Government to increase national minimum wage

In March 2006, the Department of Trade and Industry announced that it had accepted recommendations of the Low Pay Commission that the three different rates of the national minimum wage should be increased, with effect from October 2006. The move will affect some 1.3 million workers and has attracted mixed reactions from the social partners. The commission also recommended tougher enforcement of the minimum wage in sectors employing migrant workers.

On 20 March 2006, acting on recommendations of the independent Low Pay Commission (LPC), the Department of Trade and Industry (DTI) announced that the main adult rate of the national minimum wage is to rise by GBP 0.30, or almost 6%, from GBP 5.05 to GBP 5.35 (€7.68) an hour, from 1 October 2006. At the same time, the ‘development’ rate, paid to workers aged 18–21 years, will rise by GBP 0.20 to GBP 4.45 (€6.39) an hour, while workers aged 16–17 years will receive a GBP 0.30 rise to GBP 3.30 (€4.74) an hour. According to DTI figures, these increases will improve the pay of over 1.3 million low paid workers, the majority of whom are women.

Announcing the rise, Trade and Industry Secretary, Alan Johnson, noted: ‘At a time when our economy is generally strong with the longest ever period of sustained growth and nearly 2.4 million more jobs than in 1997, it is right that we continue to help those who get paid the least.’

The outgoing Chair of the LPC, Lord Adair Turner, stated that the commission had reviewed its earlier, provisional recommendations on the scale of the October 2006 increases (UK0510104N); he added that while this ‘did reveal some factors that could argue for a slight reduction in the October 2006 increase, [we] concluded that the evidence of changed economic conditions was insufficient to justify recommending a reduction in the proposed 2006 increases’. However, the LPC considered that ‘the phase in which the commission was committed to increases in the minimum wage above average earnings was now complete. Looking forward, the commission will start with no presumption that further increases above average earnings are required’.

Reaction from the social partners

The Trades Union Congress (TUC) welcomed the increases. TUC General Secretary, Brendan Barber, commented: ‘The minimum wage has been one of the government’s boldest and most successful reforms. Every time the rate has increased, low paid women have benefited more than any other group of employees, and the government was right to stand up to the employer lobby to give around one million people a pay boost this autumn.’

The Confederation of British Industry (CBI) was more equivocal, questioning whether the 2006 increases in the national minimum wage were sustainable, but welcoming the LPC’s comments that lower increases were likely in the future. CBI Director General, Sir Digby Jones, said: ‘The minimum wage jumped 12% between 2003 and 2005 – a rate of increase far in excess of average earnings growth. More and more companies are finding it difficult to absorb the rise, so another 6% will be the last thing they need. But there will be relief at the commission’s conclusion that the minimum wage will have then reached an adequate level and that future increases above and beyond average earnings are no longer necessary. It is a sensible response to employer concerns that the minimum wage is starting to have a damaging impact on competitiveness. It also recognises that lower paid employees have enjoyed a huge increase in the value of their wage in recent years; and the impact of this decision on wage differentials must not be forgotten.’

The British Chambers of Commerce (BCC) believed that the increases in the national minimum wage would hit hotels and restaurants particularly hard. According to the BCC, the sector had already suffered the loss of some 39,000 jobs during the first nine months of 2005, and the increases would put yet more jobs at risk. ‘Businesses cannot cope with more costs that are damaging their ability to compete,’ reported David Frost, Director General of the BCC. ‘We cannot continue increasing the minimum wage at the pace at which it has increased in recent years.’

Other recommendations

In response to other recommendations of the LPC, the government announced that it would:

  • accept the recommendation that ‘salary sacrifice’ schemes, including those for childcare vouchers, should not count towards the national minimum wage;
  • consider the recommendation that the commission should review the apprenticeship exemptions from the minimum wage in 2008;
  • take into account the recommendation for greater enforcement of the minimum wage in sectors that employ migrant workers, when considering sectors for targeted enforcement action in the future.

Mark Hall, Industrial Relations Research Unit (IRRU), Warwick Business School

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