National Minimum Wage: the story so far

In February 2000, the Low Pay Commission published its second report, assessing the impact of the UK's National Minimum Wage (NMW) nearly one year after its introduction. Based on a number of different research projects, it found that the NMW had delivered significant benefits for large numbers of low-paid employees. Yet the impact on employers, the report asserts, was largely "minimum wage, minimum fuss".

The Low Pay Commission (LPC) - made up of representatives of the business community and trade unions, plus independent academics, and chaired by Professor George Bain- was appointed in July 1997 (UK9711177F) to recommend the level of the UK's first National Minimum Wage (NMW), a commitment of the Labour Party government that came to power in May 1997. The LPC's first report and recommendations, published in June 1998 (UK9807135F) were followed by the introduction of the NMW in April 1999 (UK9904196F). Subsequently, the government requested that the LPC monitor the NMW's implementation and report back, and 23 research projects were drawn on as part of this process. The LPC used large-scale surveys and case studies of companies in low-paying sectors, and took a range of other written and verbal evidence. At the end of February 2000, the LPC's second report was published. The initial impressions of the LPC are that substantial numbers of employees have benefited with few detrimental effects on business and the economy.

Who benefited?

Prior to the introduction of the NMW, the LPC estimated that some 1.9 million employees would benefit from its introduction. A more accurate figure is now thought to be between 1.5 and 1.7 million employees. The new report highlights the fact that almost two-thirds of the beneficiaries so far are female, of whom two-thirds work part-time. In the year to April 1999 alone, figures show that the gap between the average hourly pay of female and male employees narrowed by a full percentage point, the largest change in almost a decade. Average hourly pay for part-time employees has also increased more rapidly than that for full-time employees. Although it is too early to judge categorically, it would also seem that the NMW has produced little effect on pay differentials, with the impact being largely confined to the very bottom of the earning distribution. Available data therefore shows that the overall earnings distribution now demonstrates a marked pay "spike" around the NMW adult rate level of GBP 3.60 per hour.

The report is also confident that compliance is much higher than was originally expected. It argues that, in the main, publicity has been successful in creating awareness of the NMW among employers and workers alike. Bodies such as trade unions, Citizens' Advice Bureaux and Low Pay Units have also played an important role in encouraging compliance. Complaints about underpayment are therefore well below those associated with other breaches of employment law. Inland Revenue NMW helpline statistics show, for example, that most calls have sought information rather than reported problems. Up to September 1999, out of 84,000 enquiries to the helpline there were fewer than 3,000 complaints. Although some employers were late in implementing the NMW, it is thought that most problems exist in companies operating at the edges of the legitimate labour market or in the informal economy. Research evidence given to the LPC suggests that ethnic minority employees are particularly at risk from being paid under the statutory rate or from other contrivances such as reducing workers' hours while maintaining their output levels.

At what cost?

The report recognises that the NMW is likely to be a particular challenge to firms facing tough market conditions and low profitability, especially where the scope for innovation is limited. It points out that this is why the LPC made the initial decision to recommend a "cautious" rate. This, taken together with a generally buoyant (service sector) economy, means that any effects on costs have been manageable for most firms. The overall impact on the UK wage bill, covering direct and knock-on effects, is estimated to be only around 0.5%. There appear to have been few negative employment effects in sectors such as the service industries where job reductions are difficult to implement without compromising quality and efficiency. Instead, employers have often sought to manage the introduction of the NMW either by raising prices or by restructuring work practices and absorbing costs through reduced profits. Nevertheless, the effects on productivity are also thought to be small. A minority of firms are thought to be making some positive improvements in response to the NMW, but the extent of any positive "shock effect" is likely to be small at present rates (UK0002157F).

Further recommendations

The NMW is a complex piece of legislation – the accompanying advisory booklet was over 100 pages long. However the LPC's second report finds that the definitions of workers, pay and working time for the purposes of calculating the NMW have worked quite well in practice, though there remain a small number of anomalies which need reviewing and clarifying:

  • definitions of workers who are eligible. This mainly concerns clarifying the coverage of voluntary workers, people with disabilities who undertake "work-like" activities for therapeutic reasons, directors who are also employees, students and seafarers;
  • definition of pay. This mainly refers to the "accommodation offset", the amount of deduction allowed from a wage when the employer supplies accommodation. The present rate is GBP 20 per week and many employers argue that this is unreasonably low; and
  • definition of working time and the pay reference period. This affects workers whose jobs involve "sleep-overs", call-out or standby and is thought to be particularly problematic in industries and occupations where working practices are less easily accommodated by the standard definition.

In addition, the report reconsiders the issue of young people and the "development rate". The NMW legislation implemented a lower rate for young workers between 18 and 21 and for all those in the first six months of an approved training scheme. The LPC found that most 21-year-olds are already being paid at or above the NMW rate and therefore argues that there is little reason not to include them in the full rate. The Commission also feels that the move from GBP 3.00 to GBP 3.20 in June 2000 for the youth rate will have no significant negative effects on the economy. The development rate for older workers in training has also had no negative effects, although take-up of this rate to date has been slow.

As a consequence of its findings, the report makes a number of recommendations, including the following:

  • 21-year-olds to be included in the main NMW rate;
  • continued publicity for the NMW, including funding community projects to raise awareness in those areas most at risk from non-compliance;
  • guidance on a number of issues to be reviewed, clarified and restated (eg voluntary workers, therapeutic earnings and student status); and
  • the accommodation deduction to be maintained at the present rate but to be reviewed at later date.

Commentary

The LPC's second report clearly expresses pleasure that the NMW has been introduced with little negative effect. In the words in the report of the LPC chair, George Bain: "This was a major intervention in the labour market, yet nine months after its launch our judgment is that it has been introduced successfully. To borrow a phrase from an American study, 'the sky hasn't fallen', or, as a national newspaper put it, 'minimum wage, minimum fuss'."

The clear winners from the legislation have undoubtedly been female part-time workers, though large numbers of other workers have also benefited from the NMW. The losers are likely to be already struggling businesses and workers in the informal economy, who might still miss out.

The government has since accepted most of the LPC recommendations, including continued publicity and assistance in those areas worst affected, with the exceptions that 21-year-olds will not be included in the main rate and that the update will be in October rather than June (UK0003158N). Two issues that have not been addressed, however, are what forms the uprating mechanism is likely to take in the future, and what the future role, if any, of the LPC will be. As the LPC argues in its report: "if [the NMW] is not uprated it will cease to be a useful labour market tool, and cease to provide any material benefit for the low-paid worker." The details of uprating were beyond its terms of reference in this report. Nevertheless, through this thorough evaluation report, the LPC has made an implicit but convincing case for an ongoing role for itself in monitoring and refining the terms of the NMW legislation. (J Arrowsmith and M Gilman, IRRU)

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