Changes made to national minimum wage

From 1 October 2004, the existing adult and development rates of the UK's national minimum wage will be increased, and a new rate for 16 and 17 year olds introduced for the first time.

Following the government’s acceptance of recommendations made by the independent Low Pay Commission (LPC), the existing adult and development rates of the UK’s national minimum wage (NMW) will be increased on 1 October 2004. On the same date, a new NMW rate for 16 and 17 year olds will be introduced for the first time.

Increases in adult and development rates

From 1 October 2004, the main adult NMW rate for workers aged 22 and over will increase from GBP 4.50 per hour to GBP 4.85. The 'development rate' for workers aged 18-21 inclusive, also applicable to workers aged 22 and above during their first six months in a new job with a new employer and who are receiving accredited training, will increase from GBP 3.80 per hour to GBP 4.10.

The new rates were first proposed by the LPC in March 2003 (UK0304101N). The government provisionally accepted the LPC’s recommendations but asked the LPC to review whether they remained appropriate in the light of economic circumstances at the time of its 2004 report.

In its March 2004 report, the LPC said that it '[continued] to believe that it is right to make a significant increase in the relative level of the minimum wage, and that this is sustainable in the current economic climate'. It therefore confirmed its original recommendations

New rate for 16 and 17 year olds

The government also accepted the recommendation in the LPC’s March 2004 report that a minimum wage should be introduced for 16-17 year olds, other than apprentices, set at GBP 3.00 from 1 October 2004 (UK0403107F). Though 16-17 year olds were originally not covered by the NMW (UK9904196F), the LPC said that it had become concerned by evidence that some 16-17 year olds were in full-time jobs providing extremely low rates of pay with minimal training and few development prospects. The LPC concluded that the NMW 'should address the worst cases of exploitation, and a wage floor for 16-17 year olds will help protect those entering the labour market for the first time'. In addition, it will bring the UK into line with all the other major countries with a national minimum wage, which already provide protection for 16-17 year olds.

Other changes

From 1 October 2004, the National Minimum Wage (Amendment) Regulations 2004 will change the way in which the NMW affects workers paid by output, including homeworkers. Employers will have to pay their output workers 'fair piece rates' based on the hourly rate of the national minimum wage. This will still mean that slower than average workers will earn less than the minimum wage and that faster than average ones will earn more. Further adjustments, to take effect in April 2005, are intended to ensure that most output workers will earn the equivalent of the minimum wage.

New terms of reference for LPC

On 2 August 2004, the Department of Trade and Industry (DTI) announced new terms of reference for the LPC’s 2005 report. The LPC has been asked to:

• 'continue to monitor and evaluate the impact of the [NMW], with particular reference to the effect on pay, employment and competitiveness in low paying sectors and small firms, and the effect on pay structures'; and

• 'review the levels of each of the different minimum wage rates and make recommendations, if appropriate, for change'.

The government has also asked the LPC to report on the effect that the NMW has had on the gender pay gap and the pay of ethnic minority and disabled workers since its introduction.

In making its recommendations for any future rate changes, the Commission is to have regard to:

• 'the wider social and economic implications';

• 'the likely effect on employment levels, especially within low-paying sectors and amongst disadvantaged people in the labour market';

• 'the impact on the costs and competitiveness of business'; and

• 'the potential costs to industry and the exchequer'.

The LPC has been asked to report to the Prime Minister and the trade and industry secretary by the end of February 2005. As part of its work programme, the Commission is seeking evidence from employers, trade unions, academics and government departments. The deadline for written submissions is 25 October 2004. The Commission is also undertaking research into specific aspects of the minimum wage.

Announcing the LPC’s new terms of reference, trade and industry secretary Patricia Hewitt said: 'The Low Pay Commission has played a vital role in ensuring the minimum wage has been so successful over the last five years. Its recommendations have helped to substantially lift the pay of low-paid workers, without putting jobs at risk.'

Commentary

The national minimum wage, introduced in April 1999, is widely regarded by trade unions and Labour Party activists as one of the key achievements of the Blair government in the employment policy area. The Trades Union Congress (TUC) believes that the NMW 'has yet to reach its full potential', but points out that the increases in its rate have outstripped both inflation and the growth in average earnings.

The CBI employers’ organisation, though unenthusiastic about the NMW, says that its introduction has been a 'success' because of the 'prudent' rate at which it has been set. The CBI believes that the LPC 'should continue to be cautious when recommending a new rate to the government, if negative effects on employment and inflation are to be avoided'. However, the CBI says that 'more employers are beginning to experience difficulties in accommodating the minimum wage'. The organisation’s 2004 employment trends survey, published in September, indicates that a quarter of respondents expected the October 2004 increases would have an impact on their costs: 'Of these, nearly half expected a significant one-off adjustment to basic pay rates, with a significant knock-on effect on costs through maintaining differentials.' According to the survey, the NMW is 'starting to bite' particularly in the retailing, distribution, hotels and restaurants sectors.

The extension of the NMW to 16 and 17 year olds is a significant development, and represents a victory for unions and other low pay campaigners who had pressed strongly for this for some time. The TUC’s evidence to the LPC argued that the absence of minimum wage protection of younger workers had led to serious exploitation, and that some young people were paid as little as GBP 2.00 per hour. The TUC regards the initial rate of GBP 3.00 as 'quite modest', but this will almost certainly increase over time. The LPC has said that the rate should be reviewed periodically, even though it '[sees] no reason automatically to link its level to that of the development rate' for 18-21 year olds. (Mark Hall, IRRU)