WELCOME TO THE LOW PAY COMMISSION

5.1 When we met in mid-January 2008 to agree our recommendations for this report we had a range of data before us covering the economy up to the fourth quarter of 2007. We also had our analyses of the impact of previous upratings and the evidence from stakeholders, both of which played a major part in our thinking. We took account too of changes to the legislative framework, particularly the proposed increase in annual leave entitlement in April 2009. Finally, we considered a range of forecasts for the UK economy in 2008 and beyond. These assumed particular importance this year as, by early 2008, the economic outlook for 2008 and beyond was becoming more uncertain.

5.2 In this chapter we give an overview of these factors before setting out our recommendations for the rates of the National Minimum Wage for October 2008 and offering a broad indication of the likely level of upratings in October 2009.

5.3 In Chapter 2 we analysed the impact of the minimum wage on the UK economy. We concluded that, although the large uprating in October 2006 had increased the �bite� of the minimum wage and had some impact on pay structures and earnings distributions, there was no evidence of any significant adverse effect on the economy as a whole or on the low-paying sectors. While research had found some evidence that the minimum wage had contributed to price increases in some sectors, these increases had no discernible impact on the general inflation level. We noted that there had been, as yet, no thorough review of the large minimum wage upratings between 2003 and 2006 and, accordingly, we commissioned a comprehensive research programme to carry out such a review. We expect that research to be completed in time to inform our next report.

5.4 As well as looking backwards at impact, it is also important to look forward to take account of likely future developments in the economy and Government regulation. We consider the latter in our discussions of increased holiday entitlement later in this chapter but we focus next on the prospects for the economy in 2008 and 2009, the period during which � if the Government agrees � our recommendations will take effect.

5.5 As we looked forward in January 2008, the economic outlook was uncertain. The upheaval caused by the financial crisis and credit concerns in the US was causing problems in financial markets across the world. The US economy had weakened with growth declining from 3.3 per cent in 2006 to about 2.2 per cent in 2007. It was expected to weaken further in 2008, although growth was forecast to recover slightly in 2009. In response to turmoil on the stock markets and disappointing data on the economy, at the start of 2008 the US Federal Reserve took the unusual step of reducing interest rates by 1.25 percentage points in just 9 days in order to stimulate the US economy.

5.6 In early 2008, other financial and stock markets were also volatile, particularly in Asia and Europe. Eurozone growth had been strong in 2006 and remained robust throughout 2007 at around 2.6 per cent. However, as the world economy and the US economy in particular weakened, growth in the Eurozone was forecast to fall to 1.9 per cent in 2008 and 2 per cent in 2009. Continued world growth was therefore considered likely to depend in large part on Asia, the Middle East and Eastern Europe. The new economic power-houses, China and India, were continuing to grow at a rapid pace and growth was expected to continue but at a slower pace than before.

5.7 In January 2008 the implications for the UK were still unclear. Although UK output had grown at or above trend over the last two years, the economy was feeling the impact of the global credit crunch. Consumer spending showed signs of slowing and, with a few notable exceptions, retail sales over Christmas 2007 had confirmed the slowdown. House prices were stagnating and shares on the FTSE fell sharply in January 2008. Producer input and output prices also rose sharply in the final quarter of 2007. Business investment was levelling off and growth in Government spending slowed, leaving the economy dependent on trade to lead growth in 2008. A recent reduction in interest rates and the expectations of further cuts led to a depreciation of sterling. As a result, in January 2008 the pound hit its lowest ever rate against the Euro, although it remained strong against the weakened US dollar. Interest rate cuts were expected to boost UK exports unless parallel concerns about inflation (fuelled by rises in food, oil and energy prices) intervened to prevent further reductions.

5.8 One surprising development over the course of 2007 was the continuing moderation in wage growth which was maintained even though employment rose to record levels, unemployment continued to fall, firms were complaining of skill shortages and there was persistent inflationary pressure.

5.9 As we look ahead to 2008 and 2009 the main areas of concern for the UK economy may be summarised as:

5.10 Despite the concerns noted above, as we surveyed UK economic prospects in January 2008 we noted some grounds for optimism. There had been continuous economic growth since 1993, employment was at record highs and the number of employee jobs in low-paying sectors was growing at a similar pace to the economy as a whole. CPI and business to business services price inflation, as measured by the Services Producer Price Index, was muted and corporate financial balances looked healthy. Consumer spending, while not as buoyant as it had been, seemed to be holding up and wage growth remained subdued. Further interest rate cuts were expected to give the economy a boost, in part as the resultant weaker pound boosted the UK�s export performance.

5.11 We now consider how these factors have affected the latest forecasts for 2008 and 2009. Figure 5.1 shows that, at the time we made our recommendations for October 2007 (in January 2007), the independent forecasts we relied on were predicting growth of 2.5 per cent in both 2007 and 2008. A year later we can report that consumer spending held up better than expected leading to GDP growth outstripping expectations. In contrast, the increased uncertainty and the extent of the problems in international finance markets in the second half of 2007 have led to downward revisions to forecasts of growth in 2008. By January 2008, the consensus forecasts for GDP growth in 2008 had fallen to 1.8 per cent, from the 2.5 per cent forecast by the same panel of experts a year earlier. However, as of late January 2008, the consensus expert view was that growth over 2007 and 2008 combined would be similar to our original expectations.

5.12 Table 5.1 shows the consensus of latest forecasts for 2008 and 2009 for a range of variables that we took into account when making our recommendations. Actual data for 2007 is given for comparison. As discussed above, GDP growth is expected to weaken in 2008 but it is then expected to pick up in 2009. Inflation, as measured by the Consumer Price Index (CPI), is expected to remain marginally above the Bank of England�s target of 2 per cent throughout 2008 and 2009. In contrast, the Retail Price Index (RPI) is forecast to fall back to 2.6 per cent by the end of 2008, from the 4.2 per cent recorded in the last quarter of 2007, although similar expectations were not realised last year.

1. Forecasts for GDP 2007 are taken from the monthly panel (November 2006�January 2008).

2. Forecasts for GDP 2008 are taken from the monthly panel (November 2006, February 2007�
January 2008).

3. Forecasts for GDP growth in 2008 were not available in December 2006 and January 2007. At the time of the last report, we used forecasts for 2008 from November 2006.

5.13 Average earnings growth is forecast to be about 4 per cent in 2008, similar to the growth recorded in the three months to November 2007. However, with RPI inflation still above 4 per cent, Industrial Relations Services is expecting the median pay settlement to increase in early 2008. Income Data Services (IDS) reported a rise in the median in January 2008 and noted that a third of settlements were at least 4 per cent. Despite the upward pressure on prices, pay settlements are expected to remain below 3.5 per cent, at least half a per cent below the growth in average earnings, as measured by the Average Earnings Index (AEI) including bonuses.

Actual Outturn and Independent Forecasts of GDP Growth, Inflation and Average Earnings, UK, 2007�2009

Source: ONS (actual data for 2007) and HM Treasury (January 2008 (forecast for 2008) and November 2007 (forecast for 2009)): GDP growth (ABMI); Total employment (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), 2007�2009.

Note:
1. Average earnings figures are for Great Britain.
2. RPIX is the Retail Price Index excluding mortgage interest payments

5.14 The consensus forecast is that employment will continue to grow, although at a slower rate of 0.5 per cent (or fewer than 160,000 jobs) in 2008. This would be a sizeable reduction in the growth rate compared with 2007 when employment growth in the year to September was 0.9 per cent (or 287,000 jobs). Some commentators, such as the Chartered Institute of Personnel and Development, are even more pessimistic, predicting employment growth of just 0.25 per cent in 2008 (fewer than 80,000 jobs).

5.15 The National Minimum Wage for adults increased in October 2007 to �5.52 per hour. If it was further increased in October 2008 by the anticipated growth in average earnings, it would rise to �5.74 per hour. If, instead, the adult minimum wage were to rise in line with the expected increase in prices, it would be somewhere between �5.64 and �5.67 an hour, depending on the price index used. If the adult minimum wage were to rise in line with median pay settlements in 2007, it would rise to about �5.70 per hour in October 2008.

5.16 In addition to considering the macroeconomic position and the range of economic forecasts, we also looked again at the level of the UK National Minimum Wage as compared to those in other countries. The Government economic evidence (BERR, 2007a) indicated that the UK minimum wage was one of the highest in the OECD when adjusted for purchasing power parity, lying third behind Australia and Belgium. In their written submission, the CBI argued that, when adjusted for productivity, the UK minimum wage had grown faster than others since 2003 with the result that it was now the third highest. This is consistent with the evidence we gathered ourselves on international comparisons using both purchasing power parity and exchange rates. We found that the UK minimum wage was behind Australia and France using purchasing power and was also behind Ireland when using exchange rates. These findings are similar to last year, although recent increases in the Irish minimum wage now mean that the adult hourly rate of the Irish minimum wage is higher, using exchange rates, than the equivalent UK minimum wage.

5.17 However, the Government�s evidence showed that the bite of the UK minimum wage (that is, its relative level when measured as a percentage of the average wage) was no greater than the OECD average. Using data from the OECD, our own enquiries confirmed that its bite relative to median earnings ranked no more than mid-table when compared to other EU and OECD countries. This suggests that the outcome of any international comparison depends on whether the focus is on an absolute monetary measure or whether it is upon the level of the minimum wage relative to the rest of the earnings distribution. In a high wage country like the UK the former measure will tend to result in a position near the top of the chart, but when taken in relation to the general level of wages as captured by the latter, the UK falls in the middle of the pack. These are headline comparisons and we must emphasise that comparisons of minimum wages in different countries are riddled with complexity. Further detail on the various comparisons can be found in Appendix 4.

5.18 In our remit, the Government asked us to take account of the impact of the second stage of the implementation of the legislation enhancing entitlement to statutory annual leave. The statutory entitlement to annual leave is currently being increased in two phases, from 4 to 5.6 weeks, pro-rata for part-timers, subject to a maximum entitlement of 28 days. The initial four day increase was introduced in October 2007 and we took this into account when we made our recommendations last year. The second increase, from 4.8 to 5.6 weeks, will be introduced from April 2009.

5.19 We estimate that the total increase (phase 1 and 2 combined) in annual leave entitlement is likely to affect 4.4 million employees (about 19 per cent of all employees), adding up to 0.5 per cent to the wage bill for the whole economy. Though there are, as yet, no hard data, estimates suggest that the increase in October 2007 has affected 3.4 million employees, adding up to 0.2 per cent to the wage bill for the whole economy. The impact is likely to have been more pronounced in low-paying sectors like hospitality, where about 43 per cent of employees are estimated to be affected.

5.20 Our estimates suggest that the second increase, in April 2009, will have a similar, albeit slightly bigger, impact. It is expected to affect around 4.4 million employees, adding up to 0.3 per cent to the wage bill for the whole economy. The impact is likely to be greater in low-paying sectors like hospitality, where around 49 per cent of employees are estimated to be affected, adding 0.9 per cent to the wage bill. These estimates are slightly below those in our 2007 Report due to the availability of improved data and a change in the method for estimating the impact. For those firms in which all employees will be entitled to the full four day increase, we estimate that the direct cost is likely to be equivalent to about 1.6 per cent on the wage bill.

5.21 Our calculations of the likely impact of these changes are based on estimates using data from before the time that the first increase in holiday entitlement was implemented. More recent information will become available when data referring to the fourth quarter of 2007 are released in the Labour Force Survey (LFS). These will be made available by ONS in mid-February 2008. These data will cover the three month period following the introduction of the first stage of the enhanced entitlement and should allow us to estimate more accurately the real impact of the increased holiday entitlement. When assessing impact, a number of other caveats should be borne in mind:

5.22 Our consultations inform our interpretation of the data. A formal written exercise was carried out over the Summer of 2007. In addition, we visited many different parts of the United Kingdom over the course of the year to listen to individuals and businesses directly affected by the minimum wage. In November we spent two days taking oral evidence from key interested groups. The Low Pay Commission Secretariat took part in many more informal meetings and visits with firms and other groups. A list of the organisations and individuals that were involved in our consultation and gave consent for us to publish their names can be found at Appendix 1.

5.23 When it came to a discussion of the appropriate level of the minimum wage for October 2008, the responses to our formal consultation exercise largely followed the pattern of previous years. The majority of unions supported a substantial increase in the rates while most employers called for restraint. The unions tended to name a specific figure (often �6 or thereabouts), whereas employer organisations preferred to use a form of words (�only a modest rise�).

5.24 The CBI described the overall economic outlook for the UK as uncertain and warned that a rise in the rate of the minimum wage above average earnings could do serious damage if the economy were to slow. The CBI�s caution about the future economic prospects was mirrored in the submissions of the British Chambers of Commerce (BCC) and the Institute of Directors, both of which argued that the impact of any large increases would be magnified in an economic downturn.

'Our view is that the labour market and the economy is strong enough to bear an increase that is both somewhat ahead of the predicted growth in average earnings in 2008/2009 and picks up the modest amount of slack generated by the 2007/2008 increases in the rates.'

TUC evidence

5.25 The TUC, on the other hand, maintained that, although growth was expected to be slightly slower in 2008, the fundamentals of the UK economy were sound. Most low-paying sectors had either experienced job growth or been stable during the past year and the UK economy was sustaining record levels of employment � all of which supported their view that the UK economy as a whole remained robust and healthy. Individual union submissions made broadly similar points: the UK economy was doing well and conditions were set fair for a substantial increase in minimum wage rates.

5.26 The CBI argued that the UK�s minimum wage was high by international standards. Although it did not want the minimum wage to �wither on the vine�, it believed that the minimum wage had now reached an appropriate level when compared to the average wage and it advised that the Commission should, as last year, remain cautious in its approach. The BCC believed future increases should be held below the forecast increase in average earnings. The British Hospitality Association (BHA), British Beer and Pub Association (BBPA) and Business in Sport and Leisure (BISL) called for a modest rise no higher than the increase for 2007. The EEF argued that it was inappropriate to link the minimum wage to average earnings growth and argued for a formulaic approach based on average pay settlements. The National Hairdressers� Federation sought an increase no higher than average earnings growth over the past 12 months. The British Apparel & Textile Confederation saw no justification for an increase in excess of 3 per cent and thought that the figure should be closer to 2 per cent, in line with the Chancellor�s targets for public sector pay. The Federation of Small Businesses (FSB) called for no increases at all and, at the very least, none above inflation. The National Farmers� Union argued for the increase to be limited to the level of the CPI to minimise disruption to pay differentials. The British Retail Consortium (BRC) repeated its claim that the minimum wage had arrived at �the tipping point� and argued for reform of the process. It did not, however, make any clear proposal for the rate of the minimum wage in October 2008.

5.27 The unions, on the other hand, were of the view that the next upratings should be sizeable. The TUC called for a minimum wage of more than �6 an hour by October 2008. It did not accept the view put forward by the CBI and others that the minimum wage had reached its highest sustainable level and therefore looked for an increase that was above the projected increase in average earnings. It was supported in this call by Usdaw and the Communication Workers� Union. GMB and Unite also supported the TUC line but then went further, arguing that such an increase should be seen merely as a first step on the road to their ultimate goal of a living wage, currently pitched somewhere between �7 and �8 an hour. Other unions went higher than �6 an hour. UNISON argued for a minimum wage of �6.75 and the Public and Commercial Services Union wanted �8 an hour in October 2008 to reflect the rising costs of housing and utilities.

5.28 The CBI continued to support strongly the retention of lower rates for young people as did other employer organisations. The unions� position was also unchanged in that most unions argued for the adoption of the adult rate for all, while recognising that this might have to be achieved over a period of years. The responses on the youth rates from organisations representing young people were more forceful than in previous years. The British Youth Council (BYC) accompanied its submission with a petition of letters signed by around 600 young people calling for equal treatment under the minimum wage. The BYC claimed that the youth rates were deeply discriminatory and contravened the spirit, if not the letter, of the age discrimination legislation. The National Union of Students took a similar line, arguing that the youth rates militated against young people staying in education. The Children�s Rights Alliance for England went further, arguing for a single minimum wage from the age of 13 (the age at which a person may legally work) and citing the UN Convention on the Rights of the Child as support for their position.

5.29 As last year, the unions argued that minimum wage upratings should not be reduced because of the parallel introduction of better minimum leave entitlements. The CBI and employers disagreed. The BHA and other hospitality bodies expected the impact to be significant in their sector. The Association of Licensed Multiple Retailers (ALMR) believed that there would be a significant increase in wage bills arising from the new entitlement. Similarly, representatives of the care sector predicted a substantial impact on their business. The FSB thought the costs would be considerable for small firms.

'Increasing numbers of firms and sectors are now being affected by the National Minimum Wage ... Over the same period, firms have faced a multitude of additional regulatory costs (estimated at over �43 billion since 1998), reducing their ability to absorb further large increases.'

CBI evidence

5.30 The Commission�s decision to move from bi-annual to annual recommendations (made in order to ensure decisions are made on the latest available data) was mentioned by five respondents � Tesco, BHA, the Cleaning and Support Services Association, BRC and the GMB. The first four of these argued that the move to an annual cycle gave insufficient time for employers to manage the upratings. The fifth, the GMB, argued against the move to annual cycles on the grounds that a longer lead-in time would allow the Commission to recommend larger increases and afford employers more time to absorb them.

5.31 A number of stakeholders asked us to consider the impact of the minimum wage in the context of other regulatory changes faced by business. Many referred to increases in statutory leave entitlement, which we cover elsewhere in this chapter. BCC estimated that the cost of new regulatory burdens on business since 1998 now totalled �55 billion. The Forum of Private Business quoted from its research report �Cost of Compliance�, which had found that smaller firms feel overburdened by employment law.

5.32 Social care providers alerted us to the decision of the Border and Immigration Agency not to issue new work permits for care staff workers from non-EU and non-EEA countries, and to limit extensions to work permits for existing senior care staff to those paid at least �7.02 an hour. This would have an impact on both wage costs and their ability to fill vacancies. The Scottish Licensed Trade Association was concerned at the effects of the smoking ban introduced in Scotland in 2006. The Association of Labour Providers (ALP) suggested that the Commission should study the interaction between the National Minimum Wage and the Agricultural Minimum Wage and the problems which arose for those who had to operate with both of them.

5.33 A few employer representatives proposed that the level of the minimum wage should vary by region. In support of their case they pointed to a higher �bite� of the minimum wage in low-income regions. Others thought there was a case for a limited, two-tier, arrangement, with one level of minimum wage for London / the South East and another for the rest of the UK. However, groups arguing for a regional minimum wage were a very small minority, perhaps reflecting the CBI�s view, expressed in oral evidence, that a regional minimum wage would bring great complexity and much confusion for little benefit. The TUC also rejected the idea of regional minima, saying it believed that the minimum wage should remain a National Minimum Wage providing a nationwide floor on wages. In fact the concept of a minimum wage that varied by region would be in conflict with the primary legislation which established a National Minimum Wage.

5.34 A year ago, in January 2007, we agreed to recommend an increase of 3.2 per cent in the adult rate of the minimum wage for October 2007. When, a year later in January 2008, we came to review the relevant evidence and consider what recommendations we should make regarding the rates for October 2008, we took as our starting point the agreed aim of the Commission � �to produce a minimum wage that helps as many low-paid workers as possible without significant adverse impact on employment or the economy� � and the following two passages from Chapter 7 of our last report.

�This [recommended increase of 3.2 per cent] is less than the predicted annual increase in average earnings, but more than the predicted increase in prices and is in line with current pay settlements.� (Paragraph 7.44)

�Our present view, drawing on the analysis we have made for this report, is that the increases we are likely to recommend for 2008 will be around the predicted rise in average earnings, but much will depend on what happens between then and now in the economy and the labour market. Two of the most important factors will be the movement in average earnings and the level of employment � especially employment in the most affected sectors. We will also want to take account of price inflation and whether it falls back in 2007 as predicted.� (Paragraph 7.45)

5.35 Looking back, the 3.2 per cent increase we recommended last year turned out, as we expected, to be lower than the growth in average earnings. But the actual increase in average earnings over the past year was 4 per cent, a little lower than the predicted growth of 4.3 per cent that we had factored into our calculations when we made our recommendation. In a sense, therefore, the 3.2 per cent uprating ended up being slightly higher, relative to the average increase, than we had envisaged.

5.36 Conversely, in January 2007 the HM Treasury Panel of Independent Forecasts was predicting that the RPI inflation rate (which then stood at 4 per cent) would moderate to 2.9 per cent over the coming year. However, RPI inflation did not come down as forecast but remained relatively high, standing at 4 per cent in December 2007. This meant that our expectation that an increase of 3.2 per cent would lead to a modest real terms rise in the hourly wage of the lowest paid was not realised. In that sense the effect of the increase we recommended was less beneficial to low-paid workers than we had envisaged.

5.37 Reviewing the most recent data on employment, we found the figures predominantly positive, with unemployment down and record numbers in work. We continued to find little evidence to suggest that the minimum wage had harmed job prospects, even in the most vulnerable sectors. Overall, employment in the low-paying sectors proved more robust than last year�s figures had suggested. Indeed, the latest figures, from September 2006 to September 2007, showed that the number of jobs in low-paying sectors had increased by 71,000, showing slightly stronger growth than in the economy as a whole, and job figures for the two largest low-paying sectors, retail and hospitality, were buoyant.

5.38 However, against the positive picture generated by an analysis of the data for the past year, a less positive scenario was presented by a preview of the economic prospects for the coming year. Most indicators were predicting a period of greater uncertainty in the UK economy than a year ago. Nevertheless, the Treasury, the CBI and the majority of reputable forecasters were predicting a downturn, not a recession, with predicted growth of around 1.8 per cent in the UK economy for 2008, to be followed by a recovery towards trend in 2009.

5.39 Against this background, we rehearsed the arguments for and against maintaining the caution of last year. There were several arguments put forward in favour of the Commission taking a bolder line this time and proposing an increase in the minimum wage above the projected 4 per cent increase in average earnings predicted for 2008. One argument was that last year�s rise of 3.2 per cent had been over-cautious in the light of the stronger than expected performance of the UK economy, which had grown at a rate of 3.1 per cent against the predicted 2.5 per cent. Another was that there was growing recognition and acceptance amongst employers and society generally of the need for the wages of the least well-paid to increase in line with wage growth in the wider economy. It was also pointed out that it had not been the Commission�s intention, last time round, to propose an increase that would be lower than the increase in RPI and it was suggested that we had the opportunity to remedy the situation by being more, rather than less, generous in our approach to October 2008. Another line of reasoning advanced was that the forthcoming increase in annual leave entitlement would have no more than a modest impact, probably lower than most official estimates. Also, it was pointed out that, whereas last year there were signs of some job losses in low-paying sectors, the most recent ONS data indicated that the employment situation was healthy and jobs were continuing to grow in most low-paying sectors. Finally, it was suggested that we should have an eye to the growing gap between the best and worst rewarded workers and we were reminded that pay of the very highest earners had continued to rise steeply relative to the pay of just about everyone else.

5.40 Against these arguments for boldness were set others that pointed to the need for further caution and a recommended figure below the predicted increase in average earnings. These counter-arguments started by pointing to the uncertain outlook for the UK economy in 2008. There were growing concerns about a serious slow-down. Recent consumer confidence indicators had declined sharply, which did not augur well for some low-paying sectors such as much of hospitality and some parts of the retail sector. In addition, we were reminded that, although we had monitored developments closely, the impact of the large minimum wage upratings of 2003 and onwards had yet to be fully assessed and that we would not have the results of the relevant research projects until the end of 2008. The continuing employer concern about the impact on differentials was another argument for caution. Moreover, it was pointed out that the increase in annual leave entitlement would undoubtedly add to costs of many firms in the low-paying sectors. And, although we had already taken account last year of the first tranche of increased holiday entitlement, we had yet to factor in the effect of the second stage. Finally, it was pointed out that, in seven of the last ten years the independent forecasts of future average earnings growth had proved to be an over-estimate. It was suggested that we should factor this into our calculations when considering what rate we ought to recommend for future years.

5.41 After weighing the arguments, consulting the evidence and reflecting on the insights we had gained from our many meetings with interested parties over the past year, we agreed that, on balance, the uncertain economic outlook made a degree of caution advisable, despite the generally encouraging labour market data. We therefore recommend that the adult rate of the minimum wage should be increased from �5.52 to �5.73 an hour in October 2008. This is close to, but less than, the predicted annual increase in average earnings. It is higher than the predicted increase in prices and marginally higher than the average increase in current pay settlements. We see this recommendation as balancing the generally positive messages in the data with the need for caution implied by the uncertain economic outlook.

5.42 In reaching this decision, we have, as our remit required, taken account of the forthcoming increase in annual leave entitlement. However, given that the evidence available to inform our view of the impact of the increased entitlement to annual leave is less than perfect, and that it should be possible in the near future to get an indication of the actual rather than the hypothetical impact, we intend to keep the matter under review during the coming year in the light of our analysis of relevant data from the LFS and the results of our ongoing consultations with stakeholders.

5.43 Looking forward to 2009, we will agree our recommendations for October 2009 based on careful consideration of the evidence gathered in the course of the year from visits, official data and the formal consultation exercise. The increases we recommend for October 2009 will be particularly influenced by three factors. We will take account of the nature of the broad economic environment. We will also look closely at the findings of the wide-ranging research programme we have instigated for the next report which is designed to assess the impact of the series of above average earnings increases in the minimum wage implemented from 2003 onwards. Finally, we will take account of developments in the low-paying sectors. We expect the recommendation to be broadly around the predicted increase in average earnings, but our decision, as always, will depend on the evidence.

5.44 In considering the Youth Development Rate and the 16�17 year old rate, we noted the calls from some unions and youth organisations for a single minimum wage rate for all, regardless of age. However, in view of the evidence from other countries of the potentially negative impact of a single rate on younger workers and the relatively poor showing of young people in the UK labour market, we believe that lower minimum wage rates for workers under the age of 21 are justified to protect their employment prospects. We therefore decided, after some discussion, to recommend that the value of the youth rates relative to the adult rate should be maintained. In line with our approach to the adult rate, we recommend that in October 2008 the Youth Development Rate should increase from �4.60 to �4.77 an hour and that the 16�17 rate should increase from �3.40 to �3.53 an hour.

5.45 The accommodation offset is a mechanism that enables employers to set the cost of accommodation provided to workers against the minimum wage up to a maximum daily limit. It is the only benefit-in-kind that may be counted towards the minimum wage. The provision of accommodation is significant in some low-paying sectors, particularly hospitality and agriculture, and the offset was designed to recognise its importance to both employers and workers. When introduced, the arrangement was supported by both employer and worker representatives and it was pitched at a level that reflected former Wages Council and industry agreements. It provides protection to the worker and gives limited recognition of the value of the benefit, but it is not intended to reflect the actual costs of provision to the employer or the commercial market value.

5.46 IDS (2007a) found that the provision of accommodation by employers was common in the hospitality sector. The research found a wide range of charges in hotels, from �15 to �85 per week, but with lower-paid staff sometimes charged less. In the pubs sector the deductions were found to be slightly lower or well below the maximum offset allowed, with no evidence that the guidelines were being breached.

5.47 Employer stakeholders in the hospitality and leisure sectors submitted written evidence calling for a more substantial rise in the offset level. The ALMR argued that the low level of the offset acts as a disincentive leading to the potential loss of this facility to the low paid, who would then face higher alternative rental costs, extended commuting and possibly reduced employment opportunities. The ALMR called for the offset to be increased to �40 per week to act as more of an incentive to provide accommodation. The CBI supported the retention of the offset, but was concerned that, for many hotels, the benefit provided was not reflected in the offset value. The BHA, BISL and BBPA maintained their support for an offset, but raised similar concerns, asking the Commission to consider increasing it towards what they regarded to be a more realistic level. They maintained that the realistic market rate would be around double the existing level. During the Commission visit to Aviemore, Macdonald Hotels also argued that the offset did not reflect the true cost of accommodation and that it penalised those who tried to offer a higher standard. They suggested different levels of offset to reflect different standards of accommodation.

5.48 The ALP repeated its contention that accommodation should be regarded as a matter of free choice where it was provided by employers outside of the employment contract. It said that, as a result of our 2006 Report (in which we decided against the adoption of such an approach), most labour providers had ceased to provide housing and such provision was now restricted to areas of low cost accommodation, such as farms. Consequently, workers were forced to look for accommodation on the open market where landlords were free to charge whatever they wished. The ALP called on the Commission to conduct a study of accommodation costs paid by low-paid workers, including �key-worker� assisted schemes and those operated by employers, to enable a more informed debate to take place on the merits of applying restrictions on the rents which could be charged to low-paid workers by employers.

5.49 The TUC and trade unions supported the retention of the offset, but submitted little evidence relating to the level. Their concerns about the application of the offset were largely related to enforcement and a number of issues which particularly affect vulnerable workers, such as illegal or excessive deductions from their wages. Housing quality was also a particular concern. The Scottish Low Pay Unit observed that deductions from wages often exceeded the maximum permitted by the offset rules.

5.50 To date, the accommodation offset has risen broadly in line with the adult rate, remaining at around 77�79 per cent of the adult National Minimum Wage. It currently stands at �4.30 per day. We received no compelling evidence that has persuaded us to deviate from our normal practice, and concluded that the accommodation offset should be increased in line with the minimum wage upratings. We therefore recommend that the value of the accommodation offset should rise from �4.30 per day to �4.46 per day from October 2008.

5.51 As last year, the recommended minimum wage rates for October 2008 are slightly below the forecast increase in average earnings. If implemented, these upratings are therefore likely to cover a similar proportion of jobs to the proportion covered by the 2007 upratings and slightly fewer jobs than in years when the upratings were in line with, or exceeded, the growth in average earnings.

5.52 In April 2007, according to ASHE, there were just under 2 million jobs that paid less than the minimum wage rates we are recommending for October 2008. These were made up of around 1.82 million jobs held by those aged 21 and over (7.7 per cent), about 141,000 jobs held by 18�20 year olds (14.5 per cent) and 36,000 jobs held by 16�17 year olds (9.3 per cent).

5.53 However, in order to estimate coverage, we need to make assumptions about how the wages of the low paid would have increased in the absence of any minimum wage upratings. In other words, we need to estimate the real value of the October 2008 minimum wage at April 2007 (the date of the latest earnings data) by downrating using estimated prices or earnings growth.

5.54 Assuming that, in line with our recommendation, 21 year olds would be entitled to the adult minimum wage from October 2008 and that the wages of the lowest paid would increase in line with forecast average earnings, we estimate that about 0.89 million jobs or 3.7 per cent of all jobs held by those aged 21 and over would be covered by the new rate of �5.73 in October 2008. If we assumed instead that the wage growth of the lowest paid would just match forecast price inflation, a greater number of jobs would be covered � between 1.07 and 1.37 million jobs (4.5 to 5.8 per cent) held by the adult workforce depending on the price index used. On this basis we estimate that the new adult rate for the minimum wage will achieve a slightly lower level of coverage than the �5.52 uprating in October 2007 (when 1.02 million or 4.3 per cent of jobs held by those aged 21 and over were covered based on the earnings assumption)1.

Estimated Number and Percentage of Jobs Covered by the Recommended October 2008 National Minimum Wage Upratings, UK, 2008

Source: LPC estimates based on ONS ASHE 2007 methodology, low-pay weights, UK, April 2007. AEI including bonuses (ONS code LNNC), RPIX (ONS code CDKQ), RPI (ONS code CZBH) and CPI (code D7G7), seasonally adjusted, UK (GB for AEI), October 2007. HM Treasury Panel of Independent Forecasts for 2008, UK, January 2008.

5.55 We have recommended increases in the Youth Development Rate and the 16�17 year old rate in line with our recommendation for the adult minimum wage � an uprating of 3.8 per cent in October 2008. Assuming that young workers� wages would increase in line with average earnings, we estimate that 90,000 jobs held by those aged 18�20 will be covered by the October 2008 Youth Development Rate � representing around 9.2 per cent of jobs held by these young workers. Based on the price assumption, the coverage estimates range between 109,000 and 118,000 jobs (about 11.1 to 12.1 per cent of all jobs held by that age group)2.

5.56 As for 16�17 year olds, we estimate, based on the earnings assumption, that 26,000 jobs (or 6.7 per cent of all jobs held by 16�17 year olds) will be covered by the October 2008 uprating. Using the price assumption, the coverage increases to 27,000�29,000 jobs for that age group (between 7.0 and 7.6 per cent of all jobs).

5.57 Overall, we therefore estimate that the total coverage of the recommended October 2008 upratings will be approximately one million jobs (4.0 per cent of all jobs) if the wages of the low paid were to increase by the forecast growth in average earnings between April 2007 and October 2008, or between 1.21 million jobs (4.8 per cent of all jobs) and 1.52 million jobs (6.1 per cent of all jobs) based on the price assumption.

5.58 As we discussed in Chapter 2, women are more likely than men to be working in low-paid jobs. Based on the earnings assumption, we estimate that the October 2008 adult minimum wage will cover around 300,000 jobs held by men and 586,000 jobs held by women. Using our alternative price assumption, we expect that up to 441,000 jobs held by men and 927,000 jobs held by women would be covered by the uprating to �5.73. On all measures, jobs held by women aged 21 and over are expected to make up around two-thirds of all jobs covered by the 2008 October uprating in the adult rate.

5.59 The �bite� of the minimum wage, that is its relationship to average earnings (measured at the median or the mean), is another way of assessing the impact of the minimum wage on the earnings distribution. In April 2007, according to ASHE, the median gross hourly earnings (excluding overtime) of all employees aged 21 and over (full and part-time) were �10.33 an hour. In order to be able to compare median earnings with the October 2008 adult rate, we need to uprate it by the growth in average earnings (including bonuses), both actual and predicted. On that basis, the adult rate of �5.73 in October 2008 is expected to be about 52.3 per cent of forecast average earnings of �10.96. This compares with a bite of 46.2 per cent when the minimum wage was introduced in 1999, a bite of 54 per cent for the October 2006 rate of �5.35 and a bite of about 52.4 per cent for the October 2007 rate of �5.52. Using the mean, we estimate that the bite in October 2008 will be about 40.4 per cent for employees aged 21 and over based on the earnings assumption3.

5.60 We anticipate that the direct impact of our recommendations on the average wage bill is likely to be modest as the recommended increase in the minimum wage is below the predicted rise in average earnings. However, our recommendation that 21 year olds should be entitled to the adult minimum wage could lead to an increase of more than 3.8 per cent for the small number who would be directly affected. As we saw in Chapter 3, around 90 per cent of jobs held by 21 year olds are already paying at least the adult rate and so the impact of this recommendation on the wage bill should be small.

5.61 The lowest rates of pay in the public sector generally tend to be above minimum wage levels and, as we saw in Chapter 2, very few jobs in the public sector are low-paid. We therefore expect that the impact of the recommended October 2008 rates on the public sector wage bill will be very small. However, given that many public bodies employ private sector firms under contract to provide services such as cleaning, there may be some indirect impact.

5.62 The minimum wage can also affect the public sector through the impact on the Exchequer of any savings resulting from reduced benefits and increased tax receipts as the minimum wage increases. Table 5.3, based on information supplied by the Government4, illustrates the impact of the 21 pence increase in the minimum wage. We estimate that total Government savings from the 2008 minimum wage upratings will be around �245 million, composed mainly of an increase of over �100 million in income tax and over �50 million in National Insurance receipts as the earnings of minimum wage earners rise. The Government also stands to make significant savings from reductions in Working Tax Credits (just under �50 million) and other benefits (over �40 million in total).

Government Savings from the 2008 National Minimum Wage Upratings, � Million, UK, 2008�2009

Source: LPC estimates based on HM Treasury calculations using ten pence increases in the minimum wage based on Family Resources Survey 2005/2006, uprated to 2008/09, UK, 2008�2009.

Note: These figures take account of changes in tax credits, benefits, taxes and National Insurance Contributions but do not take any account of likely behavioural change caused by a rise in hourly pay, such as changed levels of employment or hours worked. They also do not include the effect of the �25,000 disregard in tax credits, which allows income to rise between one year and the next by up to �25,000 before tax credits begin to be withdrawn. This means that the reductions in tax credits would in practice be significantly smaller, at least in the initial tax year.

5.63 This year, influenced by the uncertain economic prospects for the coming year, we have again exercised caution and recommended an increase that is slightly below the projected increase in average earnings. As we have said earlier, our long-term aim is to create and maintain a minimum wage that helps as many low-paid workers as possible without significant adverse impact on employment or the economy. We recognise that there are conflicting views as to the appropriate long-term level of the National Minimum Wage. As a Commission, we continue to look to the evidence to guide us. Next year, in addition to our usual sources of evidence, we will have the advantage of a series of research projects reporting on the impact of the above average earnings upratings of the minimum wage between 2003 and 2006 on the economy, the labour market and the low-paying sectors. In line with our recommendation, we also hope to have the benefit of improved data from the Office for National Statistics.

1 These numbers differ from those stated in Chapter 2 as the estimates in Chapter 2 use adults aged 22 and over.

2 These estimates are higher than from those stated in Chapters 2 and 3 as those estimates use youths aged 18�21.

3 These bite figures differ from those in Chapter 2 as the estimates here also cover workers aged 21.

4 After the Pre-Budget Report in November 2007, the Government provided us with estimates of savings for hypothetical increases in the minimum wage of 10 pence, 20 pence and 30 pence.