Beneficiaries

2.3 In this section we estimate the number of jobs which have benefited from the October 2003 and October 2004 upratings. First, we explain our reasoning for looking at coverage and consider some methodological difficulties in making these calculations. Then we look at how many jobs in April each year are paid below the forthcoming October's minimum wage and see how this has varied since the introduction of the minimum wage. Third, we use this data as an input to our estimates of the number of jobs that have benefited from the 2003 and 2004 upratings. Finally, we investigate the characteristics of the expected beneficiaries of the 2004 October upratings in terms of gender, hours worked, age, ethnicity, disability, region, sector and size of firm.

Methodological Difficulties

2.4 It is important to be able to calculate the coverage of the minimum wage - the number of people who benefit from the National Minimum Wage - but it is not straightforward. The number of beneficiaries is important not because the Low Pay Commission has a target figure in mind; we do not. But it makes little sense to have a minimum wage that does not benefit a reasonable number of people. And a minimum wage that affected too many would almost certainly be counter-productive. However, knowing the scale of coverage is important chiefly as an indicator of stability. If there are no discernible adverse effects at a given level of coverage, we can be reasonably sure that maintaining that level, or increasing it slightly, would not present major future risks.

2.5 Looking back over previous reports, we note that our forecasts of prospective beneficiaries ('forward-looking estimates') have tended to predict a higher number of beneficiaries than calculations made after an uprating has been introduced ('post-uprating estimates')¹. In our fourth report (2003), we said we would investigate the reasons for this, reviewing our estimation methodology. We came to three main conclusions.

2.6 First, we considered whether the tendency results from the fact that estimating beneficiaries in advance requires an assumption about the forecast growth of average earnings. We concluded it does not. In fact, actual average earnings growth has tended to turn out slightly lower than the forecasts we have used looking forward. If anything, our use of forecast average earnings growth would have tended to underestimate the number of beneficiaries.

2.7 Second, we investigated the reliability of the earnings data on which our estimates are based. It is clear that earnings data deficiencies did cause an overestimate of the number of beneficiaries at the introduction of the minimum wage. Since then, however, the data have improved and we do not believe that data deficiencies have been a significant determinant of the undershooting effect in recent years. Further details of the changes to the Office for National Statistics (ONS) data and methodology are given in Appendix 7.

2.8 Finally, we found one key reason why forward-looking estimates of beneficiaries have tended to exceed post-uprating estimates: the early anticipation of minimum wage upratings. Many large employers, whose main pay settlement dates continue to be in January and April, implement future minimum wage increases before mid-April, the period when the ONS earnings survey is conducted. This will have the effect of reducing our post-uprating estimates of beneficiaries which are based on the number of workers who are calculated to have received a pay increase to bring them up to or above the minimum wage level between mid-April and October of any year.

2.9 We are unable at present to quantify this effect, but it will clearly tend to reduce post-uprating estimates of beneficiaries, and may fully explain the difference between forward-looking estimates and post-uprating estimates. If it does, then it should be noted that the forward-looking estimates are the more accurate measure of the number of direct beneficiaries of the minimum wage i.e. it is our post-uprating estimates which are undercounting beneficiaries rather than our forward-looking overestimating them.

¹ It should be noted that, although we carry out these estimates after the upratings, we use data from the mid-April that precedes the upratings.

Jobs Paid Below the Minimum Wage in April 2004

2.10 ONS data show that some workers are being paid below the minimum wage. The Annual Survey of Hours and Earnings (ASHE) estimates for April 2004 show that 272,000 jobs were held by people aged 18 or over with hourly pay below the appropriate National Minimum Wage. This represents 1.1 per cent of the total number of UK jobs. 227,000 jobs were held by people aged 22 and over (1.0 per cent of jobs held by those in this age group) with pay less than £4.50 per hour (the then adult rate). A further 45,000 jobs were held by 18 to 21 year olds (2.4 per cent of jobs held by those in this age group) with pay below £3.80 per hour (the then youth Development Rate). As can be seen in Table 2.2, most of these jobs were part-time and held by women.

Table 2.2 Jobs Paid Below the October 2003 National Minimum Wage by Gender and Hours of Work for Those Aged 18 and Over, UK, April 2004

Source: ONS low pay methodology estimates using ASHE 2004, with supplementary information.

2.11 The figures should not be used to calculate the number of workers being denied their legal right to the minimum wage. Some workers may legitimately be paid below the minimum wage and it is not possible to tell from the data whether an individual is entitled to the minimum wage. For example, it is not possible to identify those who are exempt from the minimum wage or are entitled to lower rates because of certain types of training (covered by the exemption for apprentices and the older workers' Development Rate). If workers receive free accommodation, employers are entitled to offset hourly rates by up to £3.75 per day. Further, some homeworkers may not receive the full minimum wage rate. We go on to discuss issues of compliance and enforcement in Chapter 6.

2.12 Revised estimates of those paid below the applicable minimum wage for 1998-2003 using the new ONS methodology and revised data are given in Table A7.1 in Appendix 7. Estimates using the old and new methodologies are compared in Table A7.2.

Jobs in April Paid Below the Forthcoming October Minimum Wage

2.13 Table 2.3 shows that the percentage of adult jobs paid below the minimum wage in April each year, which as noted above was 1.0 per cent in 2004, has tended to fluctuate around that level. But on average, in April each year, a further five per cent are paid below the hourly rate at which the minimum wage is due to be fixed in six months time (the ASHE survey is conducted in mid-April each year). As we would expect, this percentage is higher when a large increase in the minimum wage is planned, such as in 2003 and 2004, than when a smaller rise is expected, such as in 2000 and 2002. The percentage for 2004 is similar in magnitude to that for 2001, when the minimum wage increased by over ten per cent. A similar analysis is conducted for young workers in Chapter 5.

Table 2.3 Adults (Aged 22 and Over) Earning Below the Existing National Minimum Wage and the Forthcoming National Minimum Wage Rate, 1999-2004

Source: ONS central estimates using ASHE and LFS for 1999-2004. ONS estimates using ASHE with supplementary information for 2004a.

Jobs Benefiting From the 2003 and 2004 Upratings

2.14 While noting the danger of underestimating beneficiaries as a result of the 'anticipation' effect discussed above, for consistency we use the same method as in previous reports to estimate the number of beneficiaries of the 2004 upratings. This method entails calculating how many workers are expected to have received a wage increase between April and October to bring them from below to at least the October minimum wage level. Calculating this estimate, however, requires an assumption of what wage increases would have occurred in the absence of the National Minimum Wage. We make our estimates using two alternative assumptions: that the earnings of the low-paid would have risen in line with average earnings during this period; or that they would have risen in line with prices.

2.15 To estimate the number of beneficiaries using either of these assumptions, we calculate a 'downrated' equivalent value in April of the October minimum wage rate². Using the earnings assumption (and with earnings growing at 4.2 per cent per annum in October 2004) an adult earning £4.75 or more in April 2004 was likely to have received a wage increase that would take them above the £4.85 October 2004 minimum wage rate and is therefore not counted as a beneficiary. The equivalent 'downrated' figure using the earnings assumption for youths (aged 18-21) was £4.00 (versus the October rate of £4.10) and for 16-17 year olds £2.95 (versus the October rate of £3.00). Downrating by prices (which were growing at 2.2 per cent per annum in 2004) would give us £4.80, £4.05, and £3.00 respectively. Employees have to be earning below these levels in mid-April 2004 to count as beneficiaries.

2.16 As Table 2.4 indicates, in our fourth report (2003) using data from Spring 2002, we estimated that around 1.7 million jobs would benefit from the October 2004 upratings using the earnings assumption. In the subsequent 2004 report, using data from Spring 2003, we revised our estimates downwards to 1.6 million. The latest estimate is that since April 2004, 1.1 million jobs have directly benefited from the 2004 upratings but crucially many more may have received the benefit of an anticipatory wage increase before April.

² Rounded to the nearest 5p.

Table 2.4 Estimated Beneficiaries from the 2003 and 2004 Upratings Using the Earnings Assumption³

Sources: Fourth report (2003), 2004 Report (2004). LPC calculations for this report based on ASHE/LFS central estimates for 2003, and ASHE with supplementary information for 2004.

Notes:
1. Youths are aged 18-20 and adults 21 and over in the fourth report estimates.
2 .Youths are aged 18-21 and adults 22 and over in these estimates.
3. The numbers for youths are rounded to the nearest 10,000. The numbers for adults are rounded to the nearest 100,000.
4. Estimates of the percentages of gainers are rounded to the nearest 0.1 per cent.

2.17 The above estimates follow the now familiar pattern in that, at each iteration, the estimate of the total number of beneficiaries has been revised downwards. As already stated, it is likely that this is significantly explained by wage anticipation, i.e. the October increase is awarded prior to the April of the same year.

Characteristics of Beneficiaries

2.18 Having estimated the number of jobs which benefited after April 2004 from the October 2004 upratings, we now investigate the characteristics of these beneficiaries by gender, hours of work, age, ethnicity, disability, region and sectors. We begin by looking at a picture of the beneficiaries of the 2004 upratings at a single point in time, using the earnings assumption, before concluding with a summary of commissioned research that investigated beneficiaries over time from earlier upratings.

³ Using the prices downrating assumption, in the fourth report we estimated the number of direct beneficiaries to be 1.5 million adults (aged 21 and over) and 100,000 youths (aged 18-20) in October 2003 and 2.3 million adults and 150,000 youths in October 2004. This was 6.5 per cent in 2003 and 9.8 per cent in 2004 of all employee jobs. In the 2004 report, we revised this estimate to 1.1 million adults (aged 22 and over) and 90,000 youths (aged 18-21) in October 2003 and 1.8 million adults and 130,000 youths in October 2004. This was 4.7 per cent in 2003 and 7.6 per cent in 2004 of all employee jobs. We now estimate that 1.1 million adults and 140,000 youths (about 5.2 per cent of all employee jobs for those aged 18 and over) will have directly benefited from the October 2004 upratings. This estimate will not include those who received their 2004 uprating prior to April 2004.

Gender and Hours Worked

2.19 As Figure 2.1 below reveals, two-thirds of the beneficiaries of the October 2004 upratings were women. Nearly half were women working part-time. A fifth were full-time male workers and men working part-time make up the remaining 12 per cent.

Figure 2.1

Percentage of Jobs Paying Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Gender and Hours Worked, April 2004

Source: LPC calculations using ASHE 2004, with supplementary information.

Note: We have used the earnings downrating assumption to derive estimates of the value in April 2004 of the October 2004 upratings. That is we have assumed that, in the absence of any labour market intervention, all wages would have grown by the average earnings index between April and October. In other words, wages would have risen by 2.1 per cent in this six-month period.

Age

2.20 We can see that the distribution of the beneficiaries by age is U-shaped. That is to say that between 7 and 8 per cent of workers aged 16 to 25 years old were beneficiaries compared with around 4 per cent of those aged 25 to 54. This proportion then increases to about 6 per cent of those nearing pension age.

Figure 2.2

Percentage of Jobs Paying Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Age, April 2004

Source: LPC calculations using ASHE 2004, with supplementary information.

Note: See note to Figure 2.1.

Ethnicity

2.21 For our analysis of ethnicity we use the Labour Force Survey (LFS), as the ASHE contains no information on ethnicity. It should be noted that the earnings data in the LFS are not as reliable as that in the ASHE. Using the ASHE, we estimate coverage of the 2004 upratings to be less than 5 per cent. In contrast, about 9.5 per cent of employees are estimated to be beneficiaries in the LFS, using the derived hourly pay variable. Although over 90 per cent of the beneficiaries of the 2004 upratings were white, this proportion was less than the proportion of whites in the workforce. Figure 2.3 shows the percentage of each ethnic group who benefited from the 2004 minimum wage upratings. Using LFS data, nearly a fifth of all jobs held by Pakistanis and Bangladeshis were expected to benefit from the 2004 upratings. This compares with about nine per cent of whites. Blacks were least likely to benefit.

Figure 2.3

Percentage of Employees Earning Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Ethnicity, Spring 2004

Source: LPC calculations using LFS, Spring 2004.

Notes:
1. See note to Figure 2.1.
2. The derived hourly pay variable in the LFS overestimates the number of beneficiaries compared to the ASHE, hence the coverage in Figures 2.3 and 2.4 is greater than for the other Figures in this section that use ASHE.

Disability

2.22 This analysis also uses the LFS as there is no disability information in the ASHE. The same qualifications as set out in paragraph 2.21 concerning LFS data also apply to those with disabilities. Figure 2.4 shows the percentage of those with and without work-limiting disabilities, who were set to benefit from the 2004 minimum wage upratings. Those with work-limiting disabilities were more likely to have benefited from the 2004 minimum wage uprating. This result holds for both men and women.

'Overall, over 40% of respondents have increased their minimum rates of pay in order to comply with the NMW. In the Midlands this percentage increases to 50% of the respondents. However, the areas worse affected are Scotland and Wales with nearly 60% and over 80% of respondents respectively stating that they have increased their minimum rates of pay in order to comply with the NMW.'

British Shops and Stores Association evidence

Figure 2.4

Percentage of Employees Earning Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Disability, Spring 2004

Source: LPC calculations using LFS, Spring 2004.
Notes:
1. See note to Figure 2.1.
2. See note 2 to Figure 2.3.

Region and Country

2.23 Figure 2.5 shows the percentage of jobs benefiting from the October 2004 upratings by region, country and gender. The preponderance of women is again apparent. Unsurprisingly, London has the lowest percentage of possible beneficiaries, with the South East of England close behind. The highest percentages are in the North of England, the East Midlands and Northern Ireland.

Figure 2.5

Percentage of Jobs Paying Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Region and Country, April 2004

Source: LPC calculations using ASHE 2004, with supplementary information.

Note: See note to Figure 2.1.

Low-paying Sectors

2.24 For the purposes of our analysis, the low-paying sectors consist of agriculture, retail, hospitality, security, childcare, social care, cleaning, the manufacture of textiles, clothing and footwear and hairdressing. Figure 2.6 shows the percentage of jobs (and Figure 2.7 the number of jobs) in these traditional low-paying sectors (excluding childcare) set to benefit from the October 2004 upratings.

Figure 2.6

Percentage of Jobs Paying Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Low-paying Sector, April 2004

Source: LPC calculations using ASHE 2004, with supplementary information.

2.25 Figures 2.6 and 2.7 together help us see where the 2004 upratings of the minimum wage have had most impact. They reveal that more beneficiaries of the 2004 upratings were to be found in the retail sector than any other sector. Just over 300,000 retail jobs, representing about 13 per cent of jobs in the sector, were estimated to have had their hourly rate increased from 1 October 2004 as a result of the minimum wage upratings.

2.26 While the retail sector had the most beneficiaries in number, the sectors with the largest proportion of staff affected were hospitality and hairdressing. In both sectors about 20 per cent of employees stood to benefit. Compared with retail, the absolute numbers in hairdressing were very small. Hospitality, on the other hand, had over 200,000 workers who have benefited.

Figure 2.7

Number of Jobs Paying Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Low-paying Sector, Thousands, April 2004

Source: LPC calculations using ASHE 2004, with supplementary information.

Note: See note to Figure 2.1.

Size of Firm

2.27 Figure 2.8 sets out beneficiaries by size of firm. It shows that, in general, the smaller the firm the more likely there will be workers who stand to benefit from the National Minimum Wage. Even so, most jobs in small firms were already paid above the October 2004 minimum wage rates by April 2004. Just over 10 per cent of jobs in micro firms (with 1 to 9 employees), but fewer than seven per cent in other small firms (with 10 to 49 employees) were estimated to gain from the October 2004 upratings.

'Nearly 60 per cent [of survey respondents] aimed at setting the lowest rate of pay above the NMW - the so-called "mezzanine" approach.'

British Hospitality Association evidence

Figure 2.8

Percentage of Jobs Paying Less Than £4.75 (22 and Over), £4.00 (18-21) and £2.95 (16-17) by Size of Firm, April 2004

Source: LPC calculations using ASHE 2004, with supplementary information.

Note: See note to Figure 2.1.

Flows

2.28 We commissioned research from Sloane, Murphy, Jones and Jones (2004) to examine whether minimum wage workers tended to get trapped in low-paying jobs, or whether such positions acted as a stepping-stone to more remunerative positions. They found high levels of flows into and out of minimum wage employment (churning), with 40 per cent moving into higher-paid employment a year later, 4 per cent exiting into unemployment and 12 per cent becoming economically inactive. They concluded that employment in minimum wage jobs lasted less than a year for about half of those paid at or below the minimum wage.

2.29 This dynamic picture of the characteristics of beneficiaries is similar to the static picture discussed above. The researchers found that men were more likely to exit minimum wage employment than women. Having a disability, being employed in a small firm, working part-time or being employed in the private sector increased the probability of remaining in minimum wage employment.

'Retailers do not want to be regarded as minimum wage employers ... Many retailers choose to pay a rate above the NMW to recruit and retain the best staff.'

British Retail Consortium evidence

Conclusion

2.30 We calculate that there were 1.1 million jobs where the hourly rate of pay in mid-April 2004 was below the new October 2004 minimum wage rate (suitably downrated) and which benefited directly from the 2004 upratings. This latest estimate represents about 4.6 per cent of all employee jobs. In our fourth report we calculated that the 2004 upratings would cover 6.9 per cent of the workforce.

2.31 There will, however, have been other workers who benefited from the October 2004 increases. These fall into two categories:

• Workers whose pay had already been increased prior to April 2004 because employers were anticipating the October increases;
• Workers who did not need a pay increase to take them above the October 2004 minimum wage rates, but who received an increase in order to maintain differentials.

2.32 The latter category of indirect beneficiaries is not intended to be covered by our estimates of beneficiaries, which instead seek to measure 'direct beneficiaries'. The former category - direct beneficiaries who receive pay increases before April - will be captured by our forward-looking estimates of beneficiaries but not by our post-uprating estimates.

2.33 It may therefore be that our forward-looking estimates of beneficiaries are a better indication of total direct beneficiaries than our post-uprating estimates. The fact that our post-uprating estimates are lower than our forward-looking estimates does not, therefore, in itself establish any presumption that the increases in October 2003 and October 2004 produced less of an impact than we intended.

2.34 However, this is an area that we will wish to consider further and where we may want to commission future research.

'The significant differences in the UK labour market have ultimately resulted in wage disparities.... Therefore, ACS recommends that the Low Pay Commission take into consideration the fact that retailers in some regions of the country are less able to sustain wage levels at the minimum wage than others.'

Association of Convenience Stores evidence