The National Minimum Wage and the Substitutability Between Young and Old Workers in Low Paid Occupations

Abstract

We study the effect of the National Minimum Wage (NMW) on the workforce age composition within the low paying sectors of the British economy. Our interest is in the degree of substitutability between labour inputs (young and old employees). We find evidence that both the introduction and the regular upratings of the NMW have a significant effect on the observed changes to the relative wages and to the relative wage bills but not to relative employment. We estimate the elasticity of substitution, between ‘young’ age groups and older workers (55+) to be zero, while that of ‘prime’ (22+) age and older workers, to be around 0.79. Our estimates therefore imply significant complementarity between younger and old employees.