Has the national minimum wage reduced UK wage inequality?

Abstract

The paper investigates the effect on the wage distribution of the introduction, in April 1999, of the national minimum wage (NMW) in the UK. Because of the structure of UK earnings statistics, it is not straightforward to investigate this and various methods for adjusting the published statistics are discussed. The main conclusions are that the NMW does have a detectable effect on the wage distribution and that compliance with the NMW is widespread but the effect is limited because the NMW has been set at a level such that only 6-7% of workers are directly affected and the NMW has had virtually no effect on the pay of workers who are not directly affected. Furthermore, virtually all the changes occurred within 2 months of the introduction in April 1999 and its effect declined over time from April 1999 to September 2001 as the minimum wage was not uprated in line with the increase in average earnings. The more substantial increase in the NMW in October 2001 partially, but not wholly, restored some of this decline in impact.