The UK National Minimum Wage's Impact on Productivity

Abstract

Low pay poses issues for managers internationally. We examine productivity in low‐paying sectors in Britain, since the introduction of the National Minimum Wage (NMW). We use a multiple channel analytical strategy, emphasizing the wage incentives channel and linking it to a model of unobserved productivity. We estimate firm‐specific productivity measures and aggregate them to the level of low‐paying sectors. Difference‐in‐differences analysis illustrates that the NMW positively affected aggregate low‐paying sector productivity. These findings highlight increased wage incentive effects with implications for management practice and public policy since ‘living’ wages may be productivity enhancing.