In February 2005, the Low Pay Commission published its latest report reviewing the impact of the UK's national minimum wage. This recommended increases in the adult and development rates, among other reforms.
The Low Pay Commission (LPC) published its sixth annual report in February 2005. The report highlights the ways in which the national minimum wage (NMW), introduced in April 1999 (UK9904196F), has become embedded in practice, and identifies new issues in the operation of a minimum wage system. It offers a comprehensive review of low-paying labour markets, supported by the LPC’s own survey of employers and visits to companies, as well as 13 independent research projects on specific issues. Much of this evidence will be published by the Commission on its web site.
Main recommendations
The LPC’s core recommendation is that the adult rate of the minimum wage should be raised from GBP 4.85 to GBP 5.05 per hour in October 2005. This recommendation was rapidly accepted by the government (UK0504110F). A further rise, to GBP 5.35, was recommended for October 2006, but only after a review of economic conditions at the time. The Commission proposed raising the 'development rate', which covers workers aged between 18 and 21, from GBP 4.10 to GBP 4.25 in October 2005 and to GBP 4.45 a year later.
The NMW did not cover workers aged 16 or 17 until October 2004, when a rate of GBP 3 was introduced (UK0409108F). In view of the recent introduction of this new rate, the LPC recommended keeping it unchanged, with a review in February 2006.
Developing experience of minimum wage regulation
Experience has led to adjustments to the details of the NMW. In addition, several new issues have attracted the Commission’s attention.
Abolition of development rate for adult trainees
Since 1999, the development rate applicable to 18-21 year olds has also applied to adult workers starting a job with a new employer and undertaking accredited training. This provision was intended to help to encourage people into jobs. Some evidence to the Commission supported retention of this rate, but the Commission’s research indicated that it was used by only 4% of employers and that it was felt to be overly complex. The Commission thus recommended its abolition.
Enforcement
Enforcement has been an abiding concern. The evidence in this and previous reports is that the great majority of employers comply with the NMW. The Commission quotes an estimate of the Office for National Statistics that 272,000 jobs were paid below the NMW level in April 2003. An estimate for the previous year gives 1% of jobs. These figures may be overestimates, because they include people such as trainees legally paid below the NMW. But they exclude undetected non-compliance in the 'informal economy'.
One of the LPC’s projects examined informal employment in the clothing and catering trades; it concluded that the reach of the NMW in such sectors was weak, and that illegal payment practices continued to exist. Other research examined the experiences of those involved in claims of under-payment; it revealed that some employers had made mistakes and that the inspection process could be a benefit in improving pay administration.
The Commission also reports several community-based projects to improve awareness of the NMW among vulnerable groups. One such effort in Scotland generated 1,000 calls and 50 complaints that were subsequently investigated.
The Commission recommended that the government continue to review its publicity strategy, targeting vulnerable groups. In addition, interest charges should be introduced on arrears arising from underpayment of the NMW, and there should be financial penalties for 'seriously non-compliant' employers.
Particularly affected sectors
The Commission identifies nine particularly affected sectors that together employ about a quarter of the workforce. It finds that, in general, effects on the level of employment in these sectors have been small. It gives particular attention to the social care sector that provides long term residential care for older and disabled people. A large amount of funding comes from local authorities. Funding constraints, plus growing regulatory requirements, have made it hard for the sector to respond to the NMW. The Commission recommends that the government should encourage local authorities to address the costs of provision, and that it monitor their approach.
'Salary sacrifice’ schemes
A new issue for the Commission was 'salary sacrifice' schemes, under which an employee accepts a reduction in salary for a non-cash benefit such as childcare vouchers. These schemes are used in particular in the retail sector. It is not currently legal to accept a cash wage lower than the NMW, and the government asked the Commission to consider whether non-cash benefits could be offset against the NMW. The Commission was unable to reach a view in the time available, and proposed a review of this issue. This should take note of the LPC’s key principle, that the NMW should be as simple as possible and hence that complex offsetting arrangements should be minimised.
Commentary
Between its introduction in 1999 and October 2004, the NMW rose slightly faster than the increase in average earnings. The rise in October 2005, at 4.1%, is at a rate a little below projected increases in average earnings, but the further increase in 2006 is expected to be higher than earnings increases. Critical reaction was generally muted. The employers’ organisation, the Confederation of British Industry (CBI), welcomed the LPC’s cautious approach, though it warned of difficulties in some parts of the economy. A leading article in the Financial Times (28 February 2005) expressed more concern, underlining an increase in the NMW of over 15% in the past two years and suggesting possible negative employment effects. As the Commission stressed in its report, however, very few such effects have been apparent up to now, and it recommends continued monitoring in the light of economic conditions.
The Commission continues to stress that the level of the NMW will need to reflect economic conditions. It points to significant progress since 1999 in setting a floor to wages and, for example, having a 'major beneficial influence on the aggregate earnings of women'.
The NMW has become widely accepted, and adjustments to its operation have been few. There remain, however, some sectors that have found it hard to adjust, while by contrast parts of the informal economy have yet to be brought within its reach. Attention may now need to shift to specific policies targeted at such areas. (Paul Edwards, IRRU)