The UK’s National Living Wage (NLW) has delivered sharp pay rises for low-paid workers but could create long-term challenges for employers and the economy, research has found.
A study led by Bayes Business School, formerly Cass, found that while the policy has boosted pay for millions, it has also reduced job mobility among the lowest-paid. This will potentially leave firms struggling to fill vacancies in low-wage sectors.
Worker mobility drops
When the NLW was introduced in April 2016, it increased the minimum hourly rate for workers aged 25 and over from £6.70 to £7.20. However, researchers found that movement of the lowest-paid workers between firms also decreased significantly.
Cross-firm mobility fell by between two and three percentage points compared with workers earning just above the threshold, while job mobility also declined among those earning up to 25 pence per hour above the new minimum.
In contrast, the study found no significant difference in mobility within the same firm, suggesting that many employers maintained internal pay structures and that the main reduction occurred among employees in organisations offering limited career progression.
The findings suggest that the NLW has reshaped not only pay but also behaviour among low-wage employees.
Workers previously earning below the new minimum rate of pay saw their pay jump, while rising wage floors compressed the lowest wages between firms. This has made potentially risky job switches less attractive, researchers said. In turn, this reduces flexibility and competition in the labour market.
Shifts in workforce behaviour, as a result of the NLW, are critical for employers already grappling with recruitment and retention challenges in sectors like retail, hospitality and social care.
Potential long-term damage
Research leader John Forth, professor of HR Management at Bayes, said: “Our findings indicate good news for workers in the short-run, but with potentially damaging long-term effects for the economy.
“Higher wages generally increase employee happiness. They also reduce the need for workers to take risks by moving to jobs where the non-wage aspects are hard to evaluate before you start work.
“In the long run, however, lower mobility could mean firms struggling to fill new low-pay vacancies if the rising wage discourages workers to search for new opportunities.”
He added: “We urge the Low Pay Commission to continue to monitor the impact of minimum wages on job mobility as the wage floor increases, and as the government considers the extension of the NLW to cover workers aged between 18 and 21.”
Forth said: “The NLW uprated wages for many low-paid workers in the UK labour market. Attention has naturally focused on its effect on employment rates, but our study is the first to look at how it affects job mobility among the UK’s lowest-paid workers.”
The study, titled ‘The Impact of a Rising Wage Floor on Labour Mobility Across Firms’, was published in the British Journal of Industrial Relations. It was carried out with researchers from the University of Stirling, University College London, and the University of the West of England.
Researchers used Annual Survey of Hours and Earnings (ASHE) data and looked at workers aged over 25 employed in consecutive years. They then compared two-year data blocks before and after the NLW’s introduction.
The analysis covered more than 3,000 observations in the treated group and 6,000 in the control group. The data covered 800 firms a year between 2011/12 and 2018/19, representing around 116,000 data points.
It forms part of the Wage and Employment Dynamics Project and was funded by ADR UK (Administrative Data Research UK) and the Economic and Social Research Council.
