Evidence review|Evidence briefing
Fair employment policies are measures that improve employee wellbeing – with the most common paying a living wage and adopting fair employment charters. Advocates argue that fair employment policies produce benefits for individual workers, employers, and local economies.
This briefing provides a framework to help local policymakers think through some of the benefits and costs of introducing fair employment policies within their own organisation or encouraging adoption by local employers.
Summary of findings
Effects for workers
Consider how many and which workers will be affected. Paying a living wage will have a direct effect on the hourly wages of the lowest paid employees in adopting organisations. Adoption of a living wage may also affect wage rates received by other employees in adopting organisations if employers seek to maintain differentials or in other non-adopting organisations if they face increased competition for lower paid staff. Some non-pay provisions of fair employment charters may also affect wages. However, where better pay and conditions make individuals less inclined to change jobs, this may have a negative impact on career progression and pay over the longer-term.
There is little evidence that the introduction of compulsory minimum wages reduces employment and hours worked but there is a lack of evidence on whether this is also the case for voluntary living wage schemes. Increases in pay may not increase household income if they are offset by reductions in benefits. The impact will also depend on whether the worker is in a single or multiple-income household.
To offset higher wage rates, employers may increase use of zero hours contracts, increase work intensification, or cut back on overtime, shift premiums or other staff benefits – although such adjustments may be less likely for organisations voluntarily adopting a living wage than in response to statutory minimum wages. Fair employment charters can help ensure increases in wages are not offset by declines in work conditions.
Effects for employers
Unless employment or hours adjust, the adoption of a living wage will increase wage bills, with potential impacts on prices, profit margins or investment. Implementing other elements of fair employment charters may also incur costs.
Potential benefits for employers include improved organisational reputation, staff motivation and retention, and reduced sickness absence.
Work with employers to understand the likely implications of adopting fair employment practices and whether there is a need for accompanying business support.
Area-level effects
Coverage will determine the scale of the impacts on the local economy. Decide whether to adopt fair employment policies internally or whether to also encourage other local employers, including anchor institutions, to adopt.
Where local authorities or other public sector anchor institutions increase wage rates, this will limit their ability to fund other activities.
Assess whether adoption of living wages might lead some employers to leave the local area. Relocation is likely to be limited and will depend on whether the business is tradeable and can easily relocate to another area. Also assess effects on firm entry.
Increases in wages may lead to some additional jobs being created in the local non-tradeable sector but this is likely to be limited.
Rapid evidence review
To support the drafting of the evidence briefing, we undertook a rapid evidence review of the evaluation evidence on local minimum wages.
National minimum wages are statutory minimum pay levels which all employers must pay. In federal systems, states may set minimum wages that differ from the national wage and, in some jurisdictions, local government can introduce local minimum wages that differ from the national (or state) minimum wage. In the UK, local government does not have the power to set a mandatory local minimum wage. However, there are voluntary living wage movements where employers are encouraged, but not compelled, to introduce a higher minimum wage.
Our search identified 13 evaluations of local minimum wages. The majority evaluate statutory local minimum wages in the US.
We also searched for evaluation evidence on the impacts of fair employment charters but were unable to identify any studies that met our criteria for inclusion.
Key findings
Introduction of higher local minimum wages appear to have positive effects on the wages and pay of low-wage workers, though some limited evidence suggests these benefits may accrue more to those with more experience.
As higher minimum wages increase costs for businesses, one of the key concerns is that businesses will cut jobs to offset rising costs. Many studies find either no or modest positive employment effects but others find negative effects. Negative effects are concentrated in the tradeable sector, and among less experienced low-wage workers.
Some studies find higher local minimum wages can lead to higher business exit rates, with some limited evidence that this might disproportionately affect less successful businesses, at least in the restaurant industry.
There is also some evidence that increased costs to businesses are passed on to consumers through price rises. However, all the studies that look at this except one focus on the restaurant sector, so findings may not apply more widely.
The relatively limited evidence available suggests that higher minimum wages can have positive impacts on health.
Need for more evidence
- Most of the evidence currently relates to mandatory local minimum wages. We need evidence on the impact of voluntary local minimum wages, both on key economic outcomes such as employment, wages, and business exit and entry, and on wider outcomes such as the health and wellbeing of workers.
- We need more evidence on the local economic impacts of local minimum wages on businesses in the tradeable sector and on non-food service businesses in the non-tradeable sector.
- We need more evidence on the impact of increased local minimum wages on employment opportunities for younger workers, new entries to the labour market, and other lower-paid workers who have less experience in their current roles.
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