Employers and unions differ over revisions to national minimum wage

In October 2002 the Confederation of British Industry and the Trades Union Congress submitted evidence to the Low Pay Commission on the impact of the UK's national minimum wage and proposals for revised rates. We review the very different positions adopted by the two organisations.

In June 2002, the government asked the Low Pay Commission (LPC) to continue to monitor and evaluate the impact on the national minimum wage (NMW) - introduced in 1999 (UK9904196F) - on pay, employment and competitiveness, to make recommendations for revised rates, if appropriate, and to report to the Prime Minister and the Secretary of State for Trade and Industry by the end of February 2003 (UK0207102N). Any increase in the NMW will take effect in October 2003.

During October, both the Confederation of British Industry (CBI) and the Trades Union Congress (TUC) submitted evidence as part of the LPC’s consultation process.

The CBI position

In its submission to the LPC, the CBI argued that the success of the NMW was based on its so far 'prudent' rates. Digby Jones, CBI director-general, said that 'the minimum wage has so far been a success and it should not wither on the vine, so business supports modest rises if economic circumstances allow'. However, in the CBI’s view, increasing the rate of the NMW by more than the average increase in earnings would hit 'vulnerable sectors' and risk inflationary effects. Increasing the adult hourly NMW rate to GBP 4.50 in 2003 (from GBP 4.20 as of 1 October 2002) would be in line with average earnings growth but anything further could lead to unemployment. In terms of costs to employers, the CBI pointed out that any increase in the NMW will come on top of the planned increase in National Insurance contributions in April 2003.

The CBI also said that it opposed removal of the exemptions for 16- and 17-year-olds and of the lower youth rate (currently GBP 3.60 per hour), though it would accept reducing the lower rate age threshold by one year to 21. The CBI stated that anything else would reduce opportunities for young people to enter the labour market. It also wants the 'development rate' for adults retained, while acknowledging that take-up has not been high, because it provides a potential for 'flexibility' to cope with any subsequent increases to the full adult rate.

The CBI evidence included a survey of 380 member companies, which found that one in five firms would cut jobs and a third reduce working time if the adult hourly rate rose to GBP 4.70, while 36% would cut jobs and 32% reduce hours if the rate rose to GBP 5.00. Hardest hit would be sectors such as hospitality, hairdressing, textiles, leisure and tourism, small retailers, care homes and nurseries, especially in the north of England and Wales and Northern Ireland. Not only is pay lower in these sectors, but there is less scope to make offsetting efficiency savings or to pass on any increase in costs, because of competitive pressures. More generally, the CBI argued that a large NMW increase would have a bigger impact on pay differentials for other workers than has been the case in the past, especially in a context of low inflation and average earnings growth. The CBI insists that the role of the NMW is to be a 'floor to the labour market' rather than 'an escalator' to higher wages and costs.

The TUC position

The TUC’s evidence argues that the time is right for a 'substantial increase' in the NMW as 'the rates set so far have proved to be cautious'. The current rate 'fails to set a sufficiently robust floor under wages and still means that too many people at work are reliant on in-work benefits or tax credits', which the TUC sees as a 'too large a subsidy to low-wage employers'. Its target figure is an adult hourly rate of GBP 4.60-GBP 4.75 in 2003 and GBP 5.00-GBP 5.30 by 2004. The TUC wants the mechanism for increasing the NMW to be put on an annual footing, so would welcome an LPC recommendation for a phased increase covering both 2003 and 2004.

On grounds of fairness, the TUC also wants the adult rate paid from age 18 rather than from age 22, with some protection introduced for 16- and 17-year-olds. The TUC also said that the adult development rate should be abolished on grounds of irrelevance. It also called for more resources for the Inland Revenue and Department of Trade and Industry to enforce the NMW and greater sanctions for 'rogue employers'. The TUC estimates that some 145,000 non-unionised workers are paid below the legal minimum rate. The TUC also stated that the LPC’s original ambition to benefit at least 1.9 million workers was still only 70% successful, despite successive increases in the rates. A substantial increase would also bring significant gains in terms of narrowing the gender pay gap.

John Monks, the TUC general secretary, dismissed CBI fears of significant job losses: 'In fact, the minimum wage has had no effect on employment levels, including in the low paying sectors. The 'headroom' for the minimum wage is much bigger than we originally thought. There is now room for the Commission to be much bolder.'

The TUC evidence includes an economic analysis of what the low-paying sectors of the economy will be able to bear. It points out that employment across these sectors has increased despite the 10.8% rise in the adult rate in 2001 (UK0104124N), and argued that improved pay brought benefits in terms of the recruitment, retention and training of staff. Neither have there been there any inflationary effects. The TUC also claimed that the impact of a significant increase on pay differentials would be limited because higher-paid workers in the unorganised sectors do not take the lowest paid in their organisation as comparators. Similarly, where pay is determined by collective bargaining, trade unions are generally bargaining at levels above the NMW rate and in a context of decentralised pay setting where the imperative to maintain far-reaching networks of differentials is weak.

Commentary

The submissions of the CBI and the TUC to the LPC contain few surprises, and much of the debate tends to be somewhat ritualistic and speculative. Both sides agree that the NMW has so far been a success. The CBI puts this down to the 'prudence' of the rates, which it is keen to maintain, while the TUC argues that the NMW has been set too cautiously in the past and needs a significant boost. The likely effects of a significant increase depend on economic conditions, especially as the impact of the NMW is subject to major variation by region, sector and company size, with the TUC being more confident about the future than the CBI.

A more specific question concerns the mechanism for adjusting the NMW. Should the LPC continue to act as an occasional forum for adjudicating the debate over economic conditions and the NMW rate, or should there be an automatic indexation of the NMW based on some combination of data for the growth of employment, earnings and inflation? This depends on how reasonable you view any departure rate. However, the LPC could continue to have a role in monitoring the impact of the NMW and if necessary make any recommendations for adjustment. At the very least, there is a case for formalising an annual uprating procedure. (J Arrowsmith, IRRU)