The National Minimum Wage: an update
In September 1997, the Low Pay Commission heard its first verbal evidence from the social partners as to what they see as the main points of a National Minimum Wage in the UK. This feature reviews the discussion to date.
When the new Labour Government came to power in May 1997, it was quick to highlight its intention to implement a National Minimum Wage (NMW) (UK9704125F). Within 90 days of being in government, Labour had appointed a Low Pay Commission (LPC) to advise on the introduction and operation of the NMW (UK9708158N), and was hard at work laying the foundations for a bill for its implementation. But by September 1997, when the LPC heard its first verbal evidence from the Confederation of British Industry (CBI) and the Trades Union Congress (TUC) it was becoming very clear that it was unlikely that an NMW would be established for some time. An initial recommendation is still expected by May 1988 but it seems that, since detailed legislation would be needed, a national legally-enforceable minimum wage will not come into force until spring 1999 at the earliest. Below we take stock of the debate so far and assess the likely important developments to come.
The Low Pay Commission
In August 1997, the main members were appointed to the LPC, which was headed by Professor George Bain. The LPC is made up of three members from the business community, three from the trade unions and two independent academics. Most social partners accept the composition of the Commission, but there was some concern that it was under-representative of the small business community, particularly as a large part of this sector may be most affected by the NMW.
The job of the LPC is to make recommendations to the Government concerning the rate/s to be set, and the mechanisms for doing so. The LPC's precise terms of reference require attention to:
- the wider economic and social implications;
- likely effects on the level of employment and inflation;
- the impact on the competitiveness of business, particularly in the small firm sector;
- potential costs to industry and the Exchequer; and
- the possibility of lower rate or exemption for those under the age of 25 years.
The expectation is that the Commission will continue its work once the NMW is in place. The CBI and TUC both argued, in their evidence to the LPC, that the Commission should become a permanent body to monitor and review the impact of the NMW after its introduction. The TUC sees this as part of the job of the LPC in adopting an "incremental approach to the elimination of low pay". It remains to be seen, however, whether the Government agrees.
How will the NMW be set?
The criteria: hourly pay rate, or hourly earnings?
Both the TUC and the CBI seem to favour an all-inclusive rate for the NMW, based on total earnings per hour, including taxable benefits, rather than a basic rate per hour. This formula would recognise the gap between basic pay and actual earnings in many sectors, making all bonuses an official part of an employee's wage. It would therefore include piece rates, bonus payments, profit-related pay and other non-wage benefits. The exception would relate to overtime rates, with the issues of other time-related premia relating to shiftworking and unsocial hours at present unresolved.
A definition based on earnings is not without its problems, however. The Institute of Personnel and Development (IPD), which represents personnel managers, whilst agreeing with this formula in principle, nonetheless point out that an NMW based on the inclusion of bonuses could have far-reaching effects on companies which rely on financial incentives. The IPD also says that the formula may be a problem for those companies operating seasonal businesses, if not operated correctly. For its part, the TUC is worried that the all-inclusive rate may encourage some low-paying employers to contrive dubious "bonus" schemes or to attempt to include "perks" such as staff discounts, subsidised meals, and other working condition allowances as "payments in kind" in order to reach the statutory minimum NMW level. Some concern has also been expressed about the formula's operation in industries such as textiles, where shift allowances and productivity bonuses are an essential element of recruiting and retaining employees.
The question of whether the NMW should be set at a single rate has started to come to the fore. A lower rate has been suggested for young people, trainees and new recruits drawn from the ranks of the (long-term) unemployed. Variations in the rate could also apply to different regions or industries, although this would undermine the key objective of comprehensiveness and simplicity. Both the TUC and CBI support a formula which is clear and simple and, as such, oppose rates set on the criteria of industry or region. However they both see a role for a differential rate for trainees, while not agreeing on the precise details.
The LPC has already indicated that there may have to be a different rate for those on recognised training schemes, and perhaps for 16-18 year olds more generally. More problematic is the recent suggestion by Margaret Beckett, President of the Board of Trade, that the lower rate might apply to those aged up to 25. Both the TUC and the CBI, in their evidence to the LPC, have stated that there should not necessarily be a lower NMW for the younger employees. However, both are drawn to accept a lower rate for trainees of all ages. In the end, it may be that young trainees who are linked to an accredited scheme such as National Vocational Qualifications (NVQs) will be subject to a lower-rate NMW.
A different and more fundamental problem relates to the definition of an "employee", particularly with the growth of subcontracting and self-employment in many industries. A new legal redefinition of the "employment relationship" rather than the narrower "contract of service" may be necessary to ensure the widest possible coverage of the NMW.
At what level should the NMW be set?
In October 1997, it emerged that the first figure for the NMW set by the LPC is unlikely to be a definite one, and it will perhaps take another two or three years until a figure that is acceptable to all parties is reached. Professor Bain argued that the whole process constitutes uncharted waters, so it would be imprudent for the LPC to proceed at "full speed ahead" without gauging what the effects might be. However at the same time, he made it quite clear that he is not going to be swayed by the "a priori mumbo jumbo" of academic labour economists in setting a rate. Instead, the LPC seems to favour an approach of drawing on the practical experience of employers and unions. The Commission is currently organising a series of visits and interviews around the country to this end.
The CBI has argued for a modest minimum wage rate if the risk of serious economic repercussions are to be avoided. It states that a maximum level of GBP 3.20 per hour is unlikely to cause significant damage if properly introduced, but adds that even a minimum of GBP 3.00 would run the risk of leading to job losses if wage differentials were to be restored after its introduction. The CBI also believes that a rate set at around GBP 4.40 - which is what some of the unions have been asking for - would lead to job losses of the magnitude of a quarter of a million. The TUC has stated that it favours a level set at "somewhat above GBP 4.00".
The Joseph Rowntree Foundation (an independent, non-political social policy research body ) has issued a reminder that the NMW must take the social security system into account. In a report issued in October, the Foundation stated that a minimum wage of GBP 3.75 would enable 300,000 low-paid workers to escape family poverty, whilst at the same time saving the taxpayer GBP 1.2 billion. This rate would enable many people to escape the trap whereby they are worse off working because of tax and national insurance rules, and also release funds which could be used to disseminate "best practice" efficiency savings, or be made available for more direct investment grants in the most affected sectors. Interestingly, another piece of research by the London School of Economics finds that a rate of GBP 3.85 would be equivalent to the all industry average set by the Wages Council s before their abolition in 1993 (it was then GBP 3.07) and therefore probably have few longer-term detrimental effects.
Many employers have already begun to respond to the prospect of a statutory NMW by agreeing to raise their lowest pay rate substantially. Employers in the textile finishing industry and in the building and civil engineering industry have recently agreed to a new minimum of GBP 4.00 per hour. Significantly, these increases involved the incorporation of bonuses and consolidation of allowances into the new basic rate. It is also worth noting that the recent major harmonisation deal for local authorities included an agreed GBP 4.00 minimum wage (UK9703119N).
However, much of the hotel, catering and retail industries set minimum rates far below this figure, at around GBP 3.50 an hour and below. According to Incomes Data Services, a minimum set above the GBP 3.50 mark would affect such well-known retailers as Kwik Save and Thresher (both of which have GBP 3.50 minima), Somerfield and Bhs (GBP 3.54), William Hill (GBP 3.56) and Victoria Wine (GBP 3.57).
How will the NMW be uprated?
If the NMW is to realise and sustain any of its desired effects, it would have to be uprated on a regular basis to keep pace with wages set elsewhere and with any changes in economic circumstances. So far, the LPC has rejected any fixed formula for the NMW which might link it to retail prices or median earnings. This is to maintain a degree of discretion and flexibility necessary to respond to other changes - for example, in the tax and social security systems. The LPC therefore has to decide: whether uprating should be conducted on an annual basis; at what point in the year this should be; and whether there should be any type of pre-set formula for doing so.
The case for annual uprating is that most changes to pay, taxes and benefits are already made in this way. However, a problem of annual uprating may be that it effectively becomes established as a pay norm. This could be less significant if the timing is set towards the end of the annual pay round, perhaps in March with a June implementation date, although negotiators may simply respond by delaying the settlement process to take this into account. If the uprating is broadly reflective of changes in the retail prices index, then the additional impact of an annual review may not be so great, particularly at low levels of inflation. However, those firms seeking to move away from such external references in pay determination to a focus on internal profitability or performance may see this as another hurdle to overcome.
Another suggested alternative may be to change the rate on a three- to five-yearly basis. This would allow the uprating to work separately from the usual annual settlements. The disadvantage of this may be problems for some firms of having to "catch up" every three to five years.
A particular question to be faced in the public sector relates to the subsequent role of the pay review bodies that make recommendations on pay increases for public employees (UK9702104F), if the uprating is to be made annually. If these bodies simply try to anticipate the change to the NMW, their function is effectively made redundant. If they choose to view the NMW as a starting point, they risk fuelling inflationary pressures and undermining the intentions of the NMW. Accordingly, changes to pay-fixing in the public services might be expected, should an annually uprated NMW be introduced.
How will the NMW be enforced?
The LPC also has to make a recommendation on how the NMW is to be overseen and enforced. Some of the options which have been suggested are to set up a Low Pay Inspectorate, similar to those previously operating under the Wages Councils, or alternatively to conduct monitoring through the existing VAT or National Insurance Inspectorates, which have considerable powers to investigate companies. The latter might be preferred by both Government and business, in order to reduce the personnel costs and intrusiveness of inspection.
Another issue which has to be considered is what protection will be given to employees who use the law regarding the NMW, and how the mechanisms for redress will fit into the Government's proposed trade union rights legislation and with the existing (and already overstretched) Industrial Tribunal (IT) system.
Finally, and drawing on the lessons of the old Wages Councils, a clear and simple NMW which is widely understood will also contribute to the compliance process. A requirement might therefore be made of employers that they refer to the NMW on relevant employment documents, such as the contract of employment or the pay slip, and that they publicly display the information in a way similar to the health and safety notice.
Effects: Efficiency and employment
Much of the popular debate on the NMW has revolved around questions of "how many jobs lost at a given set rate". Other commentators have pointed to the possibility of productivity improvements ensuing at the levels both of the individual firm and the general economy. It remains the case, however, that the real impact of the NMW - job losses and/or efficiency effects - will be unknown for some time. On the one hand, a direct increase in labour costs could lead to a cut in employment in some firms. On the other, rather than immediately cutting employment, firms might respond to a new NMW by eliminating any "slack" through a reorganisation of work, or by looking to improve efficiency by investing in technology or in the training of employees. Reduced absence and turnover might also be a positive result for employers. As a just-published British Chambers of Commerce survey states: "Businesses recognise that a low-wage policy can lead to a vicious circle of low morale, low performance and low productivity". Instead, a virtuous circle of partnership, commitment, skill, and efficiency is the desired economic effect of the NMW. However, it remains to be seen what will happen in practice.
Much will of course depend on the NMW itself - its level and speed of implementation. It will also depend on the labour and product market context. A growing overall market would make any transition easier to bear. Conversely, any signs of recession would simply reinforce the pressures on short-term profitability, especially in smaller firms, which makes cutting labour an easier and more acceptable option.
Finally, it is vital to remember that the NMW will come into effect at a time when employers will be addressing the implementation of the 1993 EU Directive (93/104/EC) on working time (UK9702103F). Taken together, the NMW and the Directive could have important implications for the way in which overtime is organised and paid, for example. These simultaneous regulatory pressures are therefore likely to promote a widespread and fundamental review of existing pay and working time arrangements. (MW Gilman and J Arrowsmith, IRRU)