The UK's first national minimum wage

On 1 April 1999, a statutory national minimum wage (NMW) came into effect in the UK for the first time - an event of major significance for the UK labour market and industrial relations. This feature places the new NMW in its historical context and examines the effects on wages of the formerly deregulated system. It then updates estimates of the direct effect of the NMW and considers the possible wider impact.

The UK's first ever national minimum wage (NMW) came into effect on 1 April 1999, with an adult hourly rate of GBP 3.60 and a rate for those aged 18-21 of GBP 3.00. The new NMW is based on the recommendations of the Low Pay Commission (LPC) (UK9807135F), whose chair, Professor George Bain, said in a statement that the NMW "heralds a fundamental change to the labour market in the UK. There will be a floor to wages in the first time in this country, eradicating the worst cases of exploitation."

The NMW was a key commitment of the Labour government which came to power in May 1997 (UK9704125F), and the LPC was established in July 1997 (UK9711177F) to recommend its level, which it did in June 1998. The National Minimum Wage Act- which provided powers to implement the NMW - received royal assent on 31 July. Draft Regulations governing the detailed application of the NMW were laid before Parliament in February 1999 (UK9902185N) and the Regulations were made on 6 March.

Historical context

Concern in the UK about low pay and "sweating" emerged towards the end of the 19th century. Public policy took two forms.

1. The Fair Wages Resolution of the House of Commons (1891) required contractors working on government contracts to observe terms and conditions of employment not less favourable than those in relevant collective agreements. Many local authorities passed similar resolutions.
2. The 1909 Trade Boards Act established four boards in low-paying sectors covering 20,000 workers. These boards set minimum wage levels in their sectors. The system of boards was slowly extended so that by their peak in 1953, some 3.5 million workers were covered by 66 wages councils (as the boards were renamed in 1945). The councils set not only minimum pay rates but also rates for different grades of worker; they also set holiday pay and other terms of employment. Councils comprised representatives of employers and trade unions plus independent members. Decisions were made by agreement between the social partner representatives, and in the event of disagreement by the casting vote of the independent members.

This system was criticised by proponents of stronger legislation on several grounds. It was not universal, so that whether a worker was covered or not could depend on arcane definitions of the scope of a council. Councils were said to follow rather than lead in terms of pay, so that the relative position of the low-paid remained largely unchanged for long periods. Enforcement was also uncertain, with there being very few inspectors to police the system.

In the event, alternative criticisms from opponents of regulation were more influential. Recent Conservative governments dismantled the wage-setting system. The Fair Wages Resolution was rescinded in 1983, while the powers of the wages councils were reduced in 1986, and they were abolished in 1993. At abolition, the councils covered 2.5 million workers. All statutory wage protection was thus ended, with the exception of the agricultural sector.

Effects of deregulation

Abolition of the wages councils was intended to increase flexibility and thereby to raise levels of employment. Numerous studies (summarised in the first report of the Low Pay Commission, appendices 3 and 11) suggest little employment effect. Case studies of sectors where wages councils were abolished identified little or no employment growth. Some econometric studies explored the "toughness" of wages council regulation (the wages council rate as a proportion of average pay), and suggested that tough regulation could increase, and not reduce, employment.

The other main possible effect of abolition was on pay levels and pay dispersion. The broad conclusion was that wages within firms tended to be "sticky", with few major moves to cut wage rates. Existing patterns of differentials in pay within firms tended to remain stable. The use of 18 as the age for paying adult rates also stayed largely unchanged. However, some individual employers used their new ability to change rates. One study of hotels and catering also found a move away from annual pay reviews. The overall distribution of earnings widened, which was a continuation of trends from at least 1980. Abolition was one of the forces leading to a significant tendency for pay inequality across the economy to increase.

The national minimum wage

With this background, the arrival of the statutory national minimum wage is widely seen as a significant event. Despite its universal nature, its coverage is similar to that of the wages councils. This reflects the level at which the NMW has been set (lower than many unions were suggesting, and lower than some important wages council rates, had these been uprated from their 1993 levels) and also the exclusion of workers aged under 18.

Initial estimates by the LPC put the number of employees whose pay would be immediately affected by the NMW at over 2 million. Information on the earnings of the low-paid is, however, unreliable. In March 1999, the LPC published revised figures based on attempts to reconcile what it sees as the two main sources of information, the Labour Force Survey and the New Earnings Survey. These figures put the number of employees affected by the NMW at 1.9 million (8.3% of the workforce). Although women will be most affected, it is part-time workers of both sexes who stand to gain the most, as the table below indicates.

Source:"Developing official data on low pay", Low Pay Commission, 1999, p. 6.

Sectors with the largest proportions of employees affected include hotels and restaurants (29% of employees), clothing and footwear (24%) and cleaning and security (24%).

Since the announcement in June 1998, of the key NMW rates of pay, detailed changes have been made (UK9902185N). They include the absence of any need to state the NMW on payslips and the exemption of people living and working as a member of a family. The complexity of the new law is illustrated by the length (over 100 pages) of the government guide to the NMW. The guide details such issues as:

• who is entitled to the NMW;
• what aspects and types of pay are included;
• hours of work to be assessed for NMW purposes;
• record-keeping requirements; and
• enforcement.

On the last of these, there was in the run-up to the NMW much debate about enforcement mechanisms. It has now been decided that the Inland Revenue, which is responsible for the income tax system, will be responsible. Employers failing to pay the NMW will be subject to a penalty of GBP 7.20 per day per worker in respect of whom the employer has breached the law. In addition, there can be fines of up to GBP 5,000 for each of six offences of failing to pay the NMW or keep correct records.

Commentary

As for the possible effects of the NMW, research has begun to suggest specific ways in which employers may respond. First, the NMW excludes any premium rates paid for overtime or unsocial hours work. Employers may therefore eliminate such premia. It is thus possible for a worker's total earnings to fall even though the basic rate increases. For example, a worker doing 40 hours' work for GBP 3.50 and eight hours' overtime for GBP 4.50 earns GBP 176 for 48 hours. This does not comply with the NMW because the overtime premium has to be excluded. Paying GBP 3.60 for all hours produces weekly pay of only GBP 172.80.

Second, hours actually worked may be manipulated. For example, workers in the hospitality sector may currently work unpaid time at the end of shifts in cleaning or tidying. There may be some tendency for such practices to increase.

To the extent that employers use 18 and not 21 as the age for adult rates, young workers may gain more than might be expected. The effects on young workers are among the issues that the LPC is particularly concerned about, and how pay structures change is likely to be an important focus of its inquiries.

As noted above, deregulation produced mixed effects, but certainly did not seem to increase employment levels. Regulation through the NMW is similarly unlikely to generate major employment effects. There may be two distinct processes within the economy. Research on large well-paying firms shows clearly that pay rates are often maintained, with the effects of restructuring being felt in employment levels and increasingly flexible work practices (UK9901171F). In the more low-paying sectors, jobs may be maintained but with relatively more pressure on earnings, especially overtime premia and other bonuses. (Paul Edwards, IRRU)