Search

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.

The Great Recession has seen a revival of interest in policies encouraging labor hoarding by firms. Short time work (STW) policies, which consist in offering subsidies for hours reductions to workers in firms experiencing temporary shocks, are the most emblematic of these policies, and have been used aggressively during the recession. Yet, very little is known about their employment and welfare consequences. This paper leverages unique administrative social security data from Italy and quasiexperimental variation in STW policy rules to offer compelling evidence of the effects of STW on firms' and workers' outcomes, and on reallocation in the labor market. Our results show large and significant negative effects of STW treatment on hours, but large and positive effects on headcount employment. Results also show that employment effects disappear when the program stops, and that STW offers no long term insurance to workers. Finally, we identify the presence of significant negative reallocation effects of STW on employment growth of untreated firms in the same local labor market. We develop a simple conceptual framework to rationalize this empirical evidence, from which we derive a general formula for the optimal STW subsidy that clarifies the welfare trade-offs of STW policies. Calibrating the model to our empirical evidence, we conduct counterfactual policy analysis and show that STW stabilized employment during the Great Recession in Italy, and brought (small) positive welfare gains.

This paper analyses the economic impact of a significant change to the structure of a minimum wage setting policy. The context is the United Kingdom where government mandated an unexpected change in the structure of minimum wages and their setting in 2016 by introducing a new minimum wage – the National Living Wage (NLW) – for workers aged 25 and over. The new NLW rate was significantly higher than the minimum wage for those under age 25. The analysis studies the consequences of this change in a sector containing many low wage workers, the care homes industry. The new minimum wage structure and associated higher minimum wage for those aged 25 and above significantly affected wages, but at the same time with little evidence of adverse employment effects, nor firm closure. Rather the margin of adjustment used to offset the sizable wage cost shock was a significant deterioration of the quality of care services. There is also strong evidence of wage spillovers as younger workers wages rose in tandem with the higher adult minimum wage, but with no impact on their employment. Based on further empirical tests, employer preference for fairness seems to offer the most plausible explanation for these results.