We have identified nine sectors of the economy where low pay is common and which are most affected by the minimum wage. These nine sectors provide around six million employee jobs, nearly a quarter of all the jobs in the UK economy. About three-quarters of these jobs are to be found in the retail and hospitality sectors.

We found evidence of continued employment growth in the two largest low-paying sectors and stable or growing employment in most of the others. In the two sectors where job numbers are falling, i.e. the agriculture sector and the textiles, clothing and footwear sector, the decline is part of a long-term trend attributable to external factors. As in previous reports, we found that the cleaning and security industries experience some problems in renegotiating long-term contracts to take account of minimum wage upratings.

The evidence presented to us has suggested that the minimum wage is becoming less of an issue for some small firms, but, conversely, a more significant issue for some large firms. There is, for example, evidence that some larger firms - particularly in the retail sector - are, for the first time, having to make adjustments to their pay structures as a result of recent increases in the National Minimum Wage. Overall we have found no evidence of any insuperable difficulty in coping with the October 2003 upratings, nor have we discovered any negative impact on employment. But our analysis concentrates on the impact of the October 2003 upratings, with only limited data available relating to the October 2004 upratings. We are aware that many employers in the low-paying sectors have expressed concern about the impact of the increase in the adult rate to £4.85 per hour.

We also discuss in this Chapter the complex issue of salary sacrifice, an arrangement whereby a worker agrees to a reduction in pay in return for a non-cash benefit, and note that the National Minimum Wage Regulations do not permit those earning the minimum wage to participate in these schemes. We conclude by recommending that the Government invite us to consider the issue in depth and to report back by February 2006.

We recommend that the maximum daily accommodation offset should increase to £3.90 in October 2005 and £4.15 in October 2006, in line with our recommendations for the adult rate of the minimum wage.

We continue to receive evidence that some local authorities are not taking full account of minimum wage upratings, including the costs of travelling time, when calculating fees for private care provision. We note that progress has been made in this area and recommend that the Government continue to make clear to local authorities that policies on commissioning care should reflect the costs of provision. We also recommend that the Government should monitor the approach of local authorities to the funding of social care. Two further issues which affect the social care sector are 'sleepovers' and on-call arrangements. We believe that greater publicity of the guidance is needed to ensure that the rules are understood.

Introduction

3.1 In this Chapter we look at the impact of the minimum wage on the sectors where low pay is common, which we have identified from the New Earnings Survey data. We consider the economic circumstances in which these sectors are operating and their responses to the October 2003 upratings. We also assess any sector specific issues stemming from the National Minimum Wage Regulations 1999.

3.2 We have obtained information from a wide range of sources, including statistical data provided by the Office for National Statistics (ONS), our programme of research, our employer survey, responses to our consultation and a wide-ranging series of meetings and visits. The full results of our employer survey are in Appendix 3. As we explain there, it is important to bear in mind that the responses to our questionnaire are likely to overstate the impact of the National Minimum Wage on firms for two main reasons. First, the survey specifically targeted those low-paying sectors that are most likely to have been affected. Second, even within these sectors, respondents are more likely to have been affected than non-respondents. Nevertheless our survey does provide useful information to make comparisons between sectors on the impact of the minimum wage.

3.3 We begin the Chapter by providing an overview of the impact of the minimum wage on sectors where low pay is common. We then consider the impact on small firms, since previous reports found that they have been disproportionately affected by the minimum wage. We go on to consider the impact of the minimum wage on the nine sectors we have identified as being those where low pay is common: retail, hospitality, cleaning, security, childcare, social care, agriculture, the manufacture of textiles, clothing and footwear, and hairdressing. The role of the accommodation offset is considered within the analysis of the hospitality sector. The issue of salary sacrifice is addressed under the retail sector and issues relating to sleepovers and on-call arrangements are covered in the analysis of the social care sector.

Overview

3.4 The sectors we consider in this Chapter (excluding childcare) account for around 6 million jobs, nearly 24 per cent of all UK employee jobs. Figure 3.1 shows the relative proportion of jobs in each of the sectors. As can be seen, nearly half are in retail and over a quarter in hospitality.

Figure 3.1

Breakdown of Jobs in Low-paying Sectors, Thousands, September 2004

Source: ONS employee jobs series, September 2004, GB.

3.5 Recent employee job trends by sector are shown in Figure 3.2. This shows that since the introduction of the minimum wage there has been strong growth in the number of employee jobs in both hospitality and security, and noticeable falls in textiles, clothing and footwear, cleaning and agriculture, hunting and forestry (referred to as agriculture in the remainder of this Chapter). In the year to September 2004 the number of employee jobs increased in most low-paying sectors, particularly security and cleaning, but fell in textiles, clothing and footwear and hairdressing. During this period the total number of jobs in the economy rose by 0.5 per cent (140,000 jobs), and the number of jobs in low-paying sectors rose by the same percentage (over 30,000 jobs). Looking at the micro level, in response to our employer survey the retail, hospitality, textiles and hairdressing and beauty (referred to as hairdressing in the remainder of this Chapter) sectors were the most likely to report reductions in staffing levels as a result of the October 2003 upratings, but the childcare and social care sectors were the least likely to report reductions. Further information on trends in employee jobs in the low-paying sectors can be found in Appendix 5.

Figure 3.2

Change in Employee Jobs in Low-paying Sectors, 1998-2004

Source: ONS employee jobs series, 1998-2004, GB.

3.6 Trends in self-employment by sector are given in Figures 3.3 and 3.4. They show that self-employment has increased by around 25 per cent in both the hairdressing and cleaning sectors since the introduction of the minimum wage. This represents an increase in the level of self-employment by 20,000 in hairdressing and 10,000 in cleaning. Self-employment fell by nearly 20 per cent in both hospitality and residential social care, with the levels falling by 30,000 and 3,000 respectively. However, the largest reductions in the level of self-employment were in the retail and agriculture sectors (both fell by around 35,000).

Figure 3.3

Change in Self-employment in Low-paying Sectors, 1998-2004

Source: Labour Force Survey (LFS), 1998-2004.

Figure 3.4

Number of Self-employed by Sector, Thousands, 1998-2004

Source: LFS, 1998-2004.

3.7 Table 3.1 shows that the cleaning, hospitality and hairdressing sectors have the highest percentage of employees aged 18 and over paid below or only just above the adult rate of the minimum wage. It also shows, comparing the position which applied after the upratings of 2001 with that following the October 2003 upratings, that there has been no significant change in the proportion of employees aged 18 and over being paid below or only just above the level of the adult minimum wage. The Table also illustrates the fact that a relatively high percentage of nursery nurses and employees in the hairdressing and hospitality sectors are paid below the adult rate of the minimum wage, reflecting more significant use of the youth Development Rate and exemptions from the minimum wage for apprentices in these sectors. Further information on hourly earnings in the low-paying sectors is presented in Appendix 5.

Table 3.1 Percentage of Employees Aged 18 and Over Paid the Adult Minimum Wage or Below by Sector/Occupation, 2002-2004

Source: Annual Survey of Hours and Earnings (ASHE), April 2002-2004 without supplementary information.

Note: The adult rate of the minimum wage was £4.10 per hour in April 2002, £4.20 per hour in April 2003 and £4.50 per hour in April 2004.