Earnings

2.35 In this section, we consider the hourly earnings distribution for adult workers (aged 22 and over). The hourly earnings distributions for younger workers are considered in Chapter 5.

2.36 The impact of the adult minimum wage can clearly be seen in Figure 2.9. There is a concentration of the workforce at the National Minimum Wage in all three years considered. This concentration is greatest in Spring 2002 and Spring 2004, periods that followed the large minimum wage upratings of October 2001 and October 2003. After the smaller uprating in October 2002, the proportion of jobs paid at the minimum wage rate was lower.

'As a national employer, we are also aware of the varying degree of impact felt as a result of NMW increases across the country. Up to now the South East has seen relatively little impact from NMW increases - average pay rates being higher than the level of NMW. The situation in the North and in Scotland and Wales is very different. The majority of care home staff in the North and Scotland are now paid at NMW.'

BUPA Care Homes evidence

Figure 2.9

Hourly Earnings Distribution for Employees Aged 22 and Over, 2002-2004

Source: ONS central estimate methodology, Spring 2002-2004.

Notes:
1. Gross hourly earnings excluding overtime.
2. NMW label shows the adult NMW rate in April of the given year.

'Employers who adopt a 'mezzanine floor' minimum rate set just above the minimum wage as part of their labour market strategy may fear that they will lose competitive advantage if the minimum wage is raised to a point where they cannot maintain this addition. This may well be seen as a problem for these employers, but it is not a problem for the UK economy as a whole.'

TUC evidence

2.37 In Spring 2004, there were peaks in the adult earnings distribution at around £4.50 (the then National Minimum Wage), £5.00, £5.50, £6.00 and £6.50. Similar peaks are observed for 2002 and 2003. These peaks lend support to the idea that firms, particularly those in the low-paying sectors, had a 'mezzanine' level that was between 50p and £1.00 greater than the minimum wage. Our discussions with various employers and employer organisations bear this out. Many told us that they did not wish to be seen as 'minimum wage employers'. Further, many firms observed that they could not get the quality of workers they wanted at the minimum wage so had to pay higher rates.

2.38 Excluding overtime, median gross hourly earnings of full-time adults, whose pay was not affected by absence, was £10.41 per hour in April 2004, up 5.1 per cent on April 2003. Excluding overtime, the median hourly earnings of full-time women (£9.46) increased by 5.3 per cent, compared with 4.9 per cent for men (£11.04). In comparison, the National Minimum Wage for adults rose from £4.20 in October 2002 to £4.50 in October 2003, an increase of 7.1 per cent.

2.39 The value of the adult minimum wage compared with other earnings measures is shown in Table 2.5. It can be seen that after the large upratings, such as in the 2002 and 2004 data, the minimum wage increases as a proportion of mean, median, lowest decile and lowest quartile hourly earnings. However, the converse occurs in years of small upratings, such as in the data for 2000, 2001 and 2003.

Table 2.5 Adult Minimum Wage as a Percentage of Various Gross Hourly Earnings (Excluding Overtime) Measures, All Employee Jobs, 1999-2004

Source: ASHE, April 1999-2004, without supplementary information.

Note: Employees on adult rates whose pay for the survey period was unaffected by absence.

2.40 Overall, since its introduction the value of the adult minimum wage as a percentage of median hourly earnings has increased from 47.6 per cent to 48.5 per cent in April 2004. It is expected to increase further following the October 2004 uprating. It should be noted, however, that at its introduction in April 1999 the adult rate of the minimum wage as a proportion of mean hourly earnings was 36.7 per cent. It did not reach this level again until Spring 2004, although it is now expected to increase following the 7.8 per cent uprating in October 2004.

'Differentials within companies have been squeezed to such an extent that firms now face considerable costs if they are to restore them in order to recruit staff, maintain employee motivation and reward progression. The erosion of differentials impacts on employers' ability to provide employees with a performance incentive and to recruit staff with some level of experience.'

CBI evidence

Region and Country

2.41 By looking at wages at a regional level, we can see which areas of the UK are likely to be most affected by the National Minimum Wage. In April 2004, median gross hourly earnings (excluding overtime) were highest in London at £12.89 (40 per cent higher than the national median) and lowest in the North East at £8.20, Northern Ireland at £8.26 (both about 11 per cent lower than the national median) and the East Midlands (£8.36). It can be seen from Table 2.6 that England (£9.34) has higher median average hourly pay than Scotland (£8.66), Wales (£8.46) and Northern Ireland (£8.26).

'As a matter of good business practice, differentials are important incentives to good performance and need to be maintained, particularly at lower wage levels. It is unreasonable not to raise the wages of staff paid at rates above the NMW in line with those paid at NMW level.'

BRC evidence

Table 2.6 Gross Hourly Pay Excluding Overtime by Region, All Employee Jobs, April 2004

Source: ASHE 2004, with supplementary information.

Note: Employees on adult rates whose pay for the survey period was not affected by absence.

2.42 We might expect the minimum wage to have more impact in the North East, the East Midlands and Northern Ireland, where the lowest decile hourly earnings were £5.00 or below, and much less impact in London, the South East and the East of England. Figure 2.5 showed that the highest percentage of jobs paying less than £4.75 were located in the North East, the East Midlands and Northern Ireland.

2.43 It is likely therefore that the minimum wage has had a noticeable impact in these regions. Indeed, in the year to April 2004 the largest increases in mean gross hourly earnings (excluding overtime) were in the North East (6.1 per cent), Wales (6.0 per cent) and Yorkshire and the Humber (5.1 per cent). This compares with 3.8 per cent in the East Midlands, another low-paying region, and 4.2 per cent in the UK. The largest increases in median gross hourly earnings (excluding overtime) were in Wales (7.7 per cent) and Northern Ireland (5.6 per cent).

2.44 Although there are regional disparities in gross hourly earnings, there are also significant differences within regions. Indeed, these within-region differences are often greater than those between regions. For example, median gross hourly earnings in Manchester are £10.45 but in Bolton, in the same region, they are £7.70. Further, median gross hourly earnings are £10.37 in Solihull but only £7.75 in nearby Dudley.

Public and Private Sector

2.45 In April 2004, median hourly pay was about 21.4 per cent higher in the public sector (£10.49) than in the private sector (£8.64), although the mean hourly pay was only 4.9 per cent higher in the public sector. The lowest decile hourly earnings in the private sector was under £5.00 compared with £5.78 in the public sector.

Figure 2.10

Gross Hourly Earnings (Excluding Overtime) Distribution for Employees Aged 18 and Over by Public and Private Sector, April 2004

Source: ASHE, April 2004, with supplementary information.

Note: The NMW 2004 label refers to the adult minimum wage rate in April 2004 (£4.50). The YDR 2004 refers to the youth Development Rate in April 2004 (£3.80).

2.46 Figure 2.10 depicts the gross hourly earnings distribution in the public and private sectors and highlights the difference at the bottom end of the earnings distribution. We can clearly see that the private sector is more affected by the minimum wage than the public sector. When deciding upon our recommendations, we take full account of the relative impacts on the public and private sectors.

Differentials

2.47 An important factor when assessing the impact of the National Minimum Wage is the degree to which differentials are restored following an uprating. This not only affects the number of workers who might indirectly gain from above-average increases in the minimum wage but also affects firms' total wage bills. This has consequences not only for a firm's ability to pay higher minimum wages but could also lead to economy-wide inflationary pressures.

2.48 The further up the earnings distribution that the differential impacts, the greater the number of people that gain from higher wages, but the higher the cost to firms and the greater the potential impact on inflation.

2.49 In our fourth report (2003), we analysed the extent of the differential impact and concluded that following the minimum wage increases in October 2000 and 2001, earnings increases up to the 16^th percentile were higher, on average, than the median increase but lower than the direct minimum wage impact. From the 16^th to the 41^st percentile earnings increases fluctuated around the median, with average rises being just above the median. Taking a longer view, from 2000 to 2004, similar conclusions can be reached, as seen in Figure 2.11.

2.50 Figure 2.11 also clearly shows that the minimum wage has increased the hourly wages of those at the bottom of the earnings distribution. The largest increases occurred between 1998 and 2000 following the introduction of the minimum wage. Significant gains, largely attributable to the minimum wage upratings, have also been made by those at the bottom of the distribution between 2000 and 2004.

Figure 2.11

Increase in Hourly Earnings Minus the Increase in Median Earnings by Percentile for Employees Aged 22 and Over, 1998-2004

Source: ASHE, 1998-2004, without supplementary information.

2.51 Looking in more detail at the most recent increases, as shown in Figure 2.12, we can clearly see a 'concertina' effect. When the minimum wage increase has been large, as in 2001/02 and 2003/04, differentials were eroded (especially after the October 2003 uprating) but were restored when the increase in the minimum wage was small, as in 2002/03 (the 2002 uprating).

Figure 2.12

Increase in Hourly Earnings Minus the Increase in Median Earnings by Percentile up to the Median for Employees Aged 22 and Over, 2001-2004

Source: ASHE, 2001-2004, without supplementary information.

2.52 Turning to the low-paying sectors (excluding childcare), we can see from Figure 2.13 that the lower paid in these sectors have benefited significantly from the introduction and subsequent upratings of the minimum wage. In contrast to the economy as a whole, low-paid workers in these low-paying sectors have generally had wage increases greater than for those at the upper end of the earnings distribution.

Figure 2.13

Increase in Hourly Earnings Minus the Increase in Median Earnings by Percentile for Employees Aged 22 and Over in the Low-paying Sectors (Excluding Childcare), 1998-2004

Source: ASHE, 1998-2004, without supplementary information.

2.53 Looking at the most recent increases, we can see in Figure 2.14 that there were significant increases at the bottom end of the hourly earnings distribution following the large minimum wage upratings in 2001/02 and 2003/04. In 2002/03, when the upratings were small, the low-paid received only small increases. There is also evidence to suggest some restoration of differentials in this 'pause year'.

Figure 2.14

Increase in Hourly Earnings Minus the Increase in Median Earnings by Percentile up to the Median for Employees Aged 22 and Over in the Low-paying Sectors (Excluding Childcare), 2001-2004

Source: ASHE, 1998-2004, without supplementary information.

2.54 Evidence received in our formal and informal consultation process is consistent with this 'concertina' pattern. Indeed, the CBI along with other employers organisations, argued forcibly for a 'pause' year in 2005 in order that differentials could be restored.

2.55 There were increasing concerns from employers and employer organisations that squeezed differentials had become a greater problem as a result of the two large minimum wage upratings in October 2003 and October 2004. Many employers argued that differentials had become so compressed that this had forced them to flatten their pay structures by removing some grades. This was a particular problem in the textiles industry where incentive pay was used widely.

Household Income Distribution

2.56 In the analysis on beneficiaries earlier in the Chapter, we focused our attention on individuals. In this section, we look at the impact of the National Minimum Wage on households. We commissioned research from Bryan and Taylor (2004) to investigate this issue using the British Household Panel Survey (BHPS). Defining minimum wage households as all those households containing at least one minimum wage worker, they found that these typically were couple households, usually with older dependent children, and contained multiple wage earners.

Figure 2.15

Position of Minimum Wage Households Within the Household Income Distribution, Autumn 2002

Source: Bryan and Taylor (2004) using data from the BHPS.

2.57 The proportion of minimum wage households in each decile group of the household income distribution is shown in Figure 2.15. Looking at the income distribution of all households, the National Minimum Wage does not look particularly well-targeted at the bottom of the income distribution. This is because households at the bottom of the income distribution typically contain no wage earners, consisting largely of pensioner households and benefit recipients. Confining the analysis to working-age households, however, and in particular to working-age households in which at least one individual is in work, suggests that the National Minimum Wage is well-targeted at the bottom of the income distribution. These findings are similar to those reported in Volume Two of our third report (2001).