How do minimum wages affect business performance?

Minimum wages in the UK have increased at a much faster rate since 2016 with the introduction of the National Living Wage (NLW).

This year’s increase in the NLW to £8.72 has achieved the ambition set out by the Government in 2015 to raise minimum wages to the level  of 60% of median earnings. A further target of minimum wages equal to two thirds of median earnings by 2024 has since been set, but the road to get there is looking uncertain in light of Covid-19.

While it is clear that higher minimum wages benefit low paid workers, less is known about their effect on business performance. Previous work by Frontier found that increases in the minimum wage applicable to apprentices did not lead to reductions in their employment. In a new piece of work for the Low Pay Commission (LPC) we study the impact of recent increases in the NLW on business performance including business growth, productivity, employment and pricing. We are using a number of data sources to conduct the work including the Business Structure Database, the Annual Survey of Hours and Earnings and Office for National Statistics inflation data. Our approach involves comparing sectors and employers which are highly exposed to minimum wage increases (those that pay lots of their workers the minimum wage and where labour costs are substantial) with others which are less reliant on minimum wage labour.

The emerging findings from our ongoing work were presented at the annual LPC research workshop last week by Thomas Baily and Danail Popov. Full findings will be available in the Autumn.

We regularly advise private and public bodies on labour market issues including minimum wages. More information on the current research commissioned by the Low Pay Commission is available here.

For further information please contact or call +44 (0) 20 7031 7000.