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Efficiency Wages and the Economic Effects of the Minimum Wage: Evidence from a Low-Wage Labour Market


  • The author is most grateful to Alan Manning and Stephen Machin for providing access to the data and for helpful comments as well as to Paul Gregg, Simon Burgess and Steve Pischke for valuable feedback. The article has also benefited from the comments of seminar participants at the Centre for Economic Performance (CEP) at LSE.


This article exploits a natural experiment provided by the 1999 introduction of the UK National Minimum Wage (NMW) to test for efficiency wage considerations in a low-wage sector, the UK residential care homes industry. The empirical results provide support to the wage-supervision trade-off prediction of the shirking model and suggest that the NMW may have operated as an efficiency wage in the care homes sector, leading to a reduction in supervision costs. These findings can explain earlier evidence suggesting that although the NMW introduction increased wages dramatically in the care homes sector, it generated only moderate negative employment effects.