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The National Minimum Wage and Wage Inequality: An Update. Richard Dickens and Alan Manning. Why is an update needed?. Some interesting things have been happening to wage inequality in the UK
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The National Minimum Wage and Wage Inequality: An Update Richard Dickens and Alan Manning
Why is an update needed? • Some interesting things have been happening to wage inequality in the UK • Used to it always getting worse but bottom-end wage inequality has been declining for some considerable time • Tempting to put this down to the NMW • But perhaps not all of it…
What Could Be Going On Here? • Impact of Minimum wage from 1999 • Other factors causing changes in wage inequality • Strong labour market • Rise in educational attainment • Lovely vs. lousy jobs • Immigration
Our Earlier Findings on Impact of NMW • Dickens and Manning (JRSS, 2004) • Used LFS • Found effect of NMW and zero spill-over • No effect on 10th percentile, only on 5th • Dickens and Manning (EJ, 2004) • Care homes data • Minimum wage much more important (40% affected) • Still no spill-over effect • Reduction in wage inequality seems much larger than we would expect from these results • Contrast with US • Lee (QJE, 1998) implies quite large spill-overs
What might be happening? • NMW has been increasing faster than median earnings • NMW has spill-over effects over long period – earlier studies were impact effect • Measurement Error Problems • Other factors at work
Other estimates of spike • ONS only seems to provide estimates of those paid below the NMW based on ASHE • More or less in line with LFS • LPC Report suggests 3.2% were beneficiaries of Oct 05 increase • Can’t seem to explain powerful reduction in wage inequality.
Measurement Error Problems • Would expect the pattern we see – a simple example • Underlying wage dist log normal • Perfect compliance with minimum wage – approx 5% affected • But observed wage distribution true + classical error
Can Use Hourly Rate Measure • LFS has collected hourly rate since March 1999 • Only available for 38% of people • Have to impute for others • ONS and Dickens/Manning describe methodologies for doing this
Propensity Score Re-weighting • Assumption: conditional on covariates, the distribution of hourly rate is independent of whether it is observed or not • Estimate probit model for whether hourly rate observed • A strong assumption – probably leads to over-estimate of impact of NMW
Details • Hourly rate only collected from March 1999 i.e. only one month prior to NMW • Routing of question then different from subsequently • We will compare 2001q1 with 2006q1 (2001q1 – NMW low in real terms)
Comparison of Changes in Hourly Rate and Hourly Pay Measures
Changes reach too far up wage distribution to be direct effect of NMW • Do not seem able to explain them by measurement problems • What about spill-overs?
The Lee Model of Spill-Overs • Latent log wage distribution w*(F) – assume normal • Only direct effect of NMW • Lee adds possibility of spill-over • Spill-over parameter β – high value, big spill-over • This model works well
Conclusions • Fall in wage inequality can be explained using direct effect of NMW and modest spill-over effect • Implies other factors not so important • Can this really be true?