How English care homes have coped with the National Living Wage

Giulia Giupponi 150Giulia Giupponi is an ESRC-funded PhD student at the London School of Economics and a research assistant at the Centre for Economic Performance.

Steve Machin 150Stephen Machin is Professor of Economics at the London School of Economics and Director of the Centre for Economic Performance.

They have been advising the Low Pay Commission on the impact of the National Living Wage on English care homes.

On 1 April, all five UK minimum wage rates were increased (PDF), a year on from introduction of the National Living Wage (NLW) for workers aged 25 and over with a rate of £7.20 an hour. Rates for younger workers remained at the level of the existing National Minimum Wage (NMW). The NLW is set to achieve the 2020 target of 60 per cent of median earnings. Given the scale of the change – a 7.5 per cent increase at the time of the NLW introduction (PDF) – and the ambitious target set for 2020, a natural question is the impact on employment and other margins of adjustment by firms.

To answer these questions we collected data on workers and firms in the residential care sector. Having many low-paid workers and being very labour-intensive, this sector is highly vulnerable to minimum wage increases. The regulation of resident fees by local authorities also limits the ability to pass on higher costs in the form of higher prices.

We sent questionnaires to all English care homes before and after the NLW introduction, asking questions about their business and workers. A total of 1,390 responses came back in the pre-NLW survey and 827 responses in the post-NLW survey.

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The wage effects of the NLW

We started our investigation by looking at the impact of the NLW on wages, to ensure that the minimum wage does what the policy is designed for – namely to boost wages of low wage workers. The data show that the residential care sector was heavily affected by the NLW introduction: the percentage of care assistants paid below £7.20 dropped from approximately 55 per cent before April 2016 to 5 per cent after April 2016, generating a substantial compression at the bottom of the wage distribution.

So how did care homes respond to such an important wage cost shock? Did they reduce their workforce, increase prices, incur financial losses – or even reduce the standards and quality of care?

Analysing the employment response to the minimum wage hike we didn’t find evidence of reductions in the number of employees and of total hours worked at the care home level. We then went on to explore other margins of adjustment, such as prices and profits. As expected with the limitations imposed by price regulations, we didn’t find larger price increases in firms where the NLW bit harder. And despite the lack of price increases and the substantial wage costs shock, we did not find clear evidence of lower profits or higher likelihood of closure as a consequences of the NLW.

Care homes may have responded to the wage shock by altering the type of services that they provide. Firms that were most heavily affected by the NLW had the largest increase in the share of residents requiring specialist care and were more likely to express worries about care quality reductions – suggesting that the inability to change prices may have pushed firms towards more expensive services and to reduce the standards of care.

What about the wages of workers under 25? Interestingly enough, it seems they benefitted from the NLW, even if they were supposedly unaffected by it. There was a striking compression of the bottom half of the wage distribution for care assistants aged under 25.

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How have the care homes fared?

All in all, the care homes that responded to our survey seem so far to cope with the sizable minimum wage increase. However, the results are very much about the short run consequences of NLW introduction. Whether this ability to cope will carry on as the NLW is moved towards its projected 2020 target is so far an open question.

A full report on this research will be available soon from the Low Pay Commission website

You can follow @CEP_LSE on Twitter.

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