Company wage policy in a low-wage labour market

In many countries, minimum wage policies allow employers to pay young workers less than adults, and the UK is now debating how fast to phase out its lower youth minima. But do employers actually use the room that age-specific minimum wages give them? This column uses the introduction of the UK National Living Wage, which raised the minimum wage only for workers aged 25 and over, to show that employers in a low-wage sector also raised the pay of younger colleagues. These spillovers happen inside firms, within job roles, and seem to be driven by pay equity norms.

Lower minimum wages for young workers are back at the centre of the policy debate. In the UK, the government has committed to aligning the minimum wage for 18–20 year-olds with the National Living Wage, which has applied from age 21 since April 2024. The government has left the Low Pay Commission, the independent statutory body advising the government on minimum wages, full flexibility on the pace of alignment, with priority given to young people’s employment prospects (Department for Business and Trade 2026). Supporters of youth rates argue that they protect entry-level jobs at a time of concern about young people out of work. Critics argue that paying someone less for the same job because of their age is unfair. Similar debates have taken place elsewhere in Europe: the Netherlands, for instance, lowered the age at which workers become entitled to the full adult minimum wage from 23 to 21 between 2017 and 2019.

Minimum wages set a legal floor, but what workers are actually paid is decided by firms through their own company wage policies. Understanding how the two interact is central to assessing who gains from minimum wage policy and at what cost. There is a long-standing observation that employers often do not use the lower youth rates they are allowed to pay (Katz and Krueger 1992, Card and Krueger 1995). That evidence, however, comes from settings where the subminimum was temporary and little known. Recent work shows that firms often set uniform pay for the same job across establishments (Hazell et al. 2024) and even across countries (Hjort et al. 2026), suggesting that company pay structures may transmit minimum wage increases well beyond the workers the floor directly binds. Consistent with this, ample evidence documents that minimum wages ripple up the wage distribution (Cengiz et al. 2019, Cazes and Garnero 2023). Yet we still know little about why firms extend minimum wage increases to workers the law does not cover, and therefore how policy design choices, such as age-specific rates, translate into actual pay. 

In our recent study (Giupponi and Machin 2026), we ask how firms set wages when they are legally allowed to pay workers differently by age. On 8 July 2015, the UK government unexpectedly announced the introduction of the National Living Wage. From 1 April 2016, the National Living Wage raised the minimum wage for workers aged 25 and over from £6.70 to £7.20 an hour, leaving the rate for 21–24 year-olds at £6.70. UK equality law explicitly allows employers to pay younger workers less in line with these age bands, so employers could legally have kept paying under-25s £6.70.

We study how firms set wages for employees aged under 25 in the context of English care homes – a non-union, low-wage sector where many workers are paid at or near the minimum wage. For this sector, we use monthly matched employer–employee data with detailed hourly wages from 2014 to 2020, coupled with a survey of employers’ pay practices that we administered to the same care homes we observe in the data.

Young workers got the pay rise too

If employers took advantage of the new age structure, a wage gap should have opened up at age 25. It did not. Average hourly wages remain smooth at age 25 both before and after the reform. 

Figure 1 shows how. Panel A shows that, among care assistants aged 25 and over, wages at the bottom were squeezed up and a large spike appeared at the new minimum. This is the mechanical effect of the National Living Wage introduction. Panel B shows exactly the same picture for under-25s, for whom the new rate was not binding. Many young workers had their wages raised precisely to the National Living Wage.

Could something other than company pay policy explain this pattern? We rule out the most obvious alternatives. First, employers might simply have raised the pay of workers about to turn 25. Yet the spike is just as visible among workers aged under 21, who in terms of age were years away from the higher rate. Second, the workforce might have changed, for example if employers replaced lower-paid young workers with better-paid ones. Yet the same spike appears when we follow the same young workers in the same care home before and after the reform. Third, long-term pay agreements might have prevented employers from paying young staff less. Yet the spike also appears for workers with no such commitments: new hires, staff in care homes that opened after the reform, and temporary and casual workers. Nor is it a short-lived adjustment since the spike persists for at least four years. The pattern is also not unique to social care: using earnings data for the whole UK, we find similar spillovers in other low-paying industries, such as call centres, food processing and cleaning. Importantly, we find no evidence that these wage gains cost young workers jobs.

Figure 1 Distribution of hourly wages of care assistants by age, March 2016 and March 2017

a) Aged 25 and over

b) Aged under 25

Source: Giupponi and Machin (2026), based on the Adult Social Care Workforce Data Set.
Notes: Hourly wages of care assistants in English care homes in March 2016 (grey bars) and March 2017 (white bars), in £0.10 bins. The dashed vertical line indicates the National Living Wage in March 2017.

Spillovers happen inside the firm

Why would younger workers’ pay rise when their legal minimum did not? One possibility is that the reform raised wages across the local labour market, improving young workers’ outside options and forcing all employers to pay more (Flinn 2006). Another is that spillovers originate within firms, as part of their own wage policies.

To tell these explanations apart, we compare care homes that were more or less exposed to the reform, depending on how many of their older staff were paid below the new rate prior to its introduction. The logic is simple. If spillovers come from the local labour market, all care homes in an area should have to raise young workers’ pay, however many of their own older staff got a raise. If instead spillovers come from firms’ own pay policies, they should vary with conditions inside each firm, such as how many of its own older staff the reform affected, rather than with conditions in the local labour market.

The evidence supports the second explanation. In care homes where the reform raised the pay of more older workers, younger workers’ pay also rose faster, starting immediately after the reform. On average, for every 10% increase in older workers’ pay, younger workers’ pay rose by about 4%. By contrast, spillovers were no larger where young workers had better job options elsewhere, such as in areas with higher wages or lower youth unemployment. Spillovers also arose within jobs: young care assistants’ pay followed that of older care assistants in the same home, but not that of workers in other job roles.

Pay equity, not administrative convenience

Why do firms choose to give up the savings that the law allowed them? When we asked employers, the answer was strikingly clear. Among care providers paying under-25s at or above the National Living Wage, 65% cite pay equity reasons: 54% say that paying younger workers less would be ‘unfair to the workers’ and 11% say that equal pay is needed to ‘motivate workers’. Some 23% mention recruitment and retention, while only 3% cite administrative ease.

The data tell the same story. Spillovers are larger in care homes with more compressed pay and flatter wage–tenure profiles before the reform, which theories of social preferences link to stronger pay equity norms (Cabrales et al. 2008). Where the National Living Wage did not bind for any older worker, younger workers’ wages did not jump to the new rate. And young workers became less likely to quit in care homes that raised their pay in line with older colleagues, echoing evidence that unequal pay among co-workers affects morale and quits (Breza et al. 2018, Dube et al. 2019).

Pay equity is not free. We estimate that spillovers to young workers reduced profit margins by about 0.8% on average, and by up to 2.1% in the most exposed care homes – a lower bound on the value firms place on paying workers in the same job equally.

Implications for policy

Our findings carry two lessons for the current debate on minimum wages.

First, in some settings, age-specific minimum wages may matter less than their headline rates suggest. Where younger and older workers do the same job side by side, employers may choose to pay them the same, so the adult rate can become the effective floor for young workers too. In such settings, the additional cost of phasing out youth rates may be smaller than a calculation based on the legal minimum alone would imply. 

Second, the full impact of labour market policies is shaped by firms’ pay policies. Minimum wages are set for groups of workers, but firms set pay for jobs, so who gains and who bears the cost depends on how firms’ pay structures pass increases on. The same applies to policies that lower labour costs for particular groups, such as targeted wage subsidies or payroll tax cuts. Firms that equalise pay within job roles may not fully exploit such cost differences, as also suggested by Saez et al. (2019) in their study of a payroll tax cut for young workers in Sweden.

Policymakers designing labour market policies, in the UK and elsewhere, could and should take into account how employers actually set pay.

Source : VOXeu