Wage Inequality, Minimum Wage Effects and Spillovers

This paper investigates possible spillover effects of the UK minimum wage. The halt in the growth in inequality in the lower half of the wage distribution (as measured by the 50:10 percentile ratio) since the mid 1990s, in contrast to the continued inequality growth in the upper half of the distribution, suggests the possibility of a minimum wage effect and spillover effects on wages above the minimum. This paper analyses individual wage changes, using both a difference-in-differences estimator and a specification involving cross-uprating comparisons, and concludes that there have not been minimum wage spillovers. Since the UK minimum wage has always been below the 10 percentile, this lack of spillovers implies that minimum wage changes have not had an effect on the 50:10 percentile ratio measure of inequality in the lower half of the wage distribution. JEL classifications: J31, J38, J08. * The author is grateful to the ESRC (under award RES000222611) and the Low Pay Commission for financial support and to Tim Butcher and Steve Machin for comments on an earlier version of the paper. The ASHE data were made available by the ONS, through the LPC, and have been used by permission. Address for correspondence: Economics Department, University of Warwick, Coventry CV4 7AL, UK. E-mail: [email protected].