The surprising effect of the minimum wage

Recipients become more tolerant of wage inequality, more likely to vote Conservative

The relationship between minimum wage policies and societal attitudes towards income inequality is complex and multifaceted. We have used data from before and after the minimum wage was introduced in the UK to examine its effects on workers’ social and political preferences. Our unexpected findings show shifts in attitudes towards inequality and voting behaviour among minimum wage recipients, challenging conventional expectations and revealing intriguing connections between economic policies and psychological mechanisms.

Previous research

Traditionally, economic research on the minimum wage has concentrated on its potential distortions in the labour market and its impact on the employer-employee relationship. However, recent literature has extended this focus to investigate the effects of minimum wage on workers’ overall well-being, including its potential influence on health. Professor David Neumark’s review of existing literature, for example, highlights the ambiguous effects of minimum wage on health, with some studies suggesting improvements in mental health while others indicate an exacerbation of unhealthy habits such as smoking or drinking.

Social and political preferences

While the literature has started to explore the individual effects of minimum wage on health, there has been a notable gap in understanding how the minimum wage might influence workers’ social and political preferences. Our research aimed to fill this void by examining the policy’s impact on people’s tolerance of inequality and their voting preferences.

The minimum wage was a key element of Tony Blair’s 1997 election programme, and in April 1999, two years after Labour’s victory, the minimum wage was implemented at £3.60 for workers over 22 and £3 for workers aged 18-22. Over the years, the UK’s minimum wage has increased, reaching £10.42 for workers aged 23 and over, making it one of the most generous globally. The focus on the UK case provides a specific context to examine how the introduction of the minimum wage influenced workers’ attitudes and voting preferences.

Changes in preference

The study uses British Household Panel Survey (BHPS) data to investigate whether minimum wage recipients experience changes in their social and political preferences, specifically becoming more tolerant of income inequality. Surprisingly, the findings indicate that not only do minimum wage recipients become more accepting of inequality, but there is also a shift in voting intentions towards economically liberal parties, including an inclination towards the Conservative Party. Benefiting from the minimum wage raised the likelihood of tolerating high incomes by 8.4 percentage points, and increased the probability of voting for the Conservative Party by as much as 9.7 percentage points. These results are counterintuitive – paradoxical even, considering the minimum wage’s primary aim is to reduce wage inequality, and recipients are often positioned at the lower end of the income distribution. .

Potential explanations

One potential explanation we considered was the ‘technical’ nature of the minimum wage. This hypothesis suggests that the policy may have effectively reduced wage inequality, leading to increased tolerance among recipients. However, our findings refute this explanation, demonstrating that the minimum wage in the UK had a limited impact on wage inequality. Even when controlling for this factor, the results remain consistent.

Our study suggests that the key to understanding these unexpected preferences lies in a psychological mechanism: reference dependence. This is a central principle in the prospect theory of behavioural economics, which assumes that losses and gains are valued differently, and that we tend to make decisions based on perceived gains rather than on perceived losses. Reference dependence means that people anchor themselves to a reference point they deem fair, and are averse to losing money. In the case of minimum wage recipients, the policy provides a clear reference point: offering a predictable and perceived fair wage. This clarity not only raises workers’ wages but also serves as an informative anchor, contributing to increased security and stability regarding their income.

Effects on workers’ perception

The research draws on the idea that providing workers with a clear and fair reference point can alleviate concerns about market-generated inequalities. Workers who receive the minimum wage develop a distinct perception of what constitutes a ‘fair’ wage. This perception, rooted in the stability and predictability of the minimum wage policy, influences their attitudes towards inequality. The results align with previous scientific research, indicating that individuals distinguish between ‘just’ and ‘unfair’ inequalities, advocating more for redistribution when inequality stems from factors beyond their control. In other words, if a society believes that socioeconomic success depends only on merit, and that everyone should fully enjoy the fruits of their work, this society will demand low redistribution. If, instead, people believe that wealth is mostly determined by random ‘luck’, society will likely be more concerned with inequality, and support higher redistribution.

Conclusion

In conclusion, our study was a nuanced exploration of the impact of minimum wage on social and political preferences, revealing surprising connections between economic policies and psychological mechanisms. It has recently been replicated and validated with a different econometric methodology. The findings challenge preconceived ideas, demonstrating that the introduction of the minimum wage not only influences workers’ tolerance for inequality but also shapes their voting preferences, often in unexpected directions. The study underscores the importance of considering psychological factors in economic policy analysis, emphasising that the clarity and fairness provided by minimum wage policies can have profound effects on workers’ perceptions of and attitudes towards income inequality.

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