July 2005

IZA DP No. 1690: The Dynamics of the National Minimum Wage: Transitions Between Different Labour Market States

An important policy issue is whether the National Minimum Wage (NMW) introduced in Britain in April 1999, is a stepping stone to higher wages or traps workers in a low-wage – no-wage cycle. In this paper we utilise the longitudinal element of the Labour Force Survey over the period 1999 to 2003 to model transitions between different labour market states – payment at or below the NMW, above the NMW, unemployment and inactivity, using a multinomial logit approach. It appears that for many workers payment at or below the NMW is of relatively short duration and a substantial number move into higher paid jobs.