
rt,
&co
mun
ctns
Bus
ines
s &
finan
ce
Pub
lic A
dmin
& d
efen
ce
Edc
tn,
heal
th&
soc
ial w
k
Oth
Ser
vice
s
All
Indu
strie
s
Gro
ss o
pera
ting
surp
lus
as p
erce
nt o
utpu
t
1998 1999 2000
Source: ONS Blue Book
15
Corporations Gross Operating Surplus as % GDP and GDP Growth 1980-2002
-10
-5
0
5
10
15
20
25
30
1980Q1
1982Q1
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
per
cent
Corporations gross operating surplus as % GDP GDP growth rate
Source: ONS Economic Trends
16
Increases in Hourly Earnings for Employees Aged 18 and over, 2001-2002
0
2
4
6
8
10
12
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
Percentile of Hourly Earnings Distribution
Per
cent
age
incr
ease
s
Source: Grossed NES April 2001-2002
17
Difference in Hourly Earnings Increases versus Median by Percentile 2000-2002
Source: Grossed NES April 2000-2002
-4
-2
0
2
4
6
8
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
Per
cent
age
incr
ease
in p
erce
ntile
ear
ning
s m
inus
pe
rcen
tage
incr
ease
in m
edia
n ea
rnin
gs
2000-2001 2001-2002
£5.70ph
18
Difference in Hourly Earnings Increases Compared with Median by Percentile
1998-2002
Source: Grossed NES April 1998-2002
-5
0
5
10
15
20
25
30
35
40
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
Per
cent
age
incr
ease
in p
erce
nitle
ear
ning
s m
inus
per
cent
age
incr
ease
in m
edia
n ea
rnin
gs
1998-2002
£5.00ph
19
Difference in Hourly Earnings Increases versus Median by Percentile:
Low-paying sectors 2000-2002
Source: Grossed NES April 2000-2002
-3
-2
-1
0
1
2
3
4
5
6
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
Pe
rce
nta
ge
incr
ea
se in
pe
rce
ntil
e e
arn
ing
s m
inu
s p
rece
nta
ge
incr
ea
se in
me
dia
n e
arn
ing
s
£5.00 per hour
20
Employee Jobs in Hospitality
1,400,000
1,450,000
1,500,000
1,550,000
1,600,000
1,650,000
1,700,000
Ma
r-9
8
Jun
-98
Se
p-9
8
De
c-9
8
Ma
r-9
9
Jun
-99
Se
p-9
9
De
c-9
9
Ma
r-0
0
Jun
-00
Se
p-0
0
De
c-0
0
Ma
r-0
1
Jun
-01
Se
p-0
1
De
c-0
1
Ma
r-0
2
Jun
-02
All
empl
oyee
jobs
Source: ONS
21
Effect, Conditions and Applicability: Hospitality Sector
Redistribution throughhigher prices
Low price elasticityCompetitive equilibrium
Redistribution but withreductions in sectoraldemand
Higher price elasticity
Possibly higher priceelasticity than retail -with somecompetitiveness issues(in some sub-sectors)
Volume movements inlast year affected byspecial factors (foot &mouth, terrorism)
Redistribution throughlower margins
Monopsony marginsBarriers to exitTransitional effects
?
Redistribution resisted- differentials restored
Conventional bargainingstructure – or incentivesessential
Same empirical results asfor retailing
Productivity enhancement Inherent job characteristics Significant potential torebalance service levele.g. queue length
Loss of externalcompetitiveness
Traded sector Applicable in somesubsectors - but otherfactors dominate
22
Impact of October 2001 increase – firms reporting increased use of new technology/processes: %
0 2 4 6 8 10
Hairdressing
Childcare
Social Care
Business Services
Retail
Textiles
Hospitality
Percentage of all respondents
Source: LPC Postal Survey
23
Employee Jobs in Social Care
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000M
ar-
98
Jun
-98
Se
p-9
8
De
c-9
8
Ma
r-9
9
Jun
-99
Se
p-9
9
De
c-9
9
Ma
r-0
0
Jun
-00
Se
p-0
0
De
c-0
0
Ma
r-0
1
Jun
-01
Se
p-0
1
De
c-0
1
Ma
r-0
2
Jun
-02
All
empl
oyee
jobs
Source: ONS
24
Effect, Conditions and Applicability: Social Care
Redistribution throughhigher prices
Low price elasticityCompetitive equilibrium
Redistribution but withreductions in sectoraldemand
Higher price elasticity
Price elasticity (in free-market) likely to be higherthan retailing
Redistribution throughlower margins
Monopsony marginsBarriers to exitTransitional effects
But prices largely set bylocal authoritymonopsonist purchasers
Redistribution resisted- differentials restored
Conventional bargainingstructure – or incentivesessential
Same empirical results asother sectors
Productivity enhancement Inherent job characteristics Potential limited by face-to-face service and regulationof care standards
Loss of externalcompetitiveness
Traded sector Not applicable
25
Impact of October 2001 increase – firms reporting a decrease in profits: %
0 10 20 30 40 50 60
Textiles
Business Services
Retail
Hairdressing
Childcare
Hospitality
Social Care
Percentage of all respondents
26
Registered Nursing Beds in Nursing Homes, 1995/6 to 2001, England
0
50,000
100,000
150,000
200,000
250,000
1995-96* 1996-97* 31 March1998
31 March1999
31 March2000
31 March2001
Year
Num
ber
of r
egis
tere
d be
ds
General nursing homes Mental nursing homes Private hosp+clinics
Source: Department of Health
27
Employee Jobs in Cleaning
0
100,000
200,000
300,000
400,000
500,000
600,000M
ar-9
8
Jun-
98
Sep
-98
Dec
-98
Mar
-99
Jun-
99
Sep
-99
Dec
-99
Mar
-00
Jun-
00
Sep
-00
Dec
-00
Mar
-01
Jun-
01
Sep
-01
Dec
-01
Mar
-02
Jun-
02
All
empl
oyee
jobs
Part-time Full-time
Source: ONS
28
Effect, Conditions and Applicability: Cleaning
Redistribution throughhigher prices
Low price elasticityCompetitive equilibrium
Redistribution but withreductions in demand
Higher price elasticity
Price elasticity may besignificant due to ability toredefine service level (seeproductivity below)
Redistribution throughlower margins
Monopsony marginsBarriers to exitTransitional effects
Margins heavilydetermined by contractingterms – public sector keyproblem (but improving)
Redistribution resisted- differentials restored
Conventional bargainingstructure – or incentivesessential
Same as other sectors
Productivity enhancement Inherent job characteristics Some capital/laboursubstitution!
Significant service levelredefinition
Some shift to full-time
Loss of externalcompetitiveness
Traded sector Not applicable
29
Employee Jobs in Textiles and Clothing
020,00040,00060,00080,000
100,000120,000140,000160,000180,000
Mar
-98
Jun-
98
Sep
-98
Dec
-98
Mar
-99
Jun-
99
Sep
-99
Dec
-99
Mar
-00
Jun-
00
Sep
-00
Dec
-00
Mar
-01
Jun-
01
Sep
-01
Dec
-01
Mar
-02
Jun-
02
All
empl
oyee
jobs
Textiles Clothing
Source: ONS
30
Effect, Conditions and Applicability: Textiles and Clothing
Redistribution throughhigher prices
Low price elasticityCompetitive equilibrium
Redistribution but withreductions in demand
Higher price elasticity
Competitiveness effectdominates not absoluteprice elasticity for thecatergory Some formal to
informal sector shift
Redistribution throughlower margins
Monopsony marginsBarriers to exitTransitional effects
Margin squeeze (+subsequent exit) couldresult fromcompetitiveness effect
Redistribution resisted- differentials restored
Conventional bargainingstructure – or incentivesessential
As for other sectors
Productivity enhancement Inherent job characteristics Significant theoreticalpotential – limited evidenceon scale of response
Loss of externalcompetitiveness
Traded sector Acceleration of inevitabletrend
31
Impact of 2001 NMWIncrease on Training Provision
Provided training in past 3 years
IncreasedTraining
DecreasedTraining
No Change
Workers aged 16-17 82 17 15 69
Workers aged 18-21 88 17 13 70
Workers aged 22 or over 84 16 13 71
Source: LPC Postal SurveyNote: Base, all firms affected by the October 2001 increase in the National Minimum Wage in any way, and employing workers in the relevant age group at the time of the survey, and providing training to their staff (final three columns only).
% of affected firms which:
32
Some Conclusions?Redistribution via higher prices Primary impact?
Redistribution but with reduction indemand
Unclear Some formal informal economy
effects in textiles and hairdressing?
Redistribution through lower margins Short-term oscillations due tobig/small increases
Long-term effect unclear – theorysuggests small
Social care special case due toregulation and monopsonist customer
Redistribution resisted- differentials restored
Contained effect – minimal macroproblem
Productivity enhancement Capital/labour substitution Training Work elimination/service redefinition
Minimal impact
Possibly significant in some sectors e.g.cleaning
Loss of external competitiveness Acceleration of textile sector trends
33
Gains for Working Age Households, from Minimum Wage and Tax Credits 1997 - 2001
Source: HM Treasury
0.00
5.00
10.00
15.00
20.00
25.00
Bot
tom
2nd
3rd
4th
5th
6th
7th
8th
9th
Top
Ave
rage
Gai
ns b
y In
com
e D
ecile
£ p
er w
eek
Minimum Wage Child support WFTC
34
Optimal Redistribution ApproachVia Minimum Wage Via tax and benefit
systemRedistributive effect Gainers Widespread Targeted Losers
Via price Via margin
Proportional?Mildly progressive?
Can be progressive
Potential evasion Significant – depends onlevel
Low given smallincremental impact
Employment destructiondanger
Low at prudent levels would rise with level
Minimal given smallincremental impact
Incentive to work effect Positive – but withdifferential squeezeeffects
Positive – but with tapercomplexities
Status/sense of worth Strong Strong if through taxcredit system?
Resistance to higher taxburden
Not applicable Possible constraint