The October 2003 and October 2004 upratings combined increased the minimum wage by 15.5 per cent compared with an increase in average earnings of just under 8 per cent between October 2002 and October 2004. Before that two year period, the minimum wage had increased since its introduction at a rate roughly equal to average earnings. We now estimate that workers in at least 1.1 million jobs benefited from the 2004 upratings. These are workers whose pay increased between April and October 2004 from below the October 2004 rate to equal or exceed it. We estimate the impact on the aggregate wage bill of pay increases for these beneficiaries to be 0.08 per cent. In addition, many other workers may have benefited from the October 2004 upratings prior to April 2004, when the earnings survey on which we base our estimates was conducted. Many formal pay settlements are implemented in January and early April and any wage increases made then in anticipation of the October increase would not show up in our estimates of beneficiaries.

Low pay continues to be concentrated among certain sectors and groups of workers. The main beneficiaries of the increase in the National Minimum Wage are women, part-time workers, some minority ethnic groups, young people and those who have a work-limiting health problem.

Since our fourth report the UK economy has grown faster than its long-run trend. The labour market continues to be remarkably robust. Employment is at record levels and unemployment is at its lowest for thirty years. Wage and price inflation pressures continue to be relatively subdued.

Overall, employment has increased among the groups of workers and in the sectors most affected by the National Minimum Wage. The main exceptions to this have been agriculture and the textiles, clothing and footwear sectors (the decline is a long-term trend attributable mainly to external factors) and young workers. The low-paying sectors are considered in Chapter 3; young workers are covered in Chapter 5. Among young workers, for those aged 18-21 the fall in employment has eased, remaining largely unchanged since the Autumn of 2003. Employment rates for 16-17 year olds continue to fall. But commissioned independent research found minimal negative impact of the minimum wage on employment.

In written and oral evidence, many employers told us that they were finding it a struggle to accommodate the two consecutive large increases in 2003 and 2004. Our data suggest that there has been only a small impact on the wage bill, but there is evidence suggesting that differentials have been squeezed.

There is little evidence that the minimum wage has had any impact on profits at the macroeconomic level. We did, however, find some evidence of small negative impacts on profits at the individual firm level, but not on a scale that led firms to close down or to decrease employment. We found no significant effects of the minimum wage on either prices or overall productivity, although we found some evidence of small positive effects on labour productivity in the service sector.

We again note the importance of accurate and reliable data on low pay to inform our assessment of the impact of the minimum wage. We therefore welcome the improvements made so far and we would encourage the Office for National Statistics to continue to review and improve the quality of these data.

Public sector workers are generally paid above the National Minimum Wage. The impact on public sector wage bills of the 2003 and 2004 minimum wage upratings has therefore been minimal. The 'Agenda for Change' in the National Health Service will further improve the wages of the public sector workforce.

Introduction

2.1 The National Minimum Wage was introduced in April 1999 and we now have over five years of data and experience with which to assess its impact. The initial level was set at £3.60 an hour (the adult rate) for those aged 22 and over, and £3.00 an hour (the youth Development Rate) for those aged 18-21. Those under 18 years of age were not covered at the outset. By October 2004, the adult minimum wage had risen to £4.85, the youth Development Rate was £4.10 and a new rate had been introduced at £3.00 for 16 and 17 year olds (above compulsory school age). Details of the different minimum wage rate levels since the introduction of the National Minimum Wage are set out in Table 2.1.

Table 2.1 National Minimum Wage Hourly Rates, April 1999-October 2004

2.2 In this Chapter, we assess the impact of the minimum wage since its introduction, focusing in particular on the last two upratings in October 2003 and October 2004. We consider in turn, the number of jobs affected, and thus the number of beneficiaries, the impact on earnings and differentials, the impact on the labour maket (including employment, unemployment, inactivity, hours, vacancies and pay settlements), and the impact on firms (including wage bills, profits, productivity and prices, as well as the impact on business start-ups and failures). We conclude with an overall assessment and the identification of areas for future research.