WELCOME TO THE LOW PAY COMMISSION

2.1 Since its introduction in 1999, we have carefully monitored the impact of the National Minimum Wage to determine its effects on the economy in general and on the labour market in particular. A legally enforced minimum wage set at a reasonable level raises the wage costs faced by at least some employers and this is likely to have consequences across a range of economic variables. This chapter sets out to establish whether and to what extent the National Minimum Wage has had an impact on wages and, having done so, considers how it has affected other economic outcomes.

2.2 Two things are clear from economic theory. The first is that, in the presence of a wage effect from a minimum wage, employers will need to adjust on some margin. Something has to give. Raising the wages of low-paid workers can affect a number of economic variables, principal among which are: employment, prices, productivity and profits. The second implication is that the level at which the minimum wage is set is crucial to the magnitude of those economic effects and to the scale of any negative impact.

2.3 When setting the National Minimum Wage in the UK we have sought to set it at a level that minimises any harmful outcome. Our focus has been firmly on ensuring limited adverse effects on employment and the evidence to date suggests that the strategy has been successful.

2.4 This chapter also looks at the impact on those industries, firms and workers which are more likely to be affected by the minimum wage. We start by giving a brief overview of those sectors and workers.

2.5 It is well established that different industries and occupations have different wage distributions with some paying more than others. In our 2007 Report, we described in detail how we define the low-paying sectors1, but it is basically those industries or occupations that employ a high number of minimum wage workers or those in which a high proportion of jobs are paid at the minimum wage. Figure 2.1 gives a breakdown of the number of jobs in each of our industry-defined low-paying sectors and the proportion of those that are paid at or below the minimum wage2. It is important to note that while we may classify a sector as low-paying, it clearly does not follow that all jobs in that sector will be low-paid. Many of the workers in these sectors will be earning well above the minimum wage, but each sector also has a substantial proportion of low-paid jobs. It is important to bear in mind as well that these low-paying sectors account for only 70 per cent of all employees paid at or below the minimum wage. Therefore, roughly 30 per cent of low-paid employees work in industries that we do not identify as low-paying sectors.

2.6 In terms of jobs, retail (including the motor trade) was the largest low-paying sector in September 2007 with 3.4 million jobs (40 per cent of all jobs in the low-paying sectors). However, in April 2007, only 7.5 per cent of these retail jobs were paid at or below the minimum wage3. Hospitality was the next largest sector with 1.8 million jobs (22 per cent of all jobs in the low-paying sectors). In this sector, 17.2 per cent of the workforce were paid at or below the minimum wage. The third largest low-paying sector, social care, had 1.2 million jobs (14 per cent of all jobs in the low-paying sectors), but only 5.1 per cent of these were paid at or below the minimum wage. Together the jobs in these three sectors accounted for three-quarters of all employee jobs in the low-paying sectors. They also accounted for over 50 per cent of all minimum wage employees. However, the two low-paying sectors with the largest proportion of employees paid at or below the minimum wage were hairdressing (22.2 per cent) and cleaning (19.3 per cent), although together these accounted for just 7 per cent of all minimum wage jobs.

Number of Jobs and the Proportion of Minimum Wage Jobs in Each Low-paying Sector, GB, 2007

Source: ONS employee jobs series, not seasonally adjusted, GB, September 2007 and ONS Annual Survey of Hours and Earnings (ASHE) 2007 methodology, low-pay weights, UK, April 2007.

Note: Figures in parentheses are the proportion of jobs in April 2007 that paid below the downrated value of the forthcoming minimum wage (£5.52 in October 2007). That is, adult jobs paying below £5.40, jobs for 18–21 year olds paying less than £4.50 and jobs for 16–17 year olds paying less than £3.32.

2.7 In our review of the low-paying sectors, we also looked at low-paying occupations because some areas of low-paid employment (such as childcare and office work) could not be identified using industry classifications. We have therefore used occupational definitions to investigate the impact on jobs and earnings in these occupations. Over the year to September 20074, there were on average around 355,000 jobs in low-paying childcare occupations and 308,000 jobs in low-paying office work occupations. About 8 per cent of jobs in childcare and 4 per cent of jobs in office work were paid at or below the minimum wage in April 2007.

2.8 Evidence from our consultation exercises and from official data suggests that smaller firms are more likely to be affected by the minimum wage than larger ones. In April 2007, more than 10 per cent of jobs in micro firms (with 1 to 9 employees) and 7 per cent in other small firms (10 to 49 employees) were estimated to be paying at or below the minimum wage. In contrast, only 4 per cent of jobs in large firms (250 employees or more) were paid at or below the minimum wage. Minimum wage jobs are also more likely to be found in the private sector than in the non-profit sector. They are least likely to be found in the public sector although many public sector bodies now contract out services, such as cleaning and security, to private sector organisations.

2.9 In our 2007 Report, we reported that around two-thirds of minimum wage jobs were held by women and around 60 per cent of all minimum wage jobs were part-time. This remains the case. In April 2007, 64 per cent of minimum wage jobs were held by women and 61 per cent were part-time. Minimum wage jobs were also more likely to be temporary or casual than permanent. Some ethnic minority groups, such as Pakistanis and Bangladeshis, those with disabilities, those under 25 and those over 60 were also more likely to be employed in minimum wage jobs.

2.10 In this chapter we first consider recent developments in the broader UK economy and how they differ from those forecast at the time we made our recommendations in our 2007 Report.

2.11 In January 2007, when we discussed our recommendations for uprating the minimum wage in October 2007, we concluded that reasons for caution outweighed other considerations5. As a result, we recommended that the adult minimum wage should increase by 3.2 per cent. Similar percentage increases were also recommended for both youth rates (3.4 per cent for 18–21 year olds and 3.0 per cent for 16–17 year olds). These upratings were expected to be in line with median pay settlements, a little below average earnings growth and a little above retail price inflation.

Source: Latest data from ONS (January 2008) and Forecasts from HM Treasury (February 2007). GDP growth (ABMI); Total employment as measured by Workforce Jobs (DYDC); Claimant unemployed (BCJD); Average Earnings Index including bonuses (LNNC), all seasonally adjusted, RPI (CZBH); RPIX (CDKQ); CPI (D7G7), not seasonally adjusted, UK (GB for AEI), 2006–2007.

1. Figures for actual data are consistent with the forecasts unless stated otherwise.

5. Latest data are for the three months to November 2007. Forecasts refer to whole year growth.

2.12 Table 2.1 reveals how the forecasts compare with the outturn. It shows that in 2007 the economy performed better than had been expected. Throughout 2007, the UK’s macroeconomic performance was strong and stable with GDP growth at 3.1 per cent. Consumer spending held up more strongly than anticipated at the start of the year, as consumers used savings and increased borrowing to offset reductions in their real disposable income. Government expenditure growth slowed in 2007 but business investment was strong over the year (although it weakened towards the end of 2007). The year concluded with continued uncertainty as the impact of the US financial difficulties led to disruptions in international and domestic financial markets. There was some evidence that, as a result, credit conditions had tightened in both the corporate and household sectors and were expected to tighten further into 2008. In addition, retail sales growth appeared to have slowed sharply by the end of 2007, leading most commentators to revise their forecasts for UK GDP growth in 2008 downwards. We shall comment further on these forecasts in Chapter 5.

2.13 Amid this uncertainty, the UK labour market remained remarkably robust. Employment growth in 2007 was slightly stronger than had been forecast. After the sluggish growth observed in the first quarter of 2007, employment recovered strongly and reached record highs in the three months to November 20076, and much of that increase was in full-time and permanent employee jobs. The available data suggest that growth in the low-paying sectors was at least as strong as in the economy as a whole in the year to September 2007. Although the forecasts anticipated an increase in unemployment, both headline unemployment and claimant unemployment fell over the year. However, the labour market for low-skilled workers, especially young people, performed less well than the market as a whole.

2.14 The performance of the forecasts for price inflation in 2007 was mixed. Despite rising prices for energy, fuel and food, by the end of 2007 consumer price inflation, as measured by the Consumer Price Index (CPI), had fallen back close to the Bank of England target of 2 per cent. Business services prices also remained relatively muted to the end of the third quarter of 2007. In contrast, retail price inflation measures (RPI and RPIX) were higher than forecast. In addition, producer prices for both inputs and outputs rose sharply in the last quarter of 2007.

2.15 Recent ONS data (up to December 2007) suggest that the economy continued to grow above trend, that household spending was holding up, retail sales had been robust, productivity growth was strong and the labour market was buoyant with unemployment falling and employment at record levels. Further, RPI price inflation had not fallen as quickly as forecast and has been at 4 per cent or thereabouts throughout 2007. In such circumstances and with RPI widely referred to in wage negotiations, one might expect that wage pressures would be increasing. But there has been little evidence that these factors have led to higher wage pressures (whether measured by official average earnings data or using pay settlements data from independent private sector sources). Although pay settlements have increased, they have done so only moderately. Moreover, official data from ONS suggest that average wage growth (including and excluding bonuses) has been steady. Indeed, the growth in average earnings was also lower than RPI price inflation across manufacturing, private sector services and the public sector. As a result, average wage growth has been lower than we had anticipated in January 2007.

2.16 Between 1999 and mid-2006, Figure 2.2 shows that growth in the Average Earnings Index (AEI) including bonuses was typically about one percentage point higher than the average of the median level of pay settlements7, which have tended to be more or less in line with price inflation as measured by RPI. Over the last year, however, average earnings including bonuses have grown between 3.5 and 4.1 per cent, compared with around 3.5 per cent for pay settlements. RPI, on the other hand, has grown between 3.8 and 4.8 per cent. Only the ONS wage series, Average Weekly Earnings (AWE)8, showed signs that wage inflation had increased. However, this is an experimental series and ONS regards the AEI as the best short-term measure of average wage growth.

2.17 Several explanations have been put forward to explain why average earnings are relatively subdued. Among the most plausible is the argument that the supply of labour has been greater than the growth in demand. There are three major factors contributing to the faster growth of supply: the large increase in the number of migrants entering the UK; the substantial rise in the number of workers of pensionable age looking for work, and the small but significant decrease in the numbers on disability and sickness benefits. Pressures on wages have probably reduced as a result.

Comparison of Growth in Average Earnings (GB) with Median Pay Settlements and Price Inflation (UK), 2001–2007

Source: ONS, AEI including bonuses (ONS code LNNC), Average Weekly Earnings (ONS website, 3 month average growth for whole economy), RPI (ONS code CZBH). LPC estimates of average median pay settlements from IRS, IDS, LRD and EEF pay databank records, monthly, seasonally adjusted, UK (GB for AEI), 2001–2007.

1. The AEI growth rates shown are 3-month average percentage changes compared with the same period a year earlier.

2. The RPI growth rates are percentage changes over a year earlier. These figures are not seasonally adjusted.

3. Pay settlements are medians over 3 months. The IDS monthly series began in December 2002. The average of median pay settlements prior to that time uses IRS, LRD and EEF.

2.18 The increase in the National Minimum Wage in October 2007 of 3.2 per cent was, as expected, in line with pay settlements and below average earnings growth. However, the upratings were also below the increases in RPI. Our expectation that the recommended uprating would produce a small increase in wages above RPI for those at the bottom of the pay distribution was therefore not realised. The wage rises of the average employee were also below RPI.

2.19 Before we proceed to look at the impact on earnings and employment, we must first register a concern about official data. From the outset, the Commission has relied heavily on data from the Office for National Statistics (ONS) to inform its analysis of earnings and other developments in the labour market. After problems in the early years with data that proved inadequate to assess the impact of the minimum wage, ONS worked hard to upgrade the quality of the material and succeeded in improving considerably the quality of official data on low pay. Throughout the years, we have worked closely with ONS to improve our understanding of the data and its limitations, benefiting from the expertise of its staff, and developing good working relations that have resulted in joint research and in our needs often being taken into account in ONS work plans.

2.20 It is therefore disturbing to report that this year we once more have concerns about the quality of official data. In March 2007, ONS announced major changes to several of its business surveys including reductions in the sample of the Annual Survey of Hours and Earnings (ASHE), a crucial data set on which we rely heavily. Along with other main users, we had been formally consulted about a proposed 10 per cent cut in the sample of ASHE. We objected, pointing out how vital this series was to our ability to monitor the impact of minimum wage upratings. Notwithstanding our protests, ONS implemented a cut at an even higher level of 20 per cent with no further consultation and in the face of strong opposition from the user community. Our further objections proved in vain.

2.21 Although we remain confident that the ASHE estimates are robust at the aggregate level, this significant reduction in the ASHE sample has reduced the reliability of estimates at detailed industry and occupation level and therefore impaired our ability to analyse what is happening in some individual low-paying sectors.

2.22 At the same time, ONS also introduced some methodological changes, which are designed to improve the quality of the data going forward. However, they cause a further break in this earnings series, coming on top of the discontinuity introduced in 2004 as a result of the ONS earnings review. Consistent earnings data are only available within each of the periods 1997–2004, 2004–2006 and 2006–20079. This means that we are unable to compare the latest data for 2007, on a consistent basis, with 2005, let alone with the period before the introduction of the minimum wage.

2.23 In a further change, the annual re-benchmarking of the employee jobs series has caused a break in that series, with the result that measures of annual changes in employment between March 2006 and June 2007 are no longer reliable. The employee jobs series is our main source for monitoring changes in employment by industry and so this further impedes our analyses of the low-paying sectors. We were not informed of this discontinuity until we received the revised data. ONS have also cut the sample of two constituent surveys by 12–15 per cent; however, better targeting has limited the adverse impact.

2.24 Over time, the results obtained from our disaggregated analyses of the LFS microdata (based on population estimates for Spring 2003) become more divergent from those results published on the ONS website at the aggregate level (based on the latest population estimates). The latest population estimates, which allow for the recent large increases in migration, are much higher than those in 2003. Further, as noted in our 2007 Report, the move in the reporting period for the LFS from seasonal to calendar quarters has caused a break in the microdata series. While we recognise the reasons for these changes, they have severely limited our ability to carry out analyses that compare the present with the period prior to the introduction of the minimum wage. The problem could be resolved by the production of a revised historical series and in January 2006, at the time this change was introduced, ONS indicated that they intended to produce a back series as soon as possible. To date, however, only a very limited back series has been made available but we welcome the assurances given to us by ONS that it will shortly provide a full back series with current population weights. It is important that we have this data for use in our next report.

2.25 Because of these changes (and others in recent years), many of which we acknowledge are designed to lead to longer term improvements in data quality, we no longer have consistent time series data on either earnings or employment at a disaggregated level that cover the relatively short period from 1999 to present. That is, the data currently available prevent us from being able to assess, on a consistent basis, the impact on earnings and employment of the minimum wage from its introduction to the present day.

2.26 The recommendations we make to Government are based on careful analysis of the best available data. When the quality of the data declines, no amount of excellent analysis can make good the deficit. We recommend that the Government take steps to reverse the cuts to the sample of the Annual Survey of Hours and Earnings (ASHE) and prevent further erosion of the quality of the key data provided by the Office for National Statistics.

2.27 We start our analysis of the impact on earnings by setting out a table showing how the rates of the National Minimum Wage have increased since its introduction in 1999. Table 2.2 reveals that increases in the minimum wage were largest in October 2001 but were also relatively large in October 2003, October 2004 and October 2006. As noted above, the increase in the minimum wage in October 2007 was more modest at 3.2 per cent for adult workers.

2.28 We now look at how many workers were covered by the latest uprating of the minimum wage (October 2007). We confine our analysis here to the adult rate as young workers are covered in Chapter 3. We define a worker as covered if their hourly rate increases as a direct result of the uprating of the minimum wage. We explained the methods that may be used to calculate coverage in some detail in the 2007 Report.

2.29 The latest ASHE earnings data which enable us to estimate coverage were collected in April 2007. Figure 2.3 shows that around 5.2 per cent of jobs (1.196 million) held by those aged 22 and over were paid below the forthcoming October 2007 minimum wage of £5.52. This total was made up of around one per cent of jobs (231,000) which paid below £5.35, the minimum wage in April 2007. About 2.4 per cent of jobs held by adults (565,000) were paid at the minimum wage10. A further 400,000 jobs were paid above the £5.35 minimum wage but below the forthcoming rate (£5.52)11.

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2007.

2.30 Not all those paid below £5.52 will have directly benefited from the minimum wage uprating. As explained in our previous report, we would expect some to have received pay rises that would have taken their pay above £5.52 before October. This requires us to make assumptions about how wages would have been adjusted in the absence of a minimum wage. One assumption is that wages would have increased in line with average earnings. An alternative is that they would have increased in line with prices. Assuming the former, we estimate that about 3.4 per cent of jobs (0.8 million) held by adults were covered by the 2007 uprating. Assuming that the wages of the lowest paid would have risen in line with prices, we estimate coverage in the range of 0.87 million to 1.04 million (3.8 to 4.5 per cent), depending on the price index used. These estimates for the 2007 uprating can be compared with our final estimates that around 4.8 per cent of jobs held by adults (1.1 million jobs) were covered by the 2006 minimum wage uprating. Using the prices assumption, this rises to over 5 per cent, or approximately 1.2 million jobs.

2.31 ONS data consistently record that some workers are paid below the minimum wage. Estimates for April 2007 from ASHE indicate that 292,000 jobs were held by people aged 16 or over with hourly pay below the appropriate National Minimum Wage rate. This represents 1.2 per cent of all UK jobs. The fourth column of Table 2.3 shows that the percentage of jobs held by adults aged 22 and over paid below the minimum wage in April each year has been stable at about 1 per cent since the October 2003 uprating.

2.32 These figures should not be interpreted as the number of workers being denied their legal right to the minimum wage. Some workers will be legitimately paid below the minimum wage. Inputting or counting errors will also result in an apparent underpayment. It seems unlikely that an employer in the formal sector would without a legitimate reason record an employee as being paid less than the National Minimum Wage in response to an official Government survey.

2.33 But these are not the only explanations and therefore this year, together with ONS, we decided to carry out some research, using both ASHE and the LFS, in order to get a better understanding of the reasons behind the recorded underpayment. The research (Holt, 2008a and Jenkins and Johnson, 2008) found that it was not possible to identify precisely how many of those recorded as earning below the minimum wage could be explained by legitimate exemptions or measurement errors. Their best estimate was that non-compliance could not be ruled out as an explanation for between a half and three-quarters of the number of jobs estimated to be paid below the minimum wage, though the limitations of the data made this a very tentative estimate.

2.34 The fifth and sixth columns in Table 2.3 show the number and percentage of jobs paid at or within ten pence of the minimum wage12. This has tended to fluctuate from 1.8 per cent of all jobs held by adults to 2.9 per cent (about 400,000 to 700,000 jobs), depending on the size of the minimum wage increase. In April 2007, after the large October 2006 uprating, it was at its highest at 2.9 per cent. The figure for the five pence band used elsewhere in this report is 2.4 per cent.

2.35 The final two columns in Table 2.3 show that, on average in April each year, 5 to 6 per cent of the workforce (about 1.1 to 1.4 million) is paid below the hourly rate at which the minimum wage is due to be set in six months’ time. As we would expect, the larger the planned increase, the higher the percentage affected.

2.36 Since the introduction of the minimum wage, the adult rate has increased by 53.3 per cent from £3.60 in April 1999 to £5.52 in October 2007. Over the same period, average earnings have increased by around 41 per cent and prices have increased by between 14 per cent and 27 per cent, depending on the index used. As demonstrated in Table 2.2, minimum wage increases have not been smooth. Figure 2.4 shows that, between its introduction in April 1999 and October 2004, the adult rate of the National Minimum Wage grew in line with average earnings but it then outpaced increases in average earnings in the period to October 2006. However the last uprating, in October 2007, was lower than the increase in average earnings.

Increases in the Adult National Minimum Wage Compared With Changes in Prices (UK) and Average Earnings (GB), 1999–2007

Source: LPC estimates based on ONS data, AEI including bonuses (ONS code LNMQ), RPIX (ONS code CHMK), RPI (ONS code CHAW) and CPI (ONS code D7BT), monthly, not seasonally adjusted (seasonally adjusted for AEI), UK (GB for AEI), 1999–2007.

2.37 The adult minimum wage was over half UK median hourly earnings for the first time in 2007 but was still below 40 per cent of the mean hourly wage13. Table 2.4 shows that the ‘bite’ of the minimum wage, measured against the mean or the median, has fluctuated, noticeably increasing after the large uprating in October 2001, but was not much higher in 2003 than it had been in 1999. Between 2001 and 2005, however, the ‘bite’ measured against the median increased by over five percentage points although it remained flat in 2006. The ‘bite’ on all these measures peaked in April 2007 after the October 2006 upratings. The minimum wage was over 51 per cent of median earnings and nearly 40 per cent of average earnings. It also approached 90 per cent of the lowest decile. Since then, we would expect the bite to have moderated in light of the more modest 3.2 per cent uprating in October 2007.

The National Minimum Wage as a Percentage of Various Points on the Earnings Distribution, UK, 1999–2007

Source: LPC estimates based on ASHE without supplementary information, standard weights, UK, April 1999–2004, ASHE with supplementary information, standard weights, UK, April 2004–2006 and ASHE 2007 methodology, standard weights, UK, April 2006–2007.

1. Direct comparisons before and after 2004 and those before and after 2006 should be made with care due to changes in the data series.

2. Those jobs where pay was affected by absence in the reference period were removed before the percentiles of gross hourly pay excluding overtime were calculated.

2.38 As the 2007 National Minimum Wage upratings were introduced on 1 October 2007 – too recently for data to be available to allow us to assess its impact fully – we concentrate in this section on the National Minimum Wage upratings introduced in October 2006. The relative value of the minimum wage was at its highest in October 2006 and therefore we would expect that the impact of the minimum wage would be most apparent in the earnings data for April 2007. In October 2006, the minimum wage for adults increased by 5.9 per cent, which was substantially greater than average wage growth (around 4.1 per cent). Although young people are considered in more detail in Chapter 3, it should be noted that the minimum wage increased by 4.7 per cent for youths aged 18–21 and by 10 per cent for those aged 16–17. The latter age group had received no increase in October 2005.

2.39 One effect of the adult minimum wage on the hourly earnings distribution for adult workers can clearly be seen in Figure 2.5. There is a concentration of the adult workforce at the National Minimum Wage in both April 2006 and April 2007. Such pronounced spikes were not present in the wage data prior to the introduction of the minimum wage. As a result of the large minimum wage upratings in October 2006, the concentration is higher in 2007 when 2.4 per cent of jobs paid at £5.35 an hour. After the 4.1 per cent increase in October 2005, only 1.9 per cent of jobs were paid at the minimum wage (£5.05 an hour) in April 2006.

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2007.

2.40 Our analysis above confirms that the October 2006 upratings increased the bite of the minimum wage and had a significant impact on the earnings distribution. We now focus on whether this impact extended to affecting wage differentials.

2.41 Dividing employees into 100 equally sized groups (percentiles) and ranking these groups by their hourly earnings from the lowest paid on the left to the highest paid on the right, Figure 2.6 shows how the earnings at each of these percentiles have changed on average each year compared with those at the median (earners in the middle of the distribution at the 50th percentile) for three periods: 1992–1997 (prior to the introduction of the minimum wage), 1998–2004 (covering the introduction of the minimum wage) and 2004–2007 (covering the more recent minimum wage upratings). For ease of comparison, the earnings at the median are normalised to zero. For example, over the period prior to the introduction of the minimum wage, 1992–1997 (depicted by the pink line), the lowest decile (those employees at the tenth percentile) had wage increases that were, on average, 0.6 per cent lower per annum than the wage increases for those at the median. However, in each of the other periods, 1998–2004 (depicted by the light blue line) and 2004–2007 (represented by the dark blue line), the earnings of the lowest decile increased, on average, by 0.7 per cent more each year than for those in the middle of the distribution.

2.42 Over the period prior to the introduction of the minimum wage, 1992–1997, the wages of the lowest paid increased by less than those at the median, whose wages in turn increased by less than the wages of those at the top of the earnings distribution. Following the introduction of the minimum wage, over the period 1998–2004 those at the bottom of the earnings distribution received higher pay rises than those in the middle of the distribution. Since 2004, the increases in the minimum wage appear to have had a slightly smaller effect than those from the earlier period (1998–2004). However, those at the bottom of the earnings distribution still received higher pay rises than those in the middle of the distribution. Moreover, the earlier minimum wage increases (1998–2004) appear to have had a knock-on effect up to around the 25th percentile, that is, those up to the 25th percentile received increases higher than those at the median. However, the impact declines between the 5th and 25th percentile and is smaller than the increase in the minimum wage. The more recent increases (2004–2007) appear to have had an impact, albeit small, further up the distribution. This provides some evidence of spill-over effects of the minimum wage on the earnings distribution. It also suggests that differentials just above the minimum wage may have been squeezed.

Annual Increase in Hourly Earnings minus the Increase in Median Earnings by Percentile for Employees Aged 22 and Over, UK, 1992–2007

Source: LPC estimates based on unweighted New Earnings Survey (NES), April 1992–1997, ASHE without supplementary information, standard weights, UK, April 1998–2004, ASHE with supplementary information, standard weights, UK, April 2004 and ASHE 2007 methodology, standard weights, UK, April 2007.

1. Comparisons have been made here for illustrative purposes only as no consistent earnings time series data are available from 1992 to 2007. This analysis uses ASHE with supplementary information for 2004 and ASHE 2007 methodology for 2007. These two series are not strictly comparable although the data for 2006 are similar in both.

2. Those jobs where pay was affected by absence in the reference period were removed before the percentiles were calculated.

2.43 The highest earners have continued to experience large increases in their earnings relative to the average increase. Indeed, Brewer, Sibieta and Wren-Lewis (2008) recently found that the incomes of the top percentile grew at an average real rate of 3.1 per cent a year between 1997 and 2006 (a slowdown on the growth of about 3.8 per cent a year between 1979 and 1997). This compares with average real growth of about 2.3 per cent for the lowest decile between 1997 and 2006 (an improvement on the 0.8 per cent increase between 1979 and 1997). Further, the authors found that the incomes of the very rich (the top 0.1 per cent) grew even faster than the top percentile between 1997 and 2005.

2.44 In our analyses of the minimum wage we have usually focused on percentage changes. However, differentials are often considered by employees and employers in monetary pounds and pence terms. Table 2.5 compares the adult National Minimum Wage in April of each year with the wages at the lowest decile, quartile and median for those aged 22 and over.

2.45 In percentage terms, the upratings of the minimum wage since 2001 have generally been larger than the increase in the median wage. However, in cash terms, the rise in the minimum wage has nearly always produced smaller increases than the rise in median wages. Only the very large uprating in October 2001 led to a cash increase in the minimum wage (40 pence) that exceeded the cash increase in the median wage (32 pence).

2.46 More pertinently to our analyses of differentials, we can see from Table 2.5 that the cash increase in the minimum wage has generally been greater than the cash increase in the lowest decile and lowest quartile in those years of high minimum wage increases (October 2001, 2003, 2004 and 2006 – years 2002, 2004, 2005 and 2007 in the table). The exception was that the increase in the lowest quartile (37 pence) was slightly greater than that of the minimum wage (35 pence) following the October 2004 uprating observed in the 2005 data.

Percentage and Cash Increases in the National Minimum Wage Compared with Selected Points on the Earnings Distribution, UK, 2000–2008

2.47 We have commissioned research to investigate further the impact of the minimum wage on wage differentials. It should report in time for its findings to be included in our next report.

2.48 Having looked at earnings in the economy as a whole, we now consider the impact of the minimum wage on earnings in the most affected sectors. Table 2.6 below shows the proportion of jobs held by those aged 18 and over14 in each low-paying sector paid at or below the prevailing adult minimum wage in April 2006 and April 2007. It shows an overall rise, from 6.5 to over 8 per cent, in the proportion of jobs in the industrial low-paying sectors paid at the minimum wage in the year to April 2007. Most sectors experienced an increase. In retail the proportion rose from just over 4 to nearly 7 per cent. Textiles and clothing also experienced a rise, from 5.5 to 7.9 per cent. Conversely, falls in the proportion of jobs paid at the minimum wage occurred in security and childcare.

2.49 Overall, the proportion of jobs in the low-paying sectors that were paid below the minimum wage remained virtually unchanged at 5.5 per cent. The three sectors with the highest proportion of jobs paid below the adult rate in April 2007 were hospitality, hairdressing and childcare. Given the number of young people working in these sectors, this probably reflects the widespread use of the development rate and the apprentice exemptions.

Percentage of Employee Jobs Held by those Aged 18 and Over Paid at the Adult Minimum Wage or Below by Low-paying Sector, UK, 2006–2007

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2007.

1. This table also includes those aged 18–21 paid at or below the adult rate in 2006 and 2007.

2. These sectors are defined using occupations. The other sectors are based on industry. The definitions are explained in detail in Appendix 5 of our 2007 Report.

2.50 Research we commissioned for this report by Incomes Data Services (IDS, 2007a) looked at the impact of the minimum wage across six low-paying industries (retail; hotels; fast food, pubs and restaurants; leisure; social care; and childcare). It found that the National Minimum Wage continues to have a substantial impact on the lowest rates of pay across all six industries. The minimum wage was the lowest rate of pay in one third of the social care organisations and in three quarters of the hotels surveyed. The research also found that in some sectors the minimum wage rate affected core staff (in particular in fast food establishments, pubs and restaurants and the leisure sector). In other sectors, such as social care, the impact of the minimum wage was felt mainly by support staff, such as cleaners and porters, who were below the main customer service grade. In the retail sector, trainee and starter rates were particularly affected.

2.51 We turn next to examine the impact of the National Minimum Wage on earnings in specific low-paying sectors. We focus on those industrial low-paying sectors which account for the largest numbers of minimum wage jobs (retail, hospitality, social care and cleaning), together with the childcare occupational sector.

2.52 Figure 2.7 (and Table 2.6) shows that there was a significant increase in the proportion of retail jobs paid at the National Minimum Wage between April 2006 and April 2007, up from just over 4 per cent to nearly 7 per cent. Although small retail firms continued to be most affected, the impact on large retail firms increased substantially between 2006 and 2007 and, for the first time since the introduction of the minimum wage, the highest peak in the earnings distribution for large firms was at the adult rate.

Hourly Earnings Distribution for Employees Aged 18 and Over in the Retail Sector, UK, 2006–2007

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2007.

2.53 There is some evidence that pay differentials in the sector have been squeezed, with a 13 per cent reduction in the gap between the minimum wage and the first quartile in the earnings distribution. IDS (2007a) found that the gap between the established rates of pay (normally payable after six to twelve months of starting) and the adult minimum wage had narrowed between 2003 and 2006. It noted that the largest gap between the National Minimum Wage and minimum starter rates had been maintained by relatively small retailers, although many large multiple retailers had also maintained a differential. IDS also found that many retailers had recently taken action to address the erosion of differentials between their sales assistants’ rates and those of supervisors and managers.

2.54 Table 2.6 also shows that the proportion of jobs paid at the minimum wage in hospitality increased from 15.2 per cent to 16.3 per cent between April 2006 and April 2007. This is also illustrated in Figure 2.8. The increase in the minimum wage was felt across firms of all sizes but was most evident in small firms (those employing fewer than 50 employees), where over 18 per cent of jobs paid at the minimum wage in April 2007 (up from just under 16 per cent in April 2006).

2.55 The earnings data provide some evidence of a compression of differentials. Between April 2006 and April 2007 the differential between the adult minimum wage and the fourth decile reduced from 30 pence to 25 pence an hour. IDS (2007a) found that in fast food, pubs and restaurants a key impact of the October 2006 uprating was a narrowing of pay bands, squeezing pay differentials between team members and supervisors.

Hourly Earnings Distribution for Employees Aged 18 and Over in the Hospitality Sector, UK, 2006–2007

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2007.

2.56 The social care sector, as a whole, is less affected by the minimum wage than either retail or hospitality but is the fourth largest affected sector in terms of the number of minimum wage jobs. Although minimum wage jobs account for a small proportion of all jobs in social care, Table 2.6 and Figure 2.9 show that there has been a slight increase in the proportion paid at the adult minimum wage between 2006 and 2007, from 3.6 to 4.2 per cent. The impact of the minimum wage in social care is far greater in the private sector, where in April 2007, 7 per cent of jobs were paid at this level, compared to 2 per cent of jobs in the voluntary sector, and fewer than 1 per cent in the public sector.

Hourly Earnings Distribution for Employees Aged 18 and Over in the Social Care Sector, UK, 2006–2007

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2007.

2.57 There was some limited evidence of an erosion of differentials. The differential in the hourly rate between the fifth percentile (equating to the prevailing adult rate of the National Minimum Wage) and first quartile, reduced from 81 pence to 76 pence between April 2006 and April 2007. However, there was virtually no change in the differential between the minimum wage and median earnings. This suggests that employers in this sector may also have taken action to maintain pay differentials for more senior staff. IDS research indicated that one third of organisations in social care had to raise pay rates to comply with the October 2006 minimum wage upratings – the same proportion as last year – with a median increase of 25 pence per hour. However, the number of staff affected in any organisation was generally fewer than one in ten, although in some cases it was much higher.

2.58 IDS also found that the minimum wage was becoming the lowest pay rate in a growing number of social care organisations: one-third in 2007, compared to one-quarter in 2006. Nearly half of the social care organisations that took part in the survey said that they were experiencing recruitment problems, and a third reported difficulties with retention, particularly for non-supervisory level care staff. The reasons given for this included low pay and lack of sufficient skills.

2.59 Earnings figures for childcare, in Table 2.6 and Figure 2.10, show a small fall between April 2006 and April 2007 in the proportion of jobs paid at the minimum wage, to just under 4 per cent. If we look specifically at nursery nurses we find that the proportion of jobs paid at the minimum wage fell from 4.8 per cent in April 2006 to 3.2 per cent in April 2007.

Hourly Earnings Distribution for Employees Aged 18 and Over in the Childcare Sector, UK, 2006–2007

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2007.

2.60 As with social care, the minimum wage has greatest impact on childcare jobs in the independent sector. In April 2007, 7.6 per cent of childcare jobs in the voluntary sector paid at the minimum wage, as did 7.1 per cent of jobs in the private sector. While for public sector childcare organisations, only 1.7 per cent of jobs were paid at the minimum wage. This may be part of the explanation of the appearance of two spikes in the earnings data higher than the spike at the minimum wage, at £5.50 and £5.90. These spikes may also reflect pressures to increase pay for more experienced and qualified staff.

2.61 Evidence of the continued impact of the minimum wage on the independent sector (private and voluntary) comes from our commissioned research (IDS, 2007a) which found that just under two-thirds of respondents reported increasing pay rates in order to comply with the 2006 upratings, about the same as in its 2006 survey. IDS also found that slightly fewer respondents had recruitment and retention problems than in 2006. However, where problems arose, they tended to relate to experienced and qualified staff, sometimes leaving for higher pay in local authority funded nurseries (such as Sure Start Children’s Centres).

2.62 Just under two-thirds of the IDS survey respondents said that they had to raise the rates of higher paid staff to maintain differentials. The research cited evidence of a longer-term erosion of differentials, with the differential between the median starting rate for nursery nurses and the prevailing adult minimum wage having fallen from 8 per cent to 3 per cent between 2002 and 2007, while for senior nursery nurses it fell from 22 to 11 per cent over the same period. One effect reported to IDS was that a reduction in differentials had led to less interest in training.

2.63 Age-related pay is common in the childcare sector. ASHE data show that in private sector nurseries 19 per cent of nursery nurse jobs are paid below the adult rate of the National Minimum Wage, reflecting the number of employees under the age of 22.

2.64 With around 95,000 minimum wage jobs, the cleaning sector is one of the most affected industries. In April 2007, nearly 19 per cent of jobs in the cleaning sector were paid at the adult minimum wage. Figure 2.11 and Table 2.6 also show that it was 17.6 per cent in April 2006. The earnings data for the cleaning sector also suggest an impact on pay differentials, with the hourly pay differential between those on the minimum wage and those paid at the median falling by nearly 14 per cent between 2006 and 2007. However, the earnings distribution demonstrates that the differential between the second most common rate of pay and the minimum wage rose by over 40 per cent between April 2006 and April 2007 (from £5.50 to £6.00 an hour respectively).

Hourly Earnings Distribution for Employees Aged 18 and Over in the Cleaning Sector, UK, 2006–2007

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2007.

2.65 Similar impacts of the minimum wage on earnings distributions are also observed for small firms and the groups of workers identified earlier in this chapter, with a discernable ‘spike’ at the level of the minimum wage. We next consider the views of those affected.

Stakeholders’ Views and Evidence on the Impact of the National Minimum Wage on Earnings and Differentials

2.66 On our regional visits, in the responses to our written consultation and again during oral evidence sessions, the subject of the impact of minimum wage upratings on pay differentials was a recurring theme. The CBI reported their members’ concerns that substantial increases in the minimum wage had eroded pay differentials and damaged firms’ ability to reward and motivate their employees. In some instances, they said, pay rises at the lowest end had become decoupled from performance, and there was little incentive for the lower paid to take on more responsibility or undertake training.

2.67 The Cleaning and Support Services Association (CSSA) reported a contraction of pay differentials as a result of minimum wage increases, with its own survey showing a rise of 3 per cent to almost 44 per cent of cleaning staff paid at the National Minimum Wage. The British Shops and Stores Association (BSSA) reported that its 2007 wages survey had found that an inability to maintain differentials had often led to a loss of more experienced staff to higher paid sectors. Similarly, in oral evidence the British Hospitality Association (BHA), Business in Sport and Leisure (BISL) and the British Beer and Pub Association (BBPA), told us that the minimum wage had eroded pay differentials and reduced necessary incentives for supervisors, who were increasingly required to fulfil statutory responsibilities (for example, enforcing the ban on smoking).

2.68 Some respondents gave evidence that the minimum wage had caught up with agreed industry pay rates. For example, the British Furniture Manufacturers reported that increases in the minimum wage had outstripped the industry wage increases negotiated with the GMB, so that in recent years the minimum wage has overtaken two of the three rates in the industry agreement. The Food and Drink Federation reported that, while the minimum wage initially had a minor impact, it was now affecting pay levels and the structure of remuneration for its members. Members reported pressure to maintain differentials for basic pay rates above the minimum wage.

2.69 The Association of Licensed Multiple Retailers (ALMR) reported that their own surveys of members had shown that the minimum wage had become the average hourly wage for bar staff within the sector. In addition, fewer members were paying a different rate to other hourly paid staff from that paid to bar staff. ALMR saw this as evidence of an erosion of pay differentials at the lower pay levels. The British Apparel and Textile Confederation (BATC) said that, given the economic background of great pressures on suppliers’ margins, employers in the textiles and clothing sector had negotiated below inflation pay increases, and that differentials would again be hit by any disproportionate rise in the minimum wage.

{86 per cent of staff in our hospitality business are paid at the NMW. When the NMW was introduced the company aimed to maintain a differential with the minimum wage, but were only able to do so for the first two years... There is no scope to pay more to reward the most experienced or productive staff.|

Hospitality sector employer. Commission visit to Cardiff

{Although the minimum wage had led to some compression of differentials these were being managed by retailers, for example, by merging bottom grades.|

Usdaw evidence

2.70 The British Retail Consortium (BRC) also maintained that the minimum wage was squeezing differentials in the retail trade. The BRC reported that in June 2006 the average wage for multiple retailers was 16 per cent above the minimum wage rate of £5.05 and almost 10 per cent above the future rate of £5.35. In June 2007, the average wage had fallen to 13.6 per cent above the minimum wage rate of £5.35 and 9.2 per cent above the future rate of £5.52. On the other hand, the Union of Shop Distributive and Allied Workers (Usdaw) reported that many retail employers had taken alternative approaches to the October 2007 upratings. Some had adopted the National Minimum Wage as their main sales assistant rate, while others had taken the decision to position their sales assistant rate at a specific distance above the minimum wage. Usdaw said that in its experience, as the minimum wage began to affect a company’s wage structures, various measures were taken to accommodate this as best suited the company, and that this did not limit the ability to offer and improve non-wage related elements, such as staff discounts. Accordingly, Usdaw maintained, the Commission should not be unduly concerned that raising the minimum wage rate would present insurmountable obstacles for employers’ pay structures.

2.71 In agriculture, the National Farmers’ Union (NFU) pointed out the National Minimum Wage had a direct impact by dictating the lowest wage rate set by the Agricultural Wages Boards and it also affected indirectly rates payable to other grades where the Boards wanted to maintain the pay differentials for the minimum rates of the higher grades.

2.72 As in previous years, we commissioned work to assess the impact of the October 2006 upratings and employers’ ongoing responses to the minimum wage. IDS (2007a) found that in some sectors the 2006 NMW uprating had an impact on relative pay levels, either through narrowed differentials, or by precipitating changes to pay structures in response to the narrowed differentials. This was particularly the case in retail and fast food companies where the supervisor/sales assistant distinction is important, but not substantial in pay terms.

2.73 Research by Holt, Kehil and White (2008) found some changes in the pay composition of the low-paid since the introduction of the minimum wage. Between 1997 and 2006, the incidence of additional payments among low-paid employees increased at the same time as it declined for better paid employees. However, low-paid employees were still less likely to be receiving shift premia, incentive payments or additional pay components such as car allowances or on call/stand-by allowances. By contrast, low-paid employees were as likely to be paid overtime as better paid employees. The sectors with the highest increases in the incidence of overtime among the low paid since 1997 were food processing, leisure, social care and agriculture.

2.74 The National Minimum Wage is part of a wider Government strategy to make work pay and to improve the financial incentives for people to participate in the labour market. It is designed to interact with tax credits and benefits and these supplement the household income of many minimum wage earners. It is difficult to generalise about how the minimum wage affects household income, as the impact will depend on the household circumstances of the minimum wage worker. When the minimum wage was raised to £5.35 in October 2006, gross earned income for a 35-hour week would have been £187.25. HM Treasury estimates that this would result in a net income of £179 with the disregard15 (up to April 2007) and £175 without the disregard (after April 2007) for a single individual over the age of 25 with no children, equivalent to £5.12 an hour initially and £5.01 an hour after April 2007. The tax and benefit system is more generous to those with children. If that same minimum wage earner was part of a couple with one child, HM Treasury estimate that net income would have been £273 with the disregard (up to April 2007) and £269 without (after April 2007), equivalent to £7.79 an hour before April 2007 and £7.68 thereafter.

2.75 Following the increase in the adult minimum wage in October 2007 to £5.52 per hour, a person working 35 hours would have a gross income of £193.20. The Pre-Budget Report (HM Treasury, 2007a) estimated that the net income for a family with one child and one earner would be £290 a week in April 2008. This would be equivalent to £8.29 per hour take home pay once tax credits and benefits are taken into account. For a single earner couple without children or a disability, the net income in April 2008 will be £187 a week (£5.34 an hour for a 35 hour week). In October 2007, the net income was £278 for a family with one child and one earner (£7.96 an hour) and £182 for a single person aged over 25 years old (£5.20 an hour).

Impact of the 2006 and 2007 National Minimum Wage Upratings on the Labour Market

2.76 Having established that the minimum wage has had an impact on earnings, we now look at a range of labour market indicators to discover whether employment, unemployment, hours, vacancies and redundancies have been affected. We first consider trends at aggregate, whole economy level before turning to those sectors and groups of workers more likely to be affected by the minimum wage.

2.77 In recent years there has been a substantial increase in labour supply in the UK. This has been driven by large numbers of migrants, especially those from Eastern Europe; a sizeable increase in workers over pension age returning to or remaining in employment; and an increase in participation from those previously inactive as a result of Government reforms to the benefit system for those on sickness and invalidity benefits. The UK labour market has so far proven robust and has been able to absorb these large increases in supply.

2.78 As Figure 2.12 shows, employment generally has risen steadily since the introduction of the minimum wage. Unemployment, on the other hand, fell at first then rose for a period from mid-2005 to mid-2006 before levelling out. Looking at developments over the past year, by November 2007 the UK labour market appeared to have fully recovered from the weak growth of the first quarter. There were 29.36 million people in employment in the UK in the three months to November 2007, 263,000 more than in the same period of the previous year.

Employment and ILO Unemployment Level for those Aged 16 and Over, UK, 1995–2007

Source: ONS, LFS, employment level (ONS code MGRZ), ILO unemployment level (ONS code MGSC), monthly, seasonally adjusted, UK, 1995–2007.

2.79 The headline (or ILO) unemployment level measures the number of people actively seeking work and available to start. The number of people of working age who were unemployed in the three months to November 2007 was 1.63 million, 23,000 fewer than in the same period a year ago. The claimant count, which measures the number of people claiming Job Seeker’s Allowance, fell for the fourteenth consecutive month in December 2007, declining to 807,700, down 131,400 compared with December 2006 and its lowest level since June 1975. That left the claimant count rate at 2.5 per cent, the lowest unemployment rate in the UK since April 1975.

2.80 Employment grew by 0.9 per cent over the year to November 2007. Table 2.7 shows that this increase has consisted mainly of permanent, full-time jobs in the private sector. The number of full-time employees accounted for nearly 95 per cent of this increase, growing by nearly a quarter of a million over the year to November 2007. In contrast, the number of part-time employees fell by 40,000. Further, the number of people in permanent employment increased by 0.9 per cent at the same time as the numbers in temporary employment fell by 0.7 per cent.

2.81 Prior to the introduction of the minimum wage there was some concern that a National Minimum Wage might lead to a growth in self-employment as a means of bypassing the requirements of the new legislation. The data suggest that this has not happened. Between 1998, shortly before the introduction of the minimum wage, and 2007, the number of self-employed in the low-paying sectors fell by 6 per cent compared with a growth in self-employment in the whole economy of 10 per cent.

2.82 Table 2.7 also shows that, over the last year, employment has increased for most age groups. Employment growth has been strongest for those aged over 50. However, the youngest age group, 16–17 year olds, have continued to fare badly in the labour market with employment falling by 13,000. Although there has been an increase of one per cent in the number of 18–24 year olds employed, the population of this age group has risen faster, resulting in a reduction of 0.7 percentage points in their employment rate. The labour market performance of those with no qualifications has mirrored that of young people with their employment rate falling, over the year to September 2007, by over one percentage point to 46.7. This is lower than when the minimum wage was introduced.

Source: ONS, LFS, Total employment (MGRZ); Total employees (MGRN); Total self-employed (MGRQ); Other employment includes unpaid family workers and Government supported training and employment programmes (MGRT + MGRW); Employment age 16–17 (YBTO); Employment age 18–24 (YBTR); Employment age 25–34 (YBTU); Employment age 35–49 (YBTX); Employment age 50–59/64 (MGUW); Employment age 59/64+ (MGUZ); Full-time employees (YCBK); Part-time employees (YCBN); Permanent employees (MGRN); Temporary employees (YCBZ); Public sector (G7AU); Private sector (G7K5); and Total employment (G7GO) three months to November, all seasonally adjusted, UK, 2005–2007.

Note: 1. Latest data for public or private sector are up to the third quarter of 2007.

2.83 The employment performance of other groups of workers – such as women, those with disabilities, those from ethnic minority groups and older workers – appears much better than younger workers, with employment rates only marginally lower in September 2007 than a year ago. The labour market performance of youths and other groups of workers are explored in more detail in Chapter 3.

2.84 Data on employee jobs form an important part of our analysis of the impact of the minimum wage, and are the main source for monitoring changes in employment for each low-paying industrial sector. At the time of our last report, we noted that there had been a slight decline in the overall number of employee jobs in the low-paying sectors for the first time since the introduction of the minimum wage, largely accounted for by job losses in hospitality. The official data showed year-on-year falls in jobs in the low-paying sectors for each quarter from December 2005 to September 2006. However, as explained earlier in this chapter, recent methodological changes by ONS mean that reliable data on annual changes in employee jobs between March 2006 and June 2007 are no longer available. As a result we are unable to estimate with any confidence what happened to employee jobs in this period. In looking at the employee jobs data for periods after December 2005, the only annual period available to us for which reliable comparisons can be made is that between September 2006 and September 2007.

2.85 Focusing on that period, we can see from Figure 2.13 that the growth in employee jobs in the low-paying sectors in the year to September 2007 was, at 0.85 per cent, marginally higher than the 0.77 per cent jobs growth in the whole economy. This contrasts with the slower growth seen in the low-paying sectors in 2005. This is not the first time that job growth in the low-paying sectors has exceeded that in the economy as a whole. For most of the period between December 2001 and March 2005, the low-paying sectors performed better than the whole economy in terms of employee job growth.

Change in Employee Jobs in Whole Economy and Low-paying Sectors, GB, 1999–2007

Note: * As a result of the break in the employee jobs series between December 2005 and September 2006, annual changes cannot be estimated for these periods (March 2006 to June 2007).

2.86 In September 2007, as shown in Table 2.8, there were over 8.4 million jobs in the ten low-paying industrial sectors, around 32 per cent of all jobs in the economy, and nearly 71,000 more jobs than in September 2006. The number of jobs in the low-paying sectors was 527,000 higher in December 2005 than it was in December 1998, an increase of nearly 7 per cent since the introduction of the National Minimum Wage. This compares with an increase of almost 8 per cent in the number of jobs in the economy as a whole over the same period.

2.87 However, the story as regards jobs varies for each low-paying sector. In some sectors there has been a substantial rise in the number of jobs since the introduction of the minimum wage (retail, hospitality, social care, leisure, hairdressing and security), while others have experienced a substantial decline (textiles and clothing, agriculture and food processing). Of course the reasons for growth or decline are many and various and it is difficult to know for sure what role, if any, the minimum wage has played. In textiles, for example, there was fierce competition from low-wage economies well before the advent of the minimum wage, and it is generally agreed that in agriculture the decline in employment goes back over a century and stems in large part from structural and technical developments. In the case of food processing, mechanisation, overseas competition and the consolidation of operations within the sector have all been important factors in the decline in the number of jobs.

2.88 To understand better the changes that have occurred in employment in the low-paying sectors, we focus on official data for those industrial sectors which account for the largest number of minimum wage jobs (retail, hospitality, social care and cleaning), together with the childcare occupational sector. However, as explained earlier, recent changes by ONS to the employee jobs data limit our ability to analyse changes over time for these sectors. We also set out the views of stakeholders, and the evidence they have submitted, on the impact of the minimum wage on jobs and hours.

2.89 As noted earlier in the chapter, household spending proved robust throughout 2007 with consumers funding their purchases by drawing on savings and increasing borrowing. Consequently, official statistics show that retail sales were also healthy. The value of retail sales grew by 3.6 per cent in 2007, with growth strongest in the first half of the year. This represented a strong recovery from the downturn in 2005 when the value of retail sales growth was just one per cent. Growth in 2006 was 2.8 per cent. However, consumers appeared to be feeling the effects of the financial market turmoil, with growth slowing to 2.3 per cent in the fourth quarter of 2007. Further evidence of a slowdown in the retail sector is provided by the BRC-KPMG Retail Sales Monitor (BRC-KPMG, 2008), which indicated that total sales in December 2007 rose by 2.3 per cent compared to December 2006. The three-month trend rate of growth to December 2007 also increased, up by 2.8 per cent compared to the same period in 2006. However, these growth rates were much lower than those observed earlier in the year.

Employee Jobs in the Retail Sector and Annual Change, Thousands, GB, 1999–2007

1. * As a result of the break in the employee jobs series between December 2005 and September 2006, employment levels and annual changes cannot be estimated for these periods (March 2006 and June 2006).

2. ** The break mentioned in Note 1 also means that annual changes cannot be estimated for these periods (September 2006 to June 2007).

2.90 As a result of the robust growth in retail sales earlier in 2007, employment growth in the retail sector has been strong. Figure 2.14 shows that jobs in the sector rose by over 37,000 (1 per cent) to nearly 3.4 million in the year to September 2007, accounting for around 40 per cent of all jobs in the low-paying sectors (13 per cent of jobs in the economy as a whole). The growth in jobs was relatively evenly spread between full-time and part-time work. According to the LFS microdata16, there was an increase in employment in low-paying retail occupations of around 35,000 to 2.14 million between the third quarter of 2006 and the same period in 2007.

2.91 The hospitality sector, also boosted by the robustness of consumer spending, has experienced strong growth in output (gross value added) since the beginning of 2006, peaking at over 7 per cent in the third quarter of that year before slowing to just over 4 per cent in the third quarter of 2007. Consequently, in the year to September 2007, there was a rise of over 19,000 hospitality jobs to 1.8 million, as shown in Figure 2.15. All bar one of the sub-sectors of hospitality experienced an increase in jobs over this period (restaurants by over 16,000, hotels by over 8,000, canteens and catering by over 4,000, and camp sites by over 1,000). The exception was the pubs and bars sector where jobs fell by over 11,000, perhaps as a result of the smoking ban.

2.92 We have also looked at employment change in the low-paying occupations in the hospitality sector using the LFS microdata. There was a fall of over 52,000 in the year to the third quarter of 2007, to just under 1.01 million. However, this total was still over 38,000 higher than employment in these occupations in the same period in 2005.

Employee Jobs in the Hospitality Sector and Annual Change, Thousands, GB, 1999–2007

2. ** The break mentioned in Note 1 also means that annual changes cannot be estimated for these periods (September 2006 to June 2007).

2.93 The number of jobs in social care has grown strongly since December 2003. In September 2007 there were nearly 1.2 million jobs in social care, an increase of nearly 19,000 on September 2006. Figure 2.16 also shows that this increase in jobs was at a lower rate than in some preceding periods. According to the LFS microdata, employment in low-paying social care occupations was over 646,000 in the third quarter of 2007, a fall of nearly 3,000 on the same period in 2006. This was still some 38,000 higher than the employment level in the third quarter of 2005.

Employee Jobs in the Social Care Sector and Annual Change, Thousands, GB, 1999–2007

2. ** The break mentioned in Note 1 also means that annual changes cannot be estimated for these periods (September 2006 to June 2007).

2.94 According to the Childcare and Early Years Providers Survey (DCSF, 2007), conducted in mid-2006, there were over 822,000 places in full day and sessional17 childcare in England, a rise of 9 per cent on 2003 and 6 per cent on 2005. The substantial overall increase in the 2003 to 2006 period masked some significant variation, with sessional care places falling by 14 per cent, while full day care places increased by 26 per cent. From 2003 to 2006, places in after-school clubs grew by 58 per cent (to over 260,000) and in holiday clubs by 117 per cent (to nearly 264,000). The same survey found there were over 306,000 paid staff working for childcare providers in England, up from over 228,000 in 200318. This rise was across all provision except sessional care. Figure 2.17 shows that employment in low-paying childcare occupations was broadly stable between the third quarter of 2006 and the third quarter of 2007, at over 346,000. There was a rise of over 10,000 in full-time employment, and a fall of a similar magnitude in part-time work. Employment of nursery nurses also remained fairly steady during this period, with only a marginal fall of around 1,000.

Source: LPC estimates based on LFS microdata, seasonal / calendar quarters, not seasonally adjusted, UK, 2002 to 2007.

1. The move from seasonal quarters to calendar quarters has led to a discontinuity in the LFS microdata series between Summer 2004 and 2004 Q4; thus comparisons across these periods should be made with care.

2. * Indicate periods where annual changes cannot be shown due to a lack of comparable calendar quarter data.

2.95 IDS research (IDS, 2007a) focused on independent sector (private and voluntary) nurseries, which are estimated to provide around four-fifths of all childcare places (DCSF, 2007). IDS found that, unlike in other low-paying sectors, the October 2006 upratings of the minimum wage had led to a reduction in staffing levels in about 10 per cent of nurseries. In addition, 14 per cent of these independent nurseries said they had reduced hours worked. One explanation offered for the reduction in staffing numbers and hours worked is that the increase in the minimum wage resulted, in a majority of instances, in increased fees, leading in some cases to fewer children being placed at nurseries, and as consequence fewer staff being required. Fifty eight per cent of those independent sector nurseries said they had increased fees as a result of the October 2006 minimum wage upratings (up from 45 per cent in 2005).

2.96 The employee jobs series shows that there has been an upturn in jobs in the cleaning sector since June 2004 (Figure 2.18), following a long-term decline which began prior to the introduction of the minimum wage. There was a further small increase of over 2,000 jobs between September 2006 and September 2007. Although the majority of jobs continue to be part-time, the shift towards full-time employment in the sector continued. It is likely, however, that the actual number of people employed in a cleaning capacity is greater than suggested as the employment data for the cleaning industrial sector will not include those employed directly by firms categorised within another industry. Moreover, a number of cleaners may be self-employed or working informally in a domestic setting. LFS microdata shows that, with 726,000 jobs in the third quarter of 2007, employment in low-paying cleaning occupations was considerably higher than the numbers in the cleaning industry suggested by the employee jobs series data. This was an increase of more than 6 per cent on a year ago.

Employee Jobs in the Cleaning Sector and Annual Change, Thousands, GB, 1999–2007

2. ** The break mentioned in Note 1 also means that annual changes cannot be estimated for these periods (September 2006 to June 2007).

2.97 Employment in agriculture and textiles has been in long-term decline. Between September 2006 and September 2007 agriculture and textiles again experienced falls in jobs, but at a more moderate rate than in the past. Jobs in food-processing have also continued on a downward trend, with a further fall of 4,000. Two of the sectors that had generally experienced an upward trend in jobs, hairdressing and leisure, saw no growth in the year to September 2007. There was a small fall of 3,000 jobs in hairdressing, whereas in leisure, travel and sport, a sector which has seen a substantial increase in jobs since the introduction of the minimum wage, the number of jobs remained unchanged. Conversely the security sector saw a rise of over 5,000 jobs in the year to September 2007 but the sector contains only 2 per cent of the jobs in the low-paying sectors. LFS microdata suggests that in the third quarter of 2007, there were over 301,000 employees in low-paying office work jobs, a fall of nearly 23,000 on the total for the same period in 2006.

2.98 Jobs are an important indicator of the strength of the labour market but there are other indicators of labour supply and demand which might adjust to changes in the National Minimum Wage. One of these is the number of hours worked. Employers might react to an increase in the minimum wage by maintaining the same number of employees but reducing their hours. Official statistics reveal that the number of hours worked has increased over the past year more or less in line with the increase in the number of jobs. The number of hours worked per week in the UK has risen by 1.3 per cent, from 927.7 million in the three months to November 2006 to 939.5 million in the three months to November 2007. Over the same period the average number of hours worked per employee per week increased from 31.9 to 32.1, reflecting the increase in full-time employment.

2.99 Redundancy and vacancy figures are indicators of the demand for labour in the economy. Analysis reveals a mixed picture. The number of advertised vacancies rose in the three months to December 2007 compared with both the previous three months and the same period of the previous year (by 7,100 and 75,200 respectively). The sectoral breakdown of the data shows that the number of vacancies in the distribution sector (which includes retail and hospitality) increased by 21,300 (a rise of 12.5 per cent) over the year to December 2007. However, in the three months to November 2007, the number of redundancies in the UK rose by 3,000 over the quarter, but remained 12,000 below that seen in the same period of the previous year. The increase in redundancies was confined to the financial and business services sector, perhaps, as a result of the credit crunch.

{... last year, employment in sectors with a high concentration of low pay also saw a slight increase of 37,000 extra jobs. This suggests that these sectors have, as a whole, been robust enough to cope with the most recent NMW increases.|

TUC evidence

Stakeholders’ Views and Evidence on the Impact of the National Minimum Wage on Jobs and Hours

2.100 A number of respondents to our written consultation reported that the minimum wage was having an impact on jobs, either directly or in conjunction with other costs. The BHA, BISL and BBPA pointed out that, although employment in hospitality and leisure had increased since the introduction of the minimum wage, it had stalled in the past two years. A BHA survey of members indicated continuing upward pressure on payroll as a proportion of turnover leading in some cases to a cut in jobs. ALMR said that for the first time its survey showed that a majority of respondents said they had to let staff go as a result of increases in the minimum wage.

{The National Minimum Wage has had an adverse impact on the staffing levels within our retail stores. The stores are operating on less hours than they were several years ago in order to absorb the impact of the hefty increases. This has largely been achieved by way of natural wastage, but nevertheless, the significance of the staffing cover should not be underestimated. Nearly all staff are now employed on a part-time basis (less than 30 hours) with the average being for 16 hours a week.|

The Peacock Group Ltd. Low Pay Commission
Visit to Cardiff.

2.101 In the cleaning sector, CSSA reported that clients were cutting the hours worked and changing the specifications of contracts to absorb the effect of minimum wage increases. The Association of Convenience Stores (ACS) said that many retailers had been forced to reduce the hours worked by employees, with some trying to offset National Minimum Wage costs by employing staff for less than 16 hours to reduce National Insurance costs. Although some had laid off staff, most had not yet done so, though a number had this under review. These changes have meant that supervisors and managers have faced an increased workload and longer working hours.

2.102 The CBI pointed to an increasing number of firms and sectors now affected by the minimum wage. More CBI members in retail were affected than before and similar trends were discernable in construction, communication and transport. It said that the minimum wage was having a negative impact on employment and investment in affected firms. In a CBI survey, over a quarter of the firms affected by the October 2007 upratings said they would curb growth plans or reduce investment in other areas, while a fifth said they would have to reduce staffing levels. The CBI interpreted this as evidence that the labour market had been increasingly affected as minimum wage coverage has increased.

2.103 On the other hand, trade unions made the point that employment had been rising in the low-paying sectors. Usdaw pointed out that employment in retailing, the largest of the low-paying sectors, had grown and had done so primarily at a time of rapid increases in the minimum wage. It referred to ONS data showing employment increasing by over 20,000 (almost one per cent) over the last year, which it described as a very creditable performance after five increases in interest rates. Usdaw also reminded us that the National Minimum Wage was not mentioned as one of the top 65 reasons for business failures listed by the UK Insolvency Helpline.

2.104 As the minimum wage is likely to have relatively greater impact on small firms than on larger businesses, we next look at how changes to employment levels and employee earnings in small firms compare to those in larger organisations. We also set out stakeholder views on the impact of the minimum wage on small firms.

2.105 Figure 2.19 below shows how the minimum wage19 has a greater impact on small firms (by which we mean firms with between 1 and 49 employees) than on larger businesses. Over 4 per cent of jobs in small firms were paid at the adult rate of the minimum wage in April 2007, whereas in medium-size firms (50–249 employees) just over 3 per cent of jobs were paid at this level, and in large firms (250+ employees) it was just over 2 per cent.

Hourly Earnings Distribution for Small, Medium and Large Firms, Employees Aged 18 and Over, UK, 2007

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2007.

2.106 The proportion of jobs paid at the minimum wage rose marginally for all firm sizes between April 2006 and April 2007; however the largest rise of over 0.5 percentage points was experienced by both medium-sized and large firms.

2.107 According to the latest data20, small firms accounted for 97 per cent of the 1.2 million private sector enterprises in the UK with one or more employees in 2006. They accounted for just over 37 per cent of employment and around 32 per cent of all turnover. These figures showed little change from 2005.

Source: LPC estimates based on LFS microdata, calendar quarters, not seasonally adjusted, UK, Q3 2005–Q3 2007.

2.108 LFS microdata for employees by firm size21 in Figure 2.20 show that in the third quarter of 2007 there were 185,000 more employees in small firms than in the same period in 2006, reaching a total of nearly 11.8 million employees. Over the same period, there was a fall of nearly 11,000 to about 6.3 million employees for medium-size firms (firms with 50 to 249 employees). Large firms (250 workers or more) also experienced a fall in employees, down nearly 104,000 on the third quarter of 2006, to stand at over 6.4 million employees in the third quarter of 2007. A corresponding rise in employees in small firms, and falls in employees in medium-size and large firms, also occurred between the third quarter of 2005 and the same period in 2006.

Stakeholders’ Views and Evidence on the Impact of the National Minimum Wage on Small Firms

2.109 We heard again this year how small businesses are particularly affected by the National Minimum Wage. The Federation of Small Businesses (FSB) said that increases since 2004/05 were starting to have a more significant impact. The FSB’s 2006 Employment Survey of members had found that, for affected businesses, the main impact of the minimum wage had been to reduce profit margins (72 per cent), increase prices (56 per cent) and reduce employment (36 per cent). One third of respondents said that they had to uprate workers’ pay as a result of the October 2006 minimum wage increase. The National Hairdressers’ Federation (NHF) said that the margins of small employers had been squeezed by the minimum wage, and that further cost increases would not be easily absorbed.

{We generally support the NMW, but find it an increasing struggle to meet pay costs. Pay would not have risen so quickly in the absence of a minimum wage.|

Hartley Dyke Farm Shop.
Commission
Visit to Kent.

2.110 The British Chambers of Commerce (BCC) argued that the economic situation looked uncertain for small firms, which already faced an onerous burden from Government regulations. The October 2007 increase in the minimum wage followed a period of large increases in the minimum wage at well above average earnings growth. The BCC said it had previously warned these could have adverse affects on employment prospects in key areas of the UK labour market, with small and medium-sized businesses particularly vulnerable. The problems facing small businesses could be exacerbated by domestic credit becoming costlier and less easily available, together with a slowdown in economic activity. The Forum of Private Business referred to research carried out at the end of 2006 in which 27 per cent of the small businesses surveyed reported that the increases in the minimum wage had reduced their ability to employ more people over the previous 12 months.

2.111 The Rural Shops Alliance said that the minimum wage had a significant impact on micro retail businesses, with a high proportion of staff paid at this rate and the pay of others directly linked through maintenance of differentials. However, the trade union Unite pointed out that the supermarkets dominated the food retail sector with 88 per cent of grocery sales, and argued that it was this market consolidation that had adversely affected small retailers, not the National Minimum Wage. The TUC noted that according to the latest data, the rate of start-ups and the increase in the total number of businesses had been greater for the low-paying sectors than for the whole economy.

Impact of the National Minimum Wage on Prices, Profits, Productivity, Investment and Business Start-ups and Failures

2.112 In this section we consider the impact of the minimum wage on prices, profits, productivity and investment, in many ways the determinants of the longer-term sustainability of businesses. If profitability is the ultimate determinant of sustainability, prices, productivity and investment are mechanisms through which to achieve this. Here we scrutinise the data to determine how these variables have been affected by the minimum wage. Upratings of the minimum wage may result in a rise in prices, a fall in profits, an increase in productivity, a reduction in investment, a reduction in business start-ups or an upsurge in business failures. We investigate each in turn.

2.113 Firms who employ minimum wage workers could have passed on higher labour costs in the form of higher prices. We discussed some measures of inflation earlier in the chapter in our review of the economy. Here, we first look at measures of inflation for the whole economy before investigating price rises in low-paying sectors.

2.114 Figure 2.21 shows that while price inflation rose through 2006, it has been relatively contained in 2007. On all three consumer price measures – CPI, RPI and RPIX – inflation fell back after peaking in the first quarter of 2007. However, there are signs that, led by increases in the prices of energy, fuel and food, it has picked up again in the last quarter of 2007. This pick-up in prices can also be seen in the factory output price series which shows sharp increases towards the end of 2007. Business services prices have yet to show similar signs.

Source: ONS, CPI (ONS code D7G7), RPI (ONS code CZBH), RPIX (ONS code CDKQ), SPPI (ONS code DZZ8) and Output prices (based on ONS code PLLU), quarterly, not seasonally adjusted, UK, 1998–2007.

2.115 Looking in more detail at the low-paying sectors, we can see from Figure 2.22 that the ONS experimental business-to-business price series, SPPI, suggests that firms in many low-paying sectors have not been able to raise prices by as much as the RPI. In sectors such as commercial cleaning, industrial cleaning and hotels, price inflation has been below RPI though the price of security services has increased much faster. There is some evidence of an energy effect on prices in some low-paying sectors.

Source: ONS, SPPI experimental sector series (ONS code DZZ8), Security services (ONS code PWJQ), Industrial cleaning (ONS code PWKD) and Commercial washing and dry cleaning (ONS code E23D), quarterly, not seasonally adjusted, UK, 1996–2007.

2.116 An initial study by Wadsworth (2007) suggested that the introduction and subsequent uprating of the minimum wage may have led certain industries and services to raise prices. Those industries in which the workforce contained a high proportion of minimum wage workers may have raised prices more rapidly than other industries. However, the findings from this research were tentative, due to data limitations, data availability and time constraints which precluded a more in-depth analysis of these issues.

2.117 In a subsequent study, Wadsworth (2008) concludes that, while it is hard to detect much evidence of a significant change in prices in the month in which the minimum wage changed, prices in several minimum wage industries appear to have risen relatively faster than prices in non-minimum wage sectors in the period after the minimum wage was introduced. These inflation effects were particularly significant in the four years immediately after the introduction of the minimum wage.

2.118 Firms might try and absorb the costs of minimum wage increases by accepting a squeeze on their profit margins. If these firms are earning excessive profits this need not have an adverse economic effect, but where firms are earning normal profits, this position cannot be sustained in the long-run. For the economy as a whole, there is little evidence of any impact on profits, measured in a number of ways, in the last year. Corporate financial balances are currently looking healthy. Gross and net rates of return on capital, even after excluding the oil sector, are at record levels and have been driven by services. The overall profitability of UK private non-financial corporations in the third quarter of 2007 was 16 per cent, which was higher than the 14.3 per cent observed in the third quarter of 2006. Excluding the oil and gas extraction corporations, the annual net rate of return for private non-financial corporations was 15.4 per cent, an increase of 2 percentage points on the equivalent period in 2006.

2.119 An alternative way of measuring the profitability of companies is to look at the corporate gross operating surplus. Excluding the volatile oil sector, Figure 2.23 shows the non-oil private sector profits on this measure as a percentage of GDP. It shows that the profit share has picked up since the beginning of 2006 after falling in the second half of 2005. In the third quarter of 2007, it was back to its average level (since 1980). In contrast, the wage share of GDP has been falling over the same period.

2.120 Long-run share prices can also shed some light on the expected future profit performance of companies. The FTSE All-Share Index at the end of December 2007 was up by 80 points over the year, although it closed the year 200 points below its May 2007 peak. The FTSE All-Share Index fell sharply in early January 2008 following disappointing economic news from the US.

2.121 For data on low-paying industries, we rely on the most recent information from the ABI. The latest data, for 2006, suggest that profits increased in retail, hospitality, social care and hairdressing. However, these data also indicate that profits may have fallen in agriculture, textiles, leisure, security and cleaning.

Non-oil Private Sector Profit Share and Whole Economy Wage Share, UK, 1989–2007

Source: Bank of England estimates of the non-oil profit share defined as non-oil private sector profits divided by non-oil private sector final output, and ONS Compensation of employees as percentage of Gross Domestic Product (ONS code IHXP), current prices, quarterly, seasonally adjusted, UK, 1989–2007.

2.122 Firms can also adjust to the impact of the minimum wage by increasing labour productivity. There are many ways this might occur, including firms monitoring employees more closely; motivating them to put in extra effort as a result of higher pay; substituting capital for labour; or trying to improve the quality of their capital (new technology) and workforce (training). We go on to look at investment in the following section.

Growth in Productivity for the Whole Economy, Total Services and Distribution (including Retail and Hospitality), UK, 1998–2007

Source: ONS, output per job for the whole economy (ONS code LNNP) and experimental series for total services (ONS code GGSJ) and distribution, hotels and catering (ONS code GGSM), quarterly, seasonally adjusted, UK, 1998–2007.

2.123 Official data from ONS show that productivity has been increasing in the economy as a whole since the third quarter of 2005. Figure 2.24 shows that productivity in the service sector increased at a slightly faster pace than for the economy as a whole. Although this series is not available for the low-paying sectors, it is available for the distribution sector, of which retail and hospitality are large components. We can see that productivity in the distribution sector has risen even faster than in the service sector throughout 2006 and 2007.

2.124 This picture of increasing productivity in the retail and hospitality sector is also supported by evidence from the ABI22. Using gross value added data, and adjusting for employment and hours, the figures suggest that productivity growth was sluggish in 2005 but rose sharply in 2006 in both retail and hospitality, whether measured in terms of per worker employed or per hour. In contrast, productivity growth in the leisure sector in 2006 was sluggish on both measures.

2.125 Minimum wages might also have an impact on business investment as any squeeze on profits is likely to impair the ability of businesses to invest. We investigate this issue by comparing business investment in the economy as a whole with that in an important low-paying sector, hospitality, for which relevant data are available. We can see from Figure 2.25 that, since the second quarter of 2006, business investment in the whole economy has been stronger than it has been for some time. Over the last year, business investment in the hospitality sector has shown even stronger growth than in the economy as a whole.

Annual Change in Business Investment for Whole Economy and Hospitality Sector, UK, 1997–2007

Source: ONS Business investment for Whole economy (based on ONS code NPEL) and Hotels and restaurants (based on ONS code YGRP), chained volume measures, quarterly, seasonally adjusted, UK, 1997–2007.

2.126 The National Minimum Wage might also have an effect on the number of business start-ups and failures. An increase in the minimum wage that adds to payroll costs might deter entrepreneurs from starting a business. If the increase was sufficiently large, the profits of existing firms might be squeezed leading to a rise in the number of business failures. In this section, we consider the number of business start-ups and failures in the whole economy and make comparisons between the whole economy and the low-paying sectors, focusing in particular on retail and hospitality. We then look more specifically at company insolvencies.

2.127 Looking at the net change in business start-ups and closures using data on the number of businesses registering and de-registering for VAT and focusing on the economy as a whole, Figure 2.26 demonstrates that the stock of VAT-registered enterprises has increased in every year since 1995. In the latest year available, 2006, there were some 182,000 registrations and 143,000 de-registrations resulting in a net increase of more than 39,000 in the stock of VAT-registered enterprises.

2.128 Since 2002, the number of business start-ups in the low-paying sectors has outstripped the number of business closures, suggesting that the minimum wage upratings that have taken place since 2003 have not had an adverse impact on entrepreneurial activity. In 2006, about 55,000 new firms registered in the low-paying sectors with around 47,000 de-registering, a net change of nearly 8,000. The largest net increases in the stock of VAT-registered businesses in the low-paying sectors were in retail (around 4,700) and hospitality (about 5,300). The largest net fall was in the agriculture sector (2,000).

Source: BERR Enterprise Directorate Analytical Unit, business start-ups and closures: VAT registrations and de-registrations, annual, UK, 1994–2006

2.129 The number of insolvencies in the economy represents another indicator of business closures. The number of insolvencies hit record levels during the course of 2007, peaking in the first quarter. However, the recent increases in the number of insolvencies have been driven almost entirely by increases in individual insolvencies as a result of increases in both bankruptcy orders and Individual Voluntary Agreements. Company liquidations, on the other hand, have remained relatively stable. In the year to the third quarter of 2007, they decreased by 2.8 per cent from 3,172 to 3,082 in England and Wales. They also fell in Scotland but rose in Northern Ireland.

Stakeholders’ Views and Evidence on Affordability and Funding of Minimum Wage Increases

2.130 A number of employer organisations told us of the many rising costs they face, including the minimum wage, and of the difficulty they were having in finding the financial resource to fund increases. On the other hand, a number of trade unions provided contrary evidence suggesting businesses were well able to fund increases in the minimum wage.

2.131 For example, in retail, the BRC told us that their 2007 survey results suggested that the rise in the minimum wage to £5.35 had cost the retail industry over £1.7 billion, 13 per cent more than predicted in 2006. The BRC maintained that the 6 per cent increase to £5.35 had caused many retailers severe difficulties and they would have to continue to absorb the impact of past heavy increases for some time to come. The Independent Retailers Confederation (IRC) also reported that independent retailers were finding it increasingly difficult to accommodate minimum wage increases.

2.132 A number of respondents said that the minimum wage had affected margins. The Association of Convenience Stores (ACS) told us that convenience stores operated on tight margins and, due to the National Minimum Wage, labour costs had increased well ahead of possible increases in turnover. For many retailers, they claimed, continued increases in the minimum wage had been a key reason for reduced profits and decreased competitiveness. The BRC reported that, although productivity in retail had increased, the additional revenue being generated by employees had been heavily outweighed by increased cost pressures, including wage inflation.

2.133 There were cost pressures in other low-paying industries. In the baking industry the Scottish Association of Master Bakers said that bakeries were experiencing an unprecedented increase in raw material costs, due to global economic factors and further increases were expected as the balance of supply and demand for basic agricultural produce adjusts. The National Day Nurseries Association reported that the sector had sustainability problems: many businesses were operating on low margins, with just half breaking even and a fifth making a loss. It said that recent experience showed that minimum wage increases usually resulted in a rise in fees to parents.

2.134 Against this, trade unions maintained that most businesses could easily afford increases in the minimum wage. They pointed to the strength of business profitability. The TUC noted that the current rate of profitability in UK private non-financial corporations was 15.5 per cent. Profitability in non-financial service sector corporations was higher at 21.1 per cent – the highest since records began nearly 20 years ago. The Government’s evidence stated that corporate profitability continued to be strong. Unite said that retailers were doing well, with 22 UK retailers ranked within the top 250 companies of the world in Deloitte’s Global Powers of Retailing, and argued that they were undoubtedly able to afford further increases in the minimum wage. Unite also referred to the American Express 2007 Hospitality Monitor survey, which it said showed that the UK hospitality sector was positive about future profits. Unite reported that when the sector was asked in this survey about the most significant challenge in the future it cited direct competition (50 per cent), followed by the cost of goods (18 per cent) and customer preferences (12 per cent) – not minimum wage increases.

2.135 Other stakeholders told us that some difficulties arise from an inability to increase pay sufficiently. Using the example of social care, Unison argued that low pay generated costs, by inducing high staff turnover. The United Kingdom Home Care Association (UKHCA) pointed to a turnover rate of 25 per cent in the domiciliary care sector. With the cost of training a new care worker at around £980, and averaging costs and turnover across the whole of social care, UKHCA estimated an annual loss to the sector of £78 million arising from the failure to retain trained workers, part of which could be ascribed to the sector’s inability to afford higher wages.

2.136 The National Care Association (NCA) and the English Community Care Association (ECCA) told us that fee increases paid by local authorities to providers of social care were not matching increases in the minimum wage and other costs. UKHCA reported that initial findings from its survey of local authorities in August 2007 found the average contract price increase by local authorities was 1.77 per cent, with no price increase in 38 per cent of council contracts.

2.137 In our last report we again recommended that the commissioning policies of local authorities should reflect the cost of providing care. We also emphasised the need for Government to monitor how far practice matched policy, examining reasons for any uneven provision and, if appropriate, to give further guidance. The Government has once more advised us of the substantial increase it has provided in funds for social care in recent years, together with guidance to local authorities when they commission services. The latest commissioning guidance was issued for consultation in March 2007, with the Government’s response published in early 2008.

2.138 Although the Government does not set fee levels from the centre, it does expect councils to use fair commissioning practice and continues to stress the need for councils to reflect the legitimate costs of providers when agreeing fee levels for care home placements. It is disappointing that the Government has not produced any evidence to demonstrate that it has undertaken the type of monitoring work we proposed, despite having apparently accepted our recommendation. At the same time we see continued evidence of a geographical variation in the level of fee increases paid by local authorities, with some providers facing very low or zero rises (reported to us by social care providers, sector representatives and in the Laing & Buisson (2007) market survey). We will continue to monitor developments in this area and reiterate the need for fees to reflect the costs of care including the cost of the minimum wage.

2.139 In this chapter we have reviewed the impact of the minimum wage using the best available information. Our review suggests that the UK economy performed rather better than anticipated when we recommended the October 2007 upratings last year. The 3.2 per cent wage increase introduced in October 2007 is now estimated to have covered around 0.8–1.0 million jobs held by adults (about 4.5 per cent). It is too early to assess fully the impact of this latest increase on the economy but we have been able to look at the impact of the 2006 increase.

2.140 Our review of the impact of the large 2006 upratings noted that the ‘bite’, on various measures, was at its highest in October 2006. Research found evidence that pay structures had been changed as a result of the minimum wage and that differentials had been squeezed but we still found little impact on employment. Indeed, employment in the UK was at record levels with unemployment falling. Moreover, the number of employee jobs in the low-paying sectors grew marginally faster than in the economy as a whole. There was some research evidence that firms may have passed on the costs of the minimum wage to their customers in the form of higher prices. Profits, however, appeared to increase across the economy and productivity had increased faster in retail and hospitality than in the whole economy. The evidence also suggested that the minimum wage had not affected business creation or failure.

2.141 In the next chapter we examine the effect of the minimum wage on groups of workers.

1 See Appendix 5 of our 2007 Report.

2 Minimum wage jobs are defined throughout this section as those paid below the downrated value of the forthcoming minimum wage (£5.52 in October 2007). That is, adult jobs paying below £5.40, jobs for 18–21 year olds paying less than £4.50 and jobs for 16–17 year olds paying less than £3.32.

3 The latest data at industry level are September 2007 for jobs and April 2007 for earnings.

4 Average over the year (the fourth quarter 2006 through to the third quarter of 2007) calculated using Labour Force Survey microdata.

5 See LPC 2007 Report, paragraphs 7.38–7.43.

6 The latest data at the time the recommendations were agreed.

7 The AEI captures the totality of changes in all elements of pay such as bonuses, pay progression, overtime, interim adjustments and pay restructuring outside the annual pay review, as well as changes in workforce composition. Pay settlements, on the other hand, only capture consolidated increases in basic pay and performance-related pay rises.

8 The AEI and AWE are both based on data from the Monthly Wages and Salary Survey (MWSS), but they differ in terms of weighting, estimation, imputation, the handling of outliers and the treatment of smaller firms. See Appendix 3 for further detail.

9 Further details of the sample cuts and methodological changes are given in Appendix 3.

10 Using a 5 pence pay band (those paid at least £5.35 an hour but less than £5.40 an hour).

11 Those paid at least £5.40 an hour but less than £5.52 an hour.

12 Jobs paid at the minimum wage are defined in this section as those paying within the same ten pence pay band as the National Minimum Wage (the National Minimum Wage being the lower bound). It differs from the five pence bands used elsewhere in this chapter.

13 In contrast to previous reports, following advice from ONS, we use ASHE standard weights instead of the low-pay weights. This has the effect of reducing our estimates of the bite.

14 For the low-paying sectors we look at ASHE data for jobs held by those aged 18 and over rather than for those aged 22 and over. A large proportion of the workforce in many low-paying sectors, particularly retail and hospitality, are aged between 18 and 21 years old.

15 The rules for claiming Tax Credit allow a household’s income to increase by up to £25,000 in the financial year without penalty. The increased earnings are taken into account only in the next financial year.

16 LFS microdata are weighted to the UK population in March 2003. Employment data derived from this source is likely to underestimate the actual totals as the population has grown since then.

17 ‘Full day care’ is defined as facilities that provide day care for children under eight for a continuous period of four hours or more in any day in premises which are not domestic premises. ‘Sessional care’ is defined as facilities where children under eight attend day care for no more than five sessions a week, each session being less than a continuous period of four hours in any day. Where two sessions are offered in any one day, there is a break between sessions with no children in the care of the provider.

18 Totals for each year derived by adding together number of paid staff for each type of childcare provider. Caution should be exercised with these totals as some double counting may have taken place because members of staff may have worked for more than one childcare provider.

19 The minimum wage is defined here as the actual minimum wage in the April of that year.

20 BERR Enterprise Directorate, Analytical Unit, August 2007.

21 There are differences between the estimates of the share of employment by firm size from LFS and BERR data in paragraph 2.107 and paragraph 2.108 / Figure 2.20. BERR data estimate ‘employment’ by firm size and are mainly derived from the Annual Business Inquiry (ABI), a survey of businesses. LFS microdata estimate ‘employees’ by firm size and are derived from a household survey of individuals, operating on a self-reporting basis. While the LFS data is more timely, estimates by firm size from the BERR data are likely to be more accurate.

22 The ABI is conducted annually. The latest available is September 2006.