Retail

3.14 Following a period of weaker growth in the retail sector in 2003, 2004 saw a return to the stronger annual growth in retail sales experienced in 2001 and 2002, reaching 7.7 per cent for all retailing in the third quarter of 2004. According to the ONS Retail Sales Index, growth in the predominantly non-food sector outstripped growth within predominantly food stores. The British Retail Consortium (BRC) (BRC-KPMG, 2005) has, however, expressed concern that disappointing Christmas 2004 trading figures were a reflection of a fall in consumer confidence. The BRC-KPMG Retail Sales Monitor indicated that like-for-like sales fell by 0.4 per cent in December 2004 compared with the same period a year earlier, while total sales grew by 2.5 per cent.

3.15 Figure 3.8 shows that the number of employee jobs in the retail sector has increased steadily since the introduction of the minimum wage, but has grown more slowly since 2002. Between September 2002 and September 2004 employee jobs increased by 31,000, compared with an increase of 153,000 between September 2000 and September 2002. In the year to September 2004 the number of full-time and part-time employee jobs increased by 5,000 and 16,000 respectively.

Figure 3.8

Employee Jobs in the Retail Sector, Thousands, 1998-2004

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

3.16 In previous reports, we noted that in general smaller retailers were more affected by the minimum wage than larger firms. However, evidence received for this report indicated that the minimum wage is now increasingly influencing wage levels for larger firms, particularly since the October 2004 upratings. This can be illustrated by considering trends in the extent to which wage levels are bunched around the minimum wage. For small retail firms, Figure 3.9 shows that the percentage of all workers paid at the adult minimum wage was nearly 10 per cent in April 2004, compared with nearly 8 per cent in April 2003 and 9 per cent in April 2002. For large retail firms (Figure 3.10), 4.4 per cent of workers were paid at the adult minimum wage in April 2004, which represents a slight increase compared with the previous two years. The percentage directly affected by the minimum wage is still higher in small firms, but the most common hourly rate of pay within large firms is no longer substantially above the minimum wage. In 2004, the hourly earnings distribution peaked at £4.60, or 10 pence above the minimum wage, compared with a peak 30 pence above in 2002 and 2003. The minimum wage, previously largely irrelevant to large firms' wage patterns, now has an appreciable effect.

Figure 3.9

Hourly Earnings Distribution for Employees Aged 18 and Over in Small Firms in the Retail Sector, 2002-2004

Source: ASHE, April 2002-2004 without supplementary information.

Notes:

1. Businesses with 1-49 employees.
2. NMW label shows the adult NMW rate in April of the given year.
3. Gross hourly earnings excluding overtime.

Figure 3.10

Hourly Earnings Distribution for Employees Aged 18 and Over in Large Firms in the Retail Sector, 2002-2004

Source: ASHE, April 2002-2004 without supplementary information.

Notes:

1. Businesses with 250+ employees.
2. NMW label shows the adult NMW rate in April of the given year.
3. Gross hourly earnings excluding overtime.

3.17 This increasing impact is likely to look more pronounced once we have the April 2005 data, which will also reflect the October 2004 increases. As Figure 3.11 shows, the October 2003 increases did produce some knock-on increases designed to maintain differentials for workers just above the minimum wage. Figure 3.11 also suggests some squeezing of differentials between minimum wage workers and those on, for instance, £5.00 per hour. These effects were, however, reversed in the previous year. The October 2004 increases, coming on top of the significant increases in October 2003, are likely to have a more significant impact on differentials than we have seen before.

Figure 3.11

Increase in Hourly Earnings Minus the Increase in Median Earnings by Percentile for Employees Aged 18 and Over in the Retail Sector, 2002-2004

Source: ASHE April 2002-2004, without supplementary information.

3.18 Qualitative information supports this analysis. The BRC stated in its evidence that 'the NMW is now having an appreciable detrimental impact on all sizes of retailer, not just SMEs'. In addition Incomes Data Services (IDS) (2004c) noted that the increased 'bite' of the minimum wage would now affect most retailers, although pay settlement levels were broadly in line with the trend across the whole economy. The Union of Shop, Distributive and Allied Workers (Usdaw) reported that for the first time, the minimum wage was having an impact on its negotiations.

'Whilst retailers continue to pay above the NMW, unlike two years ago, when retailers' lowest basic rates were on average twenty to thirty pence higher than the NMW, the average has been reduced to around fifteen pence above.'

BRC evidence

3.19 The British Shops and Stores Association reported that 43 per cent of respondents to its survey had increased their minimum rates to comply with the minimum wage and responses to our survey (likely to be from those more affected by the minimum wage) suggested that 55 per cent of retailers had been affected by the October 2003 upratings. Although not directly comparable with our 2002 survey, this was an increase of 15 percentage points compared with firms affected by the 2001 upratings.

3.20 Both Usdaw and IDS (2004b) noted a tendency for employers to move in one of two different directions in response to the increased pressure on the bottom of their pay structures. While some retailers accepted that the minimum wage would now form their lowest rate, others have taken a deliberate decision to move to around £5.00 per hour. This was variously seen as a means to avoid the perceived stigma of being a minimum wage employer, a way to improve staff morale or a response to the tight labour market - or all of the above.

'The NMW is now the lowest rate in many pay structures.... Many of the larger firms are continuing to pursue a policy of maintaining a buffer between their lowest rate and the statutory minimum ... but the increases in the NMW has meant the gap ... has narrowed.'

IDS, 2004c. Pay and Conditions in Retailing 2004/05

3.21 Perhaps partly in response to an increasing minimum wage impact, retailers are taking a range of steps to control wage costs. Case studies and secretariat meetings indicate that some large retailers have reduced Sunday, bank holiday and unsocial hours premiums, although this may be as much a reflection of the trend towards expanded trading hours as a response to the minimum wage. The Association of Convenience Stores told us that smaller retailers in the convenience sector had cut staffing levels by removing supervisory posts but, in some businesses, they could not be cut any further for security reasons. The BRC said that an increasing number of retailers were starting to examine their benefits package as a means to offset further increases. Usdaw noted that a small number of retailers had reintroduced a lower pay band for 18-21 year olds, reversing the long-term trend towards paying adult rates at 18, and the BRC's survey also found increasing use of the youth Development Rate. IDS (2004b) report that companies in the retail sector are moving in different directions in relation to age-related pay. The trend for companies to lower the age at which the full adult rates are paid has continued in some quarters, while others are introducing greater age differentiation into their pay structures.

3.22 Overall the retail sector is clearly being more affected by the minimum wage than previously, and the October 2004 upratings are likely to create some adjustment challenges for many retailers. But there is no sign that the minimum wage has so far had any significant impact on retail sector employment levels.

Salary Sacrifice

3.23 The BRC and a number of large retailers reported that employees in the retail sector who earn the minimum wage (or in some cases slightly more) are unable to participate in a particular type of staff benefit arrangement, usually known as a salary sacrifice scheme. Such schemes generally offer tax and National Insurance Contribution (NIC) advantages to the worker and reduce employer NICs. Salary sacrifice schemes may be used to offer a range of benefits (including pensions and bicycles for travel to work), but the two raised most frequently during our consultation related to childcare vouchers and home computers.

3.24 To participate in these schemes, a worker agrees a change to their contract of employment and accepts an entitlement to a lower salary, usually for an agreed period of time (the 'sacrifice'), in return for another non-cash benefit (which is free of tax and NICs). The minimum wage legislation does not, however, permit workers to accept voluntarily a lower cash wage than the minimum wage. The current minimum wage provisions attach no value to vouchers or stamps or to any benefits-in-kind (with the exception of accommodation), and employers may therefore need to exclude their lowest paid workers from these schemes. Although comments during our consultation were confined to the retail sector, it is possible that larger employers in other low-paying sectors may consider offering these benefits in the future.

3.25 The Commission has some sympathy with the desire of retailers to offer a range of benefits to all staff on an equal basis and regardless of the worker's wage. We also recognise the potential of the salary sacrifice schemes to support Government policy objectives. The Government's Home Computing Initiative seeks to boost computer literacy by encouraging employers to offer home computers to their employees on attractive terms via a hire agreement. And as part of its strategy to provide greater incentives for people to work, the Government has put in place a range of measures to encourage employers to contribute towards the provision of childcare. These include enabling employers to offer a tax and NICs free childcare voucher worth up to £50 per week from April 2005, and the associated administration costs and service charges will also be exempt from tax and NICs.

3.26 On 12 October 2004, the Government invited us to consider whether salary sacrifice schemes involving childcare vouchers should be allowed to count towards minimum wage pay and to report back by the end of 2004. After careful consideration, we informed the Government that we could not provide the advice requested in the short time available and suggested that the task might best be assigned to the period after publication of this report. We believed there were a number of important factors, which need to be weighed very carefully. The Commission has always believed that the minimum wage should be as simple as possible. This ensures that employers know their responsibilities, workers are clear about their entitlement and the enforcement process remains as straightforward as possible. Any change to the Regulations governing the calculation of minimum wage pay risks making this process more complicated. In addition, low-paid workers claiming the childcare element of the Working Tax Credit may find this a better source of support than childcare vouchers. Furthermore, because a salary sacrifice reduces the amount of NICs that a worker has to pay, it could have an adverse effect on their entitlements to those benefits which are dependent on contributions, in particular the State Second Pension.

3.27 We therefore believe that the issue needs to be reviewed carefully looking at all factors and considering all forms of potential salary sacrifice. We recommend that the Government invite us to review the issue of salary sacrifice in depth and to report by February 2006.

Hospitality

3.28 There are signs that the hospitality sector (which is made up of hotels, providers of holiday accommodation, pubs and bars, restaurants and take away food outlets) has recovered from the sharp decline associated with the foot and mouth crisis and the aftermath of the September 11 attacks in the United States. According to ONS UK National Accounts, output was slightly ahead of growth in the service sector as a whole during the first two quarters of 2004.

3.29 Figure 3.12 shows that the number of employee jobs in the hospitality sector grew by around 140,000 to 1.77 million in the four years to September 2004. Over two-thirds of this growth has been in full-time employee jobs, although like retail, the sector is characterised by a high degree of part-time working (just under 60 per cent of jobs are part-time). Employee jobs growth remained strong in 2002 and 2003 and grew by over 10,000 in the year to September 2004.

Figure 3.12

Employee Jobs in the Hospitality Sector, Thousands, 1998-2004

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

3.30 The minimum wage has had a strong influence on earnings in the hospitality sector, as shown in Figure 3.13. Sixteen per cent of employees were paid at the adult minimum wage in April 2004 according to ASHE 2004a (with supplementary information, not shown), with a further small peak around £5.00 per hour. Increases in lowest decile hourly earnings did not keep pace with the October 2003 uprating of the adult rate (as shown in Appendix 5), rising to £4.44 in Spring 2004. This may reflect the age composition of the workforce in hospitality and fairly widespread use of the youth Development Rate. Twelve per cent of employees were paid less than the adult rate of the minimum wage in Spring 2004. In contrast to the retail sector, in the hospitality sector the shape of the hourly earnings distribution is broadly similar for all firm sizes, although the proportion of employees earning the adult minimum wage is higher in firms with 1-49 employees (19 per cent), than in medium and large firms (12 and 14 per cent respectively).

Figure 3.13

Hourly Earnings Distribution for Employees Aged 18 and Over in the Hospitality Sector, 2002-2004

Source: ASHE, April 2002-2004 without supplementary information.

Notes:

1. NMW label shows the adult NMW rate in April of the given year.

2. Gross hourly earnings excluding overtime.

3.31 The hourly earnings data supports evidence from the hospitality industry that the minimum wage is continuing to have a significant impact. Although it should be noted that responses tend to be biased towards those most affected by the minimum wage, 55 per cent of respondents to our survey from the hospitality sector reported that they had been affected by the October 2003 upratings, up seven percentage points compared with responses to our survey on the impact of the 2001 upratings. IDS (2004b) found that most of the hotels it questioned had set their lowest rates at the minimum wage and nearly half had raised rates to comply with the adult minimum wage of £4.50 per hour, up from one third in 2001.

3.32 Hospitality employer associations emphasised the impact on differentials, with companies simplifying pay structures and some reporting difficulties in recruiting and retaining staff. A case study from a major company in the pub and restaurant sector indicated that it had simplified its pay structure from eight to three levels. As a result, differentials to reward experience and skills had largely disappeared, although the company had maintained a higher rate to reflect supervisory responsibilities. The GMB, however, told us that the hotels with which it negotiated had absorbed recent minimum wage upratings with no apparent ill effect and that in many cases the negotiations had sharpened the focus of the companies concerned on attracting and retaining skilled workers.

3.33 Figure 3.14 shows the effects of the 2002 and 2003 upratings of the minimum wage on earnings differentials in the hospitality sector. Employees earning around the level of the adult minimum wage received below median increases following the small October 2002 upratings, but above average increases as a result of the October 2003 upratings. There was also a partial restoration of differentials for employees earning up to about £5.00 per hour following the October 2003 upratings.

Figure 3.14

Increase in Hourly Earnings Minus the Increase in Median Earnings by Percentile for Employees Aged 18 and Over in the Hospitality Sector, 2002-2004

Source: ASHE April 2002-2004, without supplementary information.

3.34 The hospitality sector continues to face high staff turnover, difficulties in recruitment and retention and labour shortages (chefs, for example, continue to be difficult to find), although the British Hospitality Association (BHA) told us that these appear to have eased somewhat in recent months, partly because more staff have been recruited from overseas. The BHA said that, from May to September 2004, about 24,000 workers from eight Eastern European EU accession countries registered to work within the UK hospitality industry.

Low Pay Commission Research A hotel reported that one-quarter of its domestic staff were from eastern Europe ... not only because they were prepared to work at this rate, while local staff were not, but ... the quality of these staff, from a work, service and educational perspective, was considerably higher.... Cronin and Thewlis, 2004. Qualitative Research on Firms' Adjustments to the Minimum Wage: Final Report to the Low Pay Commission

3.35 While there is no sign that minimum wage upratings have led to job losses, we received evidence that employers have taken a range of actions to control costs, including reducing hours, typically involving 'letting staff leave early if there was no work for them to do during less busy periods' (Cronin and Thewlis, 2004). Although there is some bias towards those most affected, our survey suggested that 47 per cent of hospitality employers who stated that they were affected by the 2003 upratings had cut overall staffing and 45 per cent had cut basic hours. This sector was also the most likely in our survey to control non-labour costs (41 per cent). Within the pub sector, the British Beer and Pub Association and the CBI both attributed a decline in managed houses to a desire on the part of brewery chains to pass outlets which were not cost-effective to the tenanted sector.

3.36 Overall the hospitality sector is clearly affected by the minimum wage, and the October 2004 increases are likely to create adjustment difficulties for some firms. But the dynamics of hospitality sector employment, and the recruiting difficulties which the sector faces, suggest that the minimum wage so far has had no significantly harmful employment effects.

'The rise to £4.85 will add £187,000 to the company's annual wage bill. The company will try to recover this amount principally by cutting hours. So although jobs will not be lost, hours worked and hence take home pay will be affected.'

Brewery employing 1000 people

CBI evidence

'At present the accommodation offset is only around 50% of the average cost of providing accommodation to staff in pubs ... the offset should be increased to be more reflective of accommodation costs.'

British Beer and Pub Association evidence

3.37 We now look at two provisions of the minimum wage legislation which are mainly of interest to the hospitality sector - the accommodation offset and the treatment of tips - before turning to consider the cleaning sector.

Accommodation Offset

3.38 We continue to receive evidence about the level of the accommodation offset. In previous reports we have commented that the offset is not intended to reflect the commercial value of a property or the full cost to the employer of providing accommodation. Rather it has been set so as to strike a balance between these costs, the advantages to the employer of housing workers close to the place of work, and the desire to ensure workers a minimum level of cash wages. In recent years, the accommodation offset has risen in line with increases in the adult minimum wage. It has also been simplified. In our fourth report (2003) we recommended a change to what we considered to be the unnecessarily complicated system of hourly, daily and weekly offset rates. We are pleased that the Government has replaced the old system with a single daily rate, which increased to £3.75 per day from 1 October 2004.

3.39 In evidence, hospitality employer organisations called for a significant increase in the level of the offset to around £40-£50 per week, to reflect the actual costs to employers, to act as an incentive to retain the benefit for workers and to even out differences in pay for those employees who do not receive accommodation. IDS (2004b) found that the majority of hotels charged live-in workers £22-£45 per week for accommodation. Within agriculture, the National Farmers' Union argued that accommodation was a significant benefit and that the minimum wage should take greater account of its market value. In contrast, the GMB called for the offset to be frozen for a few years to reflect the significant advantages to the employer of having workers on or near the premises. It was concerned that some employers - particularly in holiday camps - provided accommodation of very low quality.

'We have received reports of sharing rooms with one or more other workers, where each worker's wage has been subject to the deduction; substandard, unlettable accommodation; and short-term arrangements which leave workers vulnerable.'

GMB evidence

3.40 We continue to believe that the balanced approach we have taken in previous reports is a fair one, which recognises in part the costs incurred by employers, while ensuring that the value of the minimum wage is maintained for those workers who are provided with accommodation as part of their job. We therefore recommend once again that the accommodation offset should increase in line with the adult rate of the minimum wage, rising to £3.90 per day from October 2005 and £4.15 per day from October 2006.

Tips

3.41 At present tips can only count towards minimum wage pay if they are collected centrally by the employer and distributed to staff through the payroll. Our research and visits suggest that there continues to be a range of practice, with some employers choosing to put tips through the payroll to make up minimum wage pay and others preferring not to get involved in the collection or distribution of tips and gratuities to staff. While some employer organisations would prefer the rules on the treatment of tips to be relaxed, we believe the current arrangements are working reasonably well and should remain unchanged.