A National Minimum Wage: Who, what and why?

Traditionally, in the UK minimum wages were set in certain industries by the wages council. These councils were abolished in the 1990s by the present Government, but a change of government may well see the introduction of the first universal National Minimum Wage (NMW) in the UK. This has caused tremendous speculation over what a NMW is likely to be, whom it is likely to cover and what are its likely effects. This article argues that speculation at this stage is at best unhelpful and at worse useless, until we have an idea of what the policy and coverage is likely to be.

NMW in the UK: Wages Councils

Until recent years, largely due to the voluntary system of industrial relations in the UK, a universal national minimum wage has never been more than a passing thought. Instead, because of the growing awareness of poor working conditions and low wages, trade boards were established in 1909 in certain "sweated trades" to set minimum wages and standards. The areas and industries under the boards' coverage began to widen, so that by the time they became known as Wages Councils (WCs) in 1945 they covered some 4.5 million workers. But from the 1960s, the WCs came under increasing criticism for three main reasons:

  • enforcement of orders was weak;
  • problems of low pay were intractable; and
  • WCs were felt by trade unions to hinder the development of voluntary collective bargaining.

Overall, though, research shows that while WCs may not have advanced the conditions of the low paid, they could have had more of a role in protecting them from slipping back even further. But government policy after 1979 took a different approach to wages.

The Wages Act 1986 reduced the powers of the WCs, which then covered some 2.5 million workers, including the removal of workers under the age of 21 from their protection. Then in August 1993 the WCs were abolished altogether. Minimum wage laws continued to apply only in agriculture. The abolition was part of the Conservative Government's policy of removing rigidities within the labour market so as to allow the downward drift of wages so that the unemployed might price themselves back into work. Yet even studies of the earliest trade boards show that there was little evidence of job loss as a result of the introduction of the trade boards. At worst, the effect was to eliminate the most inefficient workers and most inefficiently-managed businesses. Likewise, the Government's deregulatory reforms seem also to have had little effect. The reforms were not used to alter pay arrangements and employers largely continued to pay adult rates at 18 years old. Also since the abolition the share of national employment accounted for by the ex-wage councils industries remained at 11%.

Who will be affected by the NMW?

At the time of their abolition, minimum hourly wages in the 26 councils ranged from GPB 2.66 to GBP 3.20. At 1996 rates this would give an average level of GBP 3.20. The Trades Union Congress (TUC), on the other hand, has argued for a rate of around GBP 4.20. The estimate of the number of those covered or affected by low pay obviously depends on the starting point that one may wish to take. Below are some of the estimated numbers of workers involved at certain minimum rates of pay. In general, available estimates put the numbers earning below GBP 4.00 per hour at between 2.5 million and 5.4 million:

  • below GBP 2.40 - 350,000 employees;
  • below GBP 3.40 - 1.8 million employees; and
  • below GBP 4.00 - 3.8 million employees.

If we take as the NMW rate GBP 3.70 per hour, the mid of the figures mentioned above, 25% of all female and 8% of all male employees will be below NMW. In sectoral and occupational terms, we would find that, for instance, only 2% of males in the public sector would be affected but 31% of females in the private sector. Agriculture, distribution and hotel and catering would also be strongly affected, with a third of all employees in these industries earning below GBP 3.70. Furthermore, part-time, young, female and black workers, and those with low educational levels, are also more likely to be among the lowest paid. It is therefore argued that workers from among these groups will be the main beneficiaries, although those who live in households with two or more earners are likely to benefit more. This is because those most affected by poverty are likely to feel the impact less than other groups because they will find themselves penalised by higher tax rates and falling levels of benefit as their wages rise. So much will depend on policy issues.

Labour Party policy

At the 1992 general election, the oppositionLabour Party proposed linking the NMW to earnings. As the 1997 election approaches, the party is committed to the introduction of a "sensible and flexible" policy and has abandoned altogether the idea that the NMW should be linked to earnings. It plans to consult widely through the establishment of a Low Pay Commission (LPC). The LPC would be responsible for the following:

  • recommending the initial level of the NMW;
  • undertaking discussions on the level of the training rate;
  • conducting periodic reviews;
  • recommending future levels on the basis of its reviews;
  • considering matters referred to it by ministers;
  • overseeing and monitoring enforcement mechanisms;
  • publicising the NMW; and
  • making formal reports on the progress and issues arising from its work.

While Labour is clear on some issues, there are obviously areas of its policy that remain at the best sketchy. The policy at the moment does not include those employees under the age of 18 unless they are undergoing training to specific standards. Under these conditions, the young will receive a training allowance which is likely to be set at a percentage of the NMW rate. The General Municipal and Boilermakers Union, however, warns that the exclusion of young workers will risk creating a cut-price source of labour. This could lead to exploitation and substitution of jobs. It would also undermine the work that unions have been doing to remove age-related pay scales.

Other areas which are not yet clear are those concerning how the NMW will be uprated, how it will be enforced and whether the LPC would in fact be a negotiating forum or a consultative body.

Commentary

The impact of an NMW on various industries and occupation is likely to be very different, as will the impact on different groups of individuals. It is therefore essential that more details are known concerning what a NMW should be, and what it will be hoping ultimately to achieve. Clearly, one of the important issues is that of young people. While they clearly stand to benefit from the imposition of a NMW, they are likely to be excluded from its protection. Another issue concerns poverty: according to a report in the Financial Times (13 March 1997), some research by sources close to the Labour Party has suggested that a NMW on its own would have little effect on poverty, because of increasing tax and falling benefits as wages rise to around the NMW level (the poverty trap). Combining the NMW with tax and benefit reforms might prove to be an issue.

While Labour is to be applauded for including the social partners in the dialogue on the LPC, it must also make a stance on what its own commitments are to be in the area. The effects of the NMW will depend on its level, how employers respond and the state of the economy at the time. (Paul Edwards and Mark Gilman, IRRU)

References

"Broadening the scope of worker protection: The case of statutory minimum wages in the UK", PK Edwards, paper for conference on broader based collective bargaining, York University, Toronto (1992).

"A national minimum wage: 1 The debate". IRS Pay and Benefits Bulletin, September 1996

"A national minimum wage: 2 Labour policy". IRS Pay and Benefits bulletin, March 1997.

"Minimum wage no barrier to job creation". European Industrial Relations Review 275, December 1996.

"Employers need a national minimum wage", Employment Policy Institute.

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