The Labour Market

2.58 In this section we analyse overall trends in the UK labour market including employment, unemployment, inactivity, employee jobs, hours, vacancies and pay settlements. Although we look at trends since the introduction of the minimum wage, we focus our attention on the impact of the October 2003 upratings, looking in particular at employment, unemployment and participation among the working age population. Where data permits, we also comment on the emerging impact of the October 2004 upratings.

2.59 We analyse the labour market by looking first at the number of people in employment (employees and self-employed) using household survey data. We follow this by looking at the number of jobs in the economy using employer-based survey data.

Employment, Unemployment and Inactivity

2.60 The UK labour market continues to be strong, with employment at record levels and unemployment low. There does not appear to have been any detrimental effect on total employment from the October 2003 upratings. Indeed, total employment in the economy rose by 271,000 in the year to Autumn 2004 and was 478,000 up since Autumn 2002. Initial indications of the impact of the 2004 upratings also suggest that there has been no negative effect. There was an increase in total employment of 99,000 in the three months to Autumn 2004.

2.61 Against this backdrop unemployment has also continued to be low. The unemployment level was 1.4 million in Autumn 2004, up 13,000 on the quarter but down 64,000 from a year earlier. Since Autumn 2002, it has fallen by 129,000. The claimant unemployment count shows similar trends. In December 2004 it was down 12,400 on October 2004 and stood at 824,200. This compares with 924,600 in October 2003 and 940,400 in October 2002.

2.62 Figure 2.16 shows how the working age employment and unemployment rates have changed since Spring 1995. The employment rate in Autumn 2004 stood at 74.8 per cent, an increase of 0.2 percentage points since the minimum wage upratings in Autumn 2003. It was also 74.6 per cent in Autumn 2002.

Figure 2.16

Working Age Employment and Unemployment Rates, UK, 1995-2004

Source: LFS, seasonally adjusted, 1995-2004.

'At the time this survey was conducted [July 2004], 21% of retailers had reduced staff hours as a direct result of the NMW increasing to £4.50.'

BRC evidence

2.63 Figure 2.16 also shows that the unemployment rate has fallen from 5.3 per cent in Autumn 2002 to 5.0 per cent in Autumn 2003 and in Autumn 2004 was at a historically low rate of 4.8 per cent.

2.64 The claimant count unemployment rate in December 2004 was at its lowest since May 1975. The inactivity rate has fallen from 21.5 per cent in October 2003 to 21.4 per cent in October 2004, although it was 21.2 per cent in October 2002.

2.65 It is also worth taking a closer look at unemployment, inactivity and employment rates for different age groups. Figure 2.17 clearly shows that most age groups have benefited from the general increase in employment. There has been a particularly steep rise in the employment rate of those aged 55 and over. In contrast the employment rates of 16-17 year olds have been falling since the Summer of 1997. The employment rates of 18-21 year olds had been declining from mid-2000 to mid-2003 but appear to have levelled off since then. Young workers are analysed in more detail in Chapter 5.

Figure 2.17

Working Age Employment Rates by Age, 1994-2004

Source: LFS, not seasonally adjusted, 1994-2004.

'Bearing in mind that many charities running shops are relatively small businesses with limited budgets, the result of these higher costs has been, in some cases, a limit on the number of hours offered to those employed. Therefore although the NMW has risen ... earnings of individuals employed in our sector at the lowest levels have not necessarily increased ....'

Association of Charity Shops evidence

2.66 All age groups, with the exception of 16-17 year-olds, have experienced a declining trend in unemployment rates since the introduction of the minimum wage in April 1999.

2.67 As shown in Figure 2.18, despite their recent improvement in employment rates, inactivity rates among those aged 55 and over, although declining, are the highest of any group other than 16-17 year olds. Since the Autumn of 2001, there appears to have been an increase in inactivity among the younger age groups.

Figure 2.18

Working Age Inactivity Rates by Age, 1994-2004

Source: LFS, not seasonally adjusted, 1994-2004.

2.68 Employment at an aggregate level appears strong. Two of our commissioned research projects, however, found small negative employment effects in those sectors and among those workers most affected by the minimum wage. Galindo-Rueda and Pereira (2004) found that employment grew at a slower rate in those areas of the country most affected by the minimum wage. Dickens and Draca (2005) examined the employment effects arising from upratings to the minimum wage. They found no statistically significant effects.

Jobs

2.69 The above analysis has concentrated on data from the LFS, a household survey which looks at the number of people in jobs. In this section we explore the number of jobs by looking at data from the ONS employee jobs series, an employer-based survey.

2.70 The number of employee jobs in Great Britain was around 25.6 million in September 2004. This consisted of about 17.6 million full-time and eight million part-time employee jobs. Since September 2003, the number of employee jobs has increased by about 138,000, with most of the increase being in full-time rather than part-time positions.

2.71 The low-paying sectors we referred to earlier in the Chapter (excluding childcare) accounted for some 6.1 million jobs - around 24 per cent of all employee jobs - in September 2004. Table 2.7 shows how the number of employee jobs in the economy and in the low-paying sectors has changed since the October 2003 upratings, the October 2002 upratings and the introduction of the National Minimum Wage. In the year since the October 2003 upratings, the number of employee jobs across the low-paying sectors has remained fairly constant, increasing by 34,000. During this period, the total number of employee jobs in the economy increased at a similar rate. There was little change between September 2002 and September 2003. Since March 1999, just before the introduction of the minimum wage in April 1999, there has been an increase of around a quarter of a million in the number of employee jobs in the low-paying sectors compared with over 1.2 million extra employee jobs in the economy.

Table 2.7 Number of Employee Jobs by Sector, Great Britain, 1999-2004

Source: ONS employee jobs series, GB, 1999-2004.

2.72 In the economy as a whole, about 69 per cent of all employee jobs are full-time. In contrast, only 46 per cent of employee jobs in the low-paying sectors are full-time. Between September 2003 and September 2004, there has been an increase in both full-time (up 118,000) and part-time (up 19,000) employee jobs in the economy as a whole. In the low-paying sectors the number of full-time employee jobs increased by 58,000, although the number of part-time ones fell by 23,000.

2.73 Since the introduction of the National Minimum Wage, the number of full-time employee jobs in the economy has risen by 503,000 and part-time employee jobs increased by 725,000. In contrast, the number of full-time employee jobs in the low-paying sectors has remained largely unchanged, while the number of part-time employee jobs has increased by 251,000.

Hours

2.74 As can be seen in Figure 2.19, the total number of actual weekly hours worked in the UK has increased significantly since the 1990s recession, reflecting the increase in employment. The actual number of weekly hours worked has increased from about 830 million in the last quarter of 1993 to about 907 million in the third quarter of 2004. The introduction of the minimum wage in Spring 1999, and the subsequent upratings, have not had any adverse effect on the total number of hours worked. Indeed, total weekly hours increased by nearly 18 million between the first quarter of 1999 and the third quarter of 2004. In the year after the 2003 upratings, the total number of actual weekly hours increased by nearly 13 million.

Figure 2.19

Total Actual Weekly Hours Worked (Millions) in the UK, 1991-2004

Source: LFS, seasonally adjusted, 1991-2004.

2.75 Average weekly hours have been declining since 1994, reflecting the increase in part-time work. This decline has been further accentuated by Government policies, such as the Working Time Directive, enhanced employment rights for part-timers and targeting the 'long hours' culture by promoting work-life balance. Average weekly hours have fallen from 33.2 in the first quarter of 1997 to 31.9 in the third quarter of 2004.

2.76 According to ASHE, full-time employees worked a median of 37.5 hours per week in April 2004, up 0.2 hours on 2003. Part-time employees worked a median of 20 hours a week in April 2004, the same as in April 2003.

2.77 Table 2.8 shows that the proportion of full-time employees working overtime in April 2004 was 23.2 per cent. Using comparable data, there has been a slight increase in overtime hours since April 2003.

Table 2.8 Paid Overtime Hours: Percentage Who Worked Overtime and Their Median Hours, All Employee Jobs, UK, April 2004

Source: ASHE, 2003-2004.

Notes:

1. ASHE with supplementary information.
2. ASHE without supplementary information.
3. Employees on adult rates whose pay for the survey period was not affected by absence.

2.78 Stewart and Swaffield (2004) were commissioned to research the impact of the minimum wage on hours worked. They found evidence to suggest that, although the initial impact of the minimum wage was small and insignificant, there were some significant 'lagged' effects. Although the results were not completely robust across data sets and model specifications, they conclude that 'the introduction of the minimum wage led to a reduction in the paid working hours of about 1 to 2 hours per week for both male and female low-wage workers'. They were unable, however, to determine whether this reduction was a result of employee choice or imposed by employers.

2.79 If the minimum wage boosts take home pay then individuals may no longer need to work in two jobs in order to maintain income levels. Conversely, if hours worked decline in response to upratings of the minimum wage, then individuals may take second jobs in order to earn enough money. Robinson and Wadsworth (2004) considered these issues and found that the introduction of the minimum wage had little overall effect on the incidence of second job holding or the hours worked in second jobs.

2.80 In conclusion, the minimum wage does not seem to have had much impact on aggregate hours. Stewart and Swaffield (2004) found that some individuals worked fewer hours after the introduction of the minimum wage; this may have been their choice or may have been imposed by the employer.

Vacancies

2.81 The number of vacancies in the economy is another indicator of the health of the labour market. The number of vacancies tends to be pro-cyclical, going up in a boom but falling in a recession. The ONS monthly job vacancy series, based on a survey of employers, was introduced in April 2001. We do not, therefore, have a consistent vacancy series that covers the introduction of the National Minimum Wage. The available Jobcentre vacancies show, however, that the introduction of the minimum wage coincided with an increase in the number of Jobcentre vacancies from just under 300,000 in March 1999, to about 345,000 in March 2000 and almost 395,000 by March 2001. The number of new vacancies (inflows) and the number of filled vacancies (outflows) also increased over that period.

2.82 Table 2.9 shows the average level of vacancies in the UK, and for selected industries covering the main low-paying sectors, from September 2001 to September 2004. In general, vacancies fell from mid-2001 to mid-2003 before picking up again. Since the 2003 minimum wage upratings, vacancies have generally increased. The number of vacancies appears to be robust in the distribution, hotels and restaurants sector, which is characterised by many low-paying jobs.

Table 2.9 Job Vacancies in Selected Industries, UK, 2001-2004

Source: ONS Vacancy Survey, not seasonally adjusted, average for three months ending in month shown.

2.83 An alternative interpretation is that the level of vacancies might also be indicative of the level of mismatch in the economy. An increasing number of vacancies might be a sign that employers cannot find workers with the skills they need for the job, or that the wages on offer are not attractive to those seeking work.

Pay Settlements and Average Earnings Growth

2.84 Wage growth has been remarkably subdued in a period of tight labour markets and low unemployment. Pay settlement data from both Incomes Data Services (2005b) and Industrial Relations Services (2005) show that the median pay settlement in the economy has been running at about 3 per cent for every month since early 2003.

2.85 In the year to April 2004, growth in gross weekly pay excluding bonus payments grew by 3.9 per cent according to ASHE, compared with a figure of 4.3 per cent from the Average Earnings Index (AEI). We use the AEI as our measure of average wage growth. The AEI is also the index used for forecasts by City and independent economic institutions. Average earnings growth captures a host of influences such as hours worked, overtime, bonuses and merit awards, which partly explain why it differs from the pay settlement data.

2.86 As shown in Figure 2.20, the pace of average earnings growth has quickened slightly in 2004 but remains at a moderate level. The year-on-year growth in average earnings for the whole economy (including bonuses) leapt from 3.4 per cent in December 2003 to 5.3 per cent in March 2004, driven by large private sector bonuses in January, but moderated to 4.2 per cent in April 2004. This was still the rate of growth of average earnings in November 2004, remaining just below the pace of 4.5 per cent the Bank of England believes is consistent with its inflation target.

Figure 2.20

Growth in Average Earnings Including Bonuses: Total, Public and Private Sectors, 1996-2004

Source: ONS, AEI including bonuses, year on year three-monthly averages, 1996-2004.

2.87 In November 2004 there was a gap between the public and private sectors, with the former running slightly ahead of the private sector at 4.7 per cent per annum compared with 4.1 per cent. The increase in public sector average wage growth is likely to continue into 2005 as 'Agenda for Change' is implemented in the NHS. Public sector average wage growth is therefore likely to remain above that for the private sector.

Conclusion

2.88 The UK labour market remains healthy with employment rates high and unemployment low. Total actual weekly hours worked in the UK has continued to increase, even though average hours worked by each individual has fallen. With inflation and interest rates still low, pay settlements remain relatively subdued.

2.89 Overall, employment has increased among the groups of workers and sectors most affected by the National Minimum Wage. Employment has also been increasing in the low-paying sectors as a whole. The low-paying sectors are considered in more detail in Chapter 3. Since the introduction of the minimum wage, unemployment has fallen for all age groups except for 16 and 17 year olds. The most affected groups of workers, including young workers, are considered in more detail in Chapters 4 and 5.

2.90 In conclusion, the minimum wage does not seem to have had any significant negative impact on the labour market. We now turn our attention to the impact of the minimum wage on the firm.