Youth income and expenditure: Will the National Minimum Wage help?

A report from the British Youth Council, published in June 1998, highlights the levels of youth income and expenditure in the UK. Comparing figures from the report with the rates recently announced for the forthcoming National Minimum Wage (NMW) shows that average youth wages are already above those of the NMW. There is little indication, however, that the NMW will help in narrowing the increasing differential between youth and adult wage rates since 1979.

From April 1999, the UK will have a statutory National Minimum Wage (NMW). As well as aiding those on poverty-level wages, by providing a pay floor below which they cannot fall, it has been argued that the NMW could have the effect of allowing efficiency-inducing measures, given the right conditions (UK9807135F). This would prevent the UK economy from slipping further into a low-pay, low-productivity situation and, it is hoped, encourage a high-pay, high-productivity economy instead. This applies especially to young people. After studying the NMW proposals issued by the Low Pay Commission (LPC), however, the Government proposed in June 1998 that individuals under the age of 21 will receive a lower rate than the adult NMW rate, whilst those undergoing training are to be completely exempt from the legislation.

The LPC's main recommendations - accepted by the Government - were for an adult hourly NMW of GBP 3.70 from June 2000, with an initial rate of GBP 3.60 from April 1999. There was a widely reported debate within the Government on the key issue of the minimum rate for those aged 18-21. The Chancellor of the Exchequer, Gordon Brown, was reported as favouring a relatively low rate of GBP 3 per hour, which might even cover workers aged over 21. The LPC's terms of reference required it to recommend rates lower than the adult rate for those aged up to 25, and it recommended GBP 3.20 as a "development rate", with the adult rate starting at the age of 21. In the event, it was decided that the initial development rate would be GBP 3 with effect from April 1999, but that it would rise to the GBP 3.20 level in June 2000.

The Government was keen that the NMW would not prove detrimental to its "New Deal" employment plans for young unemployed workers (UK9707143F) and as such it thus recommended that all those aged 16 and 17 years and all those on formal apprenticeships should be exempt from the NMW.

The NMW's provisions on young workers are arguably a cause of concern for this group, whose pay levels have already fallen sharply in relation to the average adult wage in recent years. A June 1998 report by the British Youth Council (BYC) - "Youth update: income and expenditure", British Youth Council, Factsheet No. 2, June (1998)- highlights the low average rates of pay of the young, especially students who have to work to fill the shortfall between their income and expenditure. The consequences, according to the report, are that the young spend proportionally more on paying off debts than any other age group, which leaves them with less to spend. BYC is an independent charity which seeks to represent young people aged 16-25 to central and local government, political parties, pressure groups and the media.

Young people's earnings

Studying figures from the New Earnings Surveys, the BYC highlights that young people are among the lowest paid workers in the UK. Of workers aged 16-20, 72% are paid less than GBP 4.00 per hour, compared with 18% of those over 21 - see Table 1.

Table 1: Average hourly wage by age group in 1997
Age Full-time males Part-time males Full-time females Part-time females
Under 18 GBP 3.32 GBP 3.80 GBP 3.30 GBP 3.67
18-20 GBP 4.58 GBP 4.45 GBP 4.39 GBP 4.22
21-24 GBP 6.67 GBP 5.15 GBP 6.04 GBP 4.80
All age groups GBP 9.65 GBP 6.75 GBP 7.83 GBP 5.74

Source: BYC 1998.

At first sight, the figures in Table 1 indicate that average hourly earnings for young people are already above the proposed NMW rates. These figures, however, include only those workers who pay income tax. Thus those earning below GBP 80.65 per week are not represented in the data, which suggests that the average young person's hourly rate may in fact be much lower.

Furthermore, Table 2 highlights how much young people's weekly earning have fallen as a percentage of the average wage between 1979 and 1997. The table highlights significant increases in the differentials between youth and adult rates.

Table 2: Weekly earnings by age group as % of average adult wages
Age group Male Female
. 1979 1997 1979 1997
Under 18 40.1 33.8 58.1 43.2
18-20 62.5 47 77.3 51.7
20-24 82.3 68.4 93.7 78.3

Source: BYC 1998.

The Conservative Government elected in 1979 argued that pay floors set by wages council s, which then set statutory minimum rates for a number of industries, were pricing young people out of work. Over a period of nearly two decades, the Conservatives first reduced the powers of wages councils and then abolished them altogether. Yet while young people's wages have dropped dramatically, their unemployment rates have increased rather than decreased, especially for those in the under-20 age group.

Full-time education

Low rates of pay also affect those in full-time education. The BYC figures highlight that for the average student expenditure exceeds incomings from grants and loans by almost a third. This means that for many the shortfall has to be made up by taking part-time employment. Over 50% of all workers under the age of 21 are full-time students working part time. The figure for under-18s is even higher at 62%. Over 70% of working students earn less than GBP 4.00 per hour and around 13% have pay rates of less than GBP 3.00 per hour. The average works out at between GBP 3.62 and GBP 3.86 per hour.

The BYC report also found that between 52% (according to a 1995 Department for Education and Employment national survey) and 84% (according to 1995 figures from the the GMB general trade union) of children also had at least one job within the past year, with the rates of pay depending entirely on age. For example, the average hourly rate was GBP 1.55 for 12-year-olds and GBP 2.10 for 15-year-olds. The lowest rate found was GBP 0.30 per hour.

Commentary

The NMW is a new departure for the UK, and it comes after two decades in which the dispersion of earnings increased and the ratio of youth to adult wages fell. In these circumstances, the shock of a high NMW - in particular if it applied to all workers aged 18 and over - might have been considerable, with about one-fifth of those aged 18-20 being covered. As noted above, the Government's response was to lower the development rate to GBP 3.00.

Reflecting many studies in other countries, which find that minimum wages have significant effects on youth labour markets, the LPC also concluded that it would risk employment opportunities for young people if they were to be covered by the adult NMW. The LPC estimated that 21% of those aged 18-20 would be covered by a development rate, compared with the 8% of adults covered by the full NMW. This suggests that the NMW could have some effects on low youth wages but, as the BYC report stresses, the youth labour market is one of low pay, low skills and limited prospects. Research by Lucas ("Youth, gender and part time work - students in the labour process", R Lucas, Work Employment and Society, Vol. 11 No. 4 (1997)), for example, confirms the findings of the BYC on student incomes and highlights that students are being used particularly as cheap and flexible labour. An NMW is not designed to deal with such major labour market problems. (MW Gilman, IRRU)

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