IDEAS home Printed from https://ideas.repec.org/p/cep/cepdps/dp1869.html
   My bibliography  Save this paper

Company wage policy in a low-wage labor market

Author

Listed:
  • Giulia Giupponi
  • Stephen Machin

Abstract

The question of how firms set wages for their employees has been of longstanding interest. In this paper, we investigate what models of wage determination are at play in a low-wage labor market. We exploit a sizable and salient age-specific minimum wage change in the United Kingdom - the National Living Wage (NLW) introduction. Starting in April 2016, the NLW raised the minimum wage rate applying to workers aged 25 and over, leaving unchanged the minimum wage rates for younger workers. Using matched employer-employee data on the English residential care home sector, we document positive wage spillovers on workers aged under 25. Younger workers' wages are shown to have risen in tandem with those of older workers, with no differential employment effects by age at both the market level and the firm level. We probe the inter- vs intra-firm nature of wage spillovers and show that they arise within rather than between firms. Based on empirical tests and qualitative evidence from a survey of care homes in the sample, pay-equity concerns offer the most plausible explanation for the emergence of wage spillovers. The wage spillover effects that we document are shown to emerge in other low-paying sectors of the UK labor market.

Suggested Citation

  • Giulia Giupponi & Stephen Machin, 2022. "Company wage policy in a low-wage labor market," CEP Discussion Papers dp1869, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1869
    as

    Download full text from publisher

    File URL: https://cep.lse.ac.uk/pubs/download/dp1869.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 255-283.
    2. David Card & Jörg Heining & Patrick Kline, 2013. "Workplace Heterogeneity and the Rise of West German Wage Inequality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(3), pages 967-1015.
    3. Emmanuel Saez & Benjamin Schoefer & David Seim, 2019. "Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden," American Economic Review, American Economic Association, vol. 109(5), pages 1717-1763, May.
    4. DiNardo, John & Fortin, Nicole M & Lemieux, Thomas, 1996. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Econometrica, Econometric Society, vol. 64(5), pages 1001-1044, September.
    5. Claus Thustrup Kreiner & Daniel Reck & Peer Ebbesen Skov, 2020. "Do Lower Minimum Wages for Young Workers Raise Their Employment? Evidence from a Danish Discontinuity," The Review of Economics and Statistics, MIT Press, vol. 102(2), pages 339-354, May.
    6. Machin, Stephen & Manning, Alan & Rahman, Lupin, 2002. "Where the minimum wage bites hard: the introduction of the UK national minimum wage to a low wage sector," LSE Research Online Documents on Economics 20070, London School of Economics and Political Science, LSE Library.
    7. Galuscak, Kamil & Keeney, Mary & Nicolitsas, Daphne & Smets, Frank & Strzelecki, Pawel & Vodopivec, Matija, 2012. "The determination of wages of newly hired employees: Survey evidence on internal versus external factors," Labour Economics, Elsevier, vol. 19(5), pages 802-812.
    8. Deborah Goldschmidt & Johannes F. Schmieder, 2017. "The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1165-1217.
    9. Arindrajit Dube & Laura Giuliano & Jonathan Leonard, 2019. "Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior," American Economic Review, American Economic Association, vol. 109(2), pages 620-663, February.
    10. Alain Cohn & Ernst Fehr & Lorenz Goette, 2015. "Fair Wages and Effort Provision: Combining Evidence from a Choice Experiment and a Field Experiment," Management Science, INFORMS, vol. 61(8), pages 1777-1794, August.
    11. David Card & Ana Rute Cardoso & Joerg Heining & Patrick Kline, 2018. "Firms and Labor Market Inequality: Evidence and Some Theory," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 13-70.
    12. Emmanuel Saez & Manos Matsaganis & Panos Tsakloglou, 2012. "Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 493-533.
    13. Carl M. Campbell III & Kunal S. Kamlani, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 759-789.
    14. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    15. Butcher, Tim & Dickens, Richard & Manning, Alan, 2012. "Minimum wages and wage inequality: some theory and an application to the UK," LSE Research Online Documents on Economics 48937, London School of Economics and Political Science, LSE Library.
    16. David H. Autor & Alan Manning & Christopher L. Smith, 2016. "The Contribution of the Minimum Wage to US Wage Inequality over Three Decades: A Reassessment," American Economic Journal: Applied Economics, American Economic Association, vol. 8(1), pages 58-99, January.
    17. David Card & Alexandre Mas & Enrico Moretti & Emmanuel Saez, 2012. "Inequality at Work: The Effect of Peer Salaries on Job Satisfaction," American Economic Review, American Economic Association, vol. 102(6), pages 2981-3003, October.
    18. Petri Böckerman & Roope Uusitalo, 2009. "Minimum Wages and Youth Employment: Evidence from the Finnish Retail Trade Sector," British Journal of Industrial Relations, London School of Economics, vol. 47(2), pages 388-405, June.
    19. Stephen Machin & Alan Manning, 2004. "A Test of Competitive Labor Market Theory: The Wage Structure among Care Assistants in the South of England," ILR Review, Cornell University, ILR School, vol. 57(3), pages 371-385, April.
    20. David S. Lee, 1999. "Wage Inequality in the United States During the 1980s: Rising Dispersion or Falling Minimum Wage?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 977-1023.
    21. repec:bla:scandj:v:97:y:1995:i:2:p:295-307 is not listed on IDEAS
    22. Ann P. Bartel & Nancy D. Beaulieu & Ciaran S. Phibbs & Patricia W. Stone, 2014. "Human Capital and Productivity in a Team Environment: Evidence from the Healthcare Sector," American Economic Journal: Applied Economics, American Economic Association, vol. 6(2), pages 231-259, April.
    23. Stephen Machin & Alan Manning & S Woodland, 1993. "Are Workers Paid their Marginal Product? Evidence from a Low Wage Labour Market," CEP Discussion Papers dp0158, Centre for Economic Performance, LSE.
    24. Marco Manacorda, 2004. "Can the Scala Mobile Explain the Fall and Rise of Earnings Inequality in Italy? A Semiparametric Analysis, 19771993," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 585-614, July.
    25. Stephen Machin & Alan Manning & Lupin Rahman, 2003. "Where the Minimum Wage Bites Hard: Introduction of Minimum Wages to a Low Wage Sector," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 154-180, March.
    26. Marco Leonardi & Michele Pellizzari & Domenico Tabasso, 2019. "Wage Compression within the Firm: Evidence from an Indexation Scheme," The Economic Journal, Royal Economic Society, vol. 129(624), pages 3256-3291.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Forth, John & Singleton, Carl & Bryson, Alex & Phan, Van & Ritchie, Felix & Whittard, Damian, 2024. "The Impact of a Rising Wage Floor on Labour Mobility across Firms," IZA Discussion Papers 17132, Institute of Labor Economics (IZA).
    2. Ellora Derenoncourt & David Weil, 2024. "Voluntary Minimum Wages," Working Papers 333, Princeton University, Department of Economics, Center for Economic Policy Studies..

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arindrajit Dube & Attila Lindner, 2024. "Minimum Wages in the 21st Century," RF Berlin - CReAM Discussion Paper Series 2425, Rockwool Foundation Berlin (RF Berlin) - Centre for Research and Analysis of Migration (CReAM).
    2. Jonas Hjort & Xuan Li & Heather Sarsons, 2020. "Random-Coefficients Logit Demand Estimation with Zero-Valued Market Shares," Working Papers 2020-15, Becker Friedman Institute for Research In Economics.
    3. Hjort, Jonas & Li, Xuan & Sarsons, Heather, 2020. "Across-Country Wage Compression in Multinationals," CEPR Discussion Papers 14465, C.E.P.R. Discussion Papers.
    4. Niklas Engbom & Christian Moser, 2022. "Earnings Inequality and the Minimum Wage: Evidence from Brazil," American Economic Review, American Economic Association, vol. 112(12), pages 3803-3847, December.
    5. Brochu, Pierre & Green, David A. & Lemieux, Thomas & Townsend, James, 2023. "The Minimum Wage, Turnover, and the Shape of the Wage Distribution," IZA Discussion Papers 16514, Institute of Labor Economics (IZA).
    6. Gregory, Terry & Zierahn, Ulrich, 2022. "When the minimum wage really bites hard: The negative spillover effect on high-skilled workers," Journal of Public Economics, Elsevier, vol. 206(C).
    7. Brian Bell & Stephen Machin, 2018. "Minimum Wages and Firm Value," Journal of Labor Economics, University of Chicago Press, vol. 36(1), pages 159-195.
    8. Carlos Oliveira, 2022. "How is the Minimum Wage Shaping the Wage Disitribution: Bite, Spillovers, and Wage Inequality," GEE Papers 0160, Gabinete de Estratégia e Estudos, Ministério da Economia, revised May 2022.
    9. Nikhil Datta & Giulia Giupponi & Stephen Machin, 2019. "Zero-hours contracts and labour market policy," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 34(99), pages 369-427.
    10. Machin, Stephen & Giupponi, Giulia, 2018. "Changing the Structure of Minimum Wages: Firm Adjustment and Wage Spillovers," CEPR Discussion Papers 12919, C.E.P.R. Discussion Papers.
    11. Rizov, Marian & Croucher, Richard & Lange, Thomas, 2016. "The UK national minimum wage's impact on productivity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 27(4), pages 819-835.
    12. Oliveira, Carlos, 2021. "How is the Minimum Wage Shaping the Wage Distribution: Minimum Wage, Spillovers, and Wage Inequality in Portugal," MPRA Paper 112534, University Library of Munich, Germany.
    13. Jae Song & David J Price & Fatih Guvenen & Nicholas Bloom & Till von Wachter, 2019. "Firming Up Inequality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(1), pages 1-50.
    14. Andres Drenik & Simon Jager & Pascuel Plotkin & Benjamin Schoefer, 2023. "Paying Outsourced Labor: Direct Evidence from Linked Temp Agency-Worker-Client Data," The Review of Economics and Statistics, MIT Press, vol. 105(1), pages 206-216, January.
    15. Terry Gregory & Ulrich Zierahn, 2020. "When the Minimum Wage Really Bites Hard: Impact on Top Earners and Skill Supply," CESifo Working Paper Series 8540, CESifo.
    16. Mario Bossler & Thorsten Schank, 2023. "Wage Inequality in Germany after the Minimum Wage Introduction," Journal of Labor Economics, University of Chicago Press, vol. 41(3), pages 813-857.
    17. Cengiz, Doruk & Dube, Arindrajit & Lindner, Attila & Zipperer, Ben, 2018. "The effect of minimum wages on low-wage jobs: evidence from the United States using a bunching estimator," LSE Research Online Documents on Economics 88682, London School of Economics and Political Science, LSE Library.
    18. Magda, Iga & Gromadzki, Jan & Moriconi, Simone, 2021. "Firms and wage inequality in Central and Eastern Europe," Journal of Comparative Economics, Elsevier, vol. 49(2), pages 499-552.
    19. Sotomayor, Orlando J., 2021. "Can the minimum wage reduce poverty and inequality in the developing world? Evidence from Brazil," World Development, Elsevier, vol. 138(C).
    20. Simona Ferraro & Jaanika Meriküll & Karsten Staehr, 2018. "Minimum wages and the wage distribution in Estonia," Applied Economics, Taylor & Francis Journals, vol. 50(49), pages 5253-5268, October.

    More about this item

    Keywords

    wage determination; minimum wage; fairness; Wages;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp1869. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://cep.lse.ac.uk/_new/publications/discussion-papers/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.