National minimum wage has reduced wage inequality

The national minimum wage (NMW) has played a significant role in reducing wage inequality – at least in the bottom half of the wage distribution – according to researchers at the London School of Economics who looked at trends in wage inequality between 1998 (when the NMW was introduced) and 2010.

Key findings

  • The introduction of the NMW explains a 'sizeable part' of the evolution of wage inequality over the period examined.
  • The decline in wage inequality has been most marked in the lowest-wage segments of the labour market.
  • For young workers, around half of the change in wage inequality can be ascribed to the NMW.
  • For older workers, the impact of the NMW is smaller: but the overall trends are weaker and the NMW seems to be able to explain all the observed changes.
  • The impact of the NMW reaches up to 40 per cent above the NMW level in 2010, which corresponds to the 25th percentile. These 'spillover' effects are larger in low-wage sectors.

Source: Tim Butcher, Richard Dickens and Alan Manning, Minimum Wages and Wage Inequality: Some Theory and an Application to the UK, DP1177, Centre for Economic Performance (London School of Economics)