New research conducted by Bayes Business School, formerly known as Cass, has demonstrated that the introduction of the National Living Wage (NLW) in April 2016 has had a marked effect on the mobility of the UK’s workforce. Specifically, it revealed that the policy, while designed to raise the earnings of low-paid employees, has significantly curtailed the movement of minimum wage workers between firms. The findings suggest that although the NLW succeeded in increasing the incomes of those on the lowest pay scales, it may have inadvertently diminished the flexibility of the labour market. Workers who once sought new opportunities may now be less inclined to move, as the higher wage floor appears to reduce their incentive to switch jobs for relatively small pay increases elsewhere.

The UK Government introduced the National Living Wage to replace the National Minimum Wage for workers aged 25 and over. It came into force with an initial increase of fifty pence, bringing the hourly rate to £7.20. This was, at the time, the most substantial single rise in the minimum wage since its establishment in 1999. The policy represented an ambitious attempt to raise living standards for adults in full-time work, aligning pay more closely with the cost of living. However, the Bayes study suggests that this rise, though well-intentioned, may have generated a trade-off between wage growth and labour dynamism. In other words, while workers’ earnings increased, the broader movement of labour—crucial for a healthy and adaptive economy—appears to have slowed.

The study, led by Professor John Forth, a specialist in Human Resource Management at Bayes Business School, stands as the first comprehensive UK assessment of how a rising wage floor influences job mobility among minimum-wage earners. Drawing on data from the Annual Survey of Hours and Earnings (ASHE), the research explored the extent to which the new wage policy affected the probability of workers moving between organisations. It focused specifically on individuals aged 25 and above who were employed in consecutive years, enabling a robust comparison before and after the NLW’s introduction. Using two-year data blocks, the researchers analysed both wage progression and job mobility trends across firms, identifying patterns that could be directly attributed to the implementation of the policy.

The findings revealed that, following the introduction of the National Living Wage, movements between firms among the lowest-paid workers fell by approximately two to three percentage points compared with employees earning just above the threshold. Moreover, this decline in job mobility was not confined solely to those at the minimum wage level; workers earning up to 25 pence above the new threshold also exhibited reduced job movement. This indicates that the dampening effect on mobility extended beyond those directly targeted by the wage increase. However, within the same firms, no significant differences in mobility were observed between the lowest-paid and other employees. This suggests that the main factor behind reduced mobility is not internal pay structures but rather a general decrease in workers’ willingness to leave for alternative positions, especially where firms offer limited career advancement opportunities.

The data suggested that while workers previously earning below the new wage floor benefited from an immediate pay increase, the overall wage compression between firms diminished the appeal of job switching. In essence, the rise in the wage floor narrowed the gap between what competing employers could offer, thereby reducing the perceived benefits of taking the risk associated with changing jobs. As Professor Forth and his colleagues noted, higher wages can certainly improve job satisfaction and financial stability in the short term. Yet, this can also lessen the motivation for employees to seek new positions, especially when the differences in remuneration are minimal and when non-wage factors—such as work environment, management quality, or commuting distance—are uncertain before employment begins. The researchers caution that over time, this reduced movement could impede the ability of firms to recruit suitable candidates for low-wage roles, potentially constraining overall economic productivity.

Professor Forth concluded that while the National Living Wage has provided tangible and immediate benefits to many low-paid workers, the policy carries implications that extend beyond the question of fair pay. The reduced labour mobility could have broader economic consequences, particularly if firms face difficulties in filling entry-level positions or if workers find themselves with fewer pathways for progression. He emphasised the importance of continued monitoring by the Low Pay Commission to ensure that future wage adjustments strike a balance between improving living standards and maintaining a dynamic, efficient labour market. As the government considers extending the National Living Wage to younger workers aged between 18 and 21, the study’s findings offer a timely reminder of the complex relationship between wage policy, worker behaviour, and economic adaptability.

More information: John Forth et al, The Impact of a Rising Wage Floor on Labour Mobility Across Firms, British Journal of Industrial Relations. DOI: 10.1111/bjir.70008

Journal information: British Journal of Industrial Relations Provided by City St George’s, University of London