The number of jobs held by 18-21 year olds that benefited from the October 2004 uprating of the youth Development Rate is estimated at 120,000; this compares with 70,000 benefiting from the October 2003 uprating. In addition, many young people received pay rises as a result of increases in the adult rate. All the available evidence indicates that the minimum wage has not harmed the employment prospects of young people. Employment rates for 18-21 year olds have remained largely unchanged following the October 2003 increases in the minimum wage, though they are below the peaks reached in 2000/01. Total employment levels of young people are increasing, including in low-paying sectors.

The introduction of the 16-17 year old rate in October 2004 benefited up to 45,000 jobs. We will consider the impact of the minimum wage for 16-17 year olds in future reports.

In line with previous experience following a large uprating, the number of young people's jobs being paid below the adult rate of the minimum wage has increased, with a number of firms introducing age-related pay to offset the cost of minimum wage upratings. But other firms are moving in the opposite direction and there is no clear long-term trend. Age-related pay is not widespread and, even in the minority of firms that employ it, its use is often restricted to certain positions or new recruits in the first few months of employment. Where firms have introduced age-related pay, there is evidence that the minimum wage has resulted in age 22 being established as the threshold for payment of full adult rates of pay, whereas previously lower ages tended to be used.

The forthcoming implementation of the Equal Treatment Directive (2000/78/EC) outlawing age discrimination at work increases the need to ensure an appropriate youth Development Rate. We are strongly convinced that there is a need for a youth Development Rate which is lower than the adult rate and that adverse consequences for some young people would result if employers were not able to pay some younger workers below the adult minimum wage level. But we believe that the most appropriate cut-off point between the youth Development Rate and the adult rate is at the 21^st birthday. We therefore again recommend that 21 year olds should receive the adult rate of the National Minimum Wage.

The exemptions from the minimum wage for apprentices continue to work well, while the older workers' Development Rate remains little used. We believe that implementation of the Equal Treatment Directive will necessitate a change to the present requirement that apprentices must be under the age of 26 for the 12 months exemption from the minimum wage to apply. Our provisional conclusion is that the older workers' Development Rate should be abolished from October 2006, and that, simultaneously, the 12 months exemption from the minimum wage should be extended to cover all apprentices aged 19 and over. We recommend that the Government invite the Commission to review these provisional conclusions and make firm recommendations on these matters by February 2006.

Back to top

Introduction

5.1 Since the initial introduction of the National Minimum Wage we have aimed to ensure that young people are not priced out of the labour market. We have also been concerned that the minimum wage should not reduce training opportunities.

5.2 The evidence demonstrates that young people's wages are significantly lower than those of older workers and that young people are more likely to suffer unemployment. Research shows that youth unemployment can scar a person's employment prospects in later life and international evidence suggests that any potential adverse effects of national minimum wages are more likely to be felt among young people than adults. It is for these reasons that we have consistently recommended a youth Development Rate for 18-20 year olds, set at around 85 per cent of the adult rate.

5.3 We believe that the youth Development Rate offers valuable flexibility to employers and provides scope for a higher adult rate without risking the job prospects of young people. But we also consider that, to be credible, the youth Development Rate should only apply to those needing protection. It is a matter of judgement where the cut-off for the adult rate should apply, but we have always recommended that 21 year olds should be entitled to the adult rate. In the past the Government has disagreed and, in responding to the recommendation in our fourth report (2003), the Government commented that 'analysis of the employment and unemployment rates for young workers suggests a mixed performance on the part of 21 year olds, and we do not want to jeopardise their job prospects'.

5.4 Our fourth report (2003) established that young people had fared worse than average in the labour market in the year following the October 2001 upratings, and our 2004 report found that the labour market performance of young people continued to decline in the year to Autumn 2003. We considered it unlikely that the fall in the employment rate of 18-21 years olds was caused by the minimum wage but nevertheless we recognised the need for some caution on the youth Development Rate.

5.5 The fourth report also found that a number of full-time jobs for 16-17 year olds offered very low pay and little or no training. We were pleased that the Government subsequently accepted our recommendation that we should advise on whether a minimum wage for 16-17 year olds could be introduced which would put a stop to exploitation, without either encouraging young people out of education or harming the supply of training places. Our 2004 report concluded that this balance was possible and the Government accepted our recommendation of a minimum wage of £3.00 per hour for 16-17 year olds. This was implemented in October 2004 and we will assess its impact in future reports.

5.6 In this Chapter we first consider the impact of the October 2003 upratings on young people's labour market performance. Second we estimate the number of beneficiaries of the latest upratings and consider the impact on earnings. We then assess recent trends in the use of age-related pay and consider the role of the youth Development Rate, including its age coverage. Finally we consider training and workforce development, the role of the older workers' Development Rate and the minimum wage exemption for apprentices. Additional information on the labour market position of 18-21 year olds can be found in Appendix 6.

Back to top

Employment, Unemployment and Participation of Young People

5.7 The overall UK labour market has remained remarkably robust since the introduction of the minimum wage. Young people, however, have fared less well. Our previous reports found that in the two years following the October 2001 upratings there was a decline in the employment rate of 18-21 year olds and a slight rise in their unemployment rate. They also showed that the employment rate of 16-17 year olds has been on a declining trend since mid-1997. We consider here whether these trends have continued, looking separately at the labour market performance of 18-21 and 16-17 year olds.

Labour Market Position of 18-21 Year Olds

5.8 Employment rates of 18-21 year olds rose steadily from 1994-2001, appearing unaffected by the initial introduction of the minimum wage. But as Figure 5.1 shows, they fell during the period Summer 2001-Summer 2003, by 2.2 and 1.5 percentage points for men and women respectively. We commented on this decline in our fourth report (2003), and though we had no reason to believe that it had been produced by the 2001 upratings of the minimum wage, we flagged the need for caution looking forward. Since Summer 2003, however, there has been a slight increase in the employment rate of both men and women, despite the significant October 2003 upratings. Unemployment rates for 18-21 year olds have largely mirrored the employment trends, as illustrated in Figure 5.2.

Figure 5.1

Employment Rates for 18-21 Year Olds by Gender, 1998-2004

Source: Labour Force Survey (LFS), four quarter moving average, 1998-2004.

Figure 5.2

Unemployment Rates for 18-21 Year Olds by Gender, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

5.9 To understand the dynamics of the labour market for 18-21 year olds, it is essential to look separately at those in full-time education (FTE), and those not, and to consider the impact of the changing balance between these two groups. Figure 5.3 shows that the proportion of the total age cohort in FTE is increasing slowly. This in itself would tend to have a mildly depressive effect on the trend in the employment rate, since people in FTE are less likely to be in employment.

Figure 5.3

Proportion of 18-21 Year Olds in Full-time Education, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

5.10 However over the period 2001-2004, this gradual shift towards FTE was not the dominant factor at work, since employment rates fell and then began to rise again in both the FTE and non-FTE segments. Figure 5.4 shows the employment rates for those in FTE, with falls for women between 2001-2002, and for men between 2002-2003, but with both trends now reversed. Figure 5.5 shows employment rates for those not in FTE, with the male employment rate falling between 2001-2002 and then stabilising, while the female rate fell from 2002-2003 and then stabilised.

Figure 5.4

Employment Rates for 18-21 Year Olds in Full-time Education, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

Figure 5.5

Employment Rates for 18-21 Year Olds Not in Full-time Education, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

5.11 The reasons for the oscillations are unclear. We have found no evidence that they are linked to upratings of the minimum wage. And the most sustained change occurring is not the emergence of an increasing number of young people looking for work but failing to find it, but rather a rise in the inactivity rate, with a rise in the proportion of both young men and young women who are not in FTE, not in employment, but also not looking for work. Such a rise, illustrated in Figure 5.6, is more likely to be driven by wider social factors than by a deficiency of demand for labour caused by too high a minimum wage.

Figure 5.6

Inactivity Rates for 18-21 Year Olds Not in Full-time Education, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

5.12 Whatever the precise drivers of the trends it is clear that any concerns should be primarily focused on 18 and 19 year olds rather than slightly older age groups. As Figure 5.7 shows, the employment rate for 18 year olds not in FTE fell by 4.9 percentage points between Autumn 2000 and Autumn 2003, and that of 19 year olds by 3.8 percentage points. Among 20 and 21 year olds the changes were minimal.

Figure 5.7

Employment Rates of Young People Not in Full-time Education by Age, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

5.13 If the minimum wage were harming the employment prospects of young people, we would expect most impact to occur among those with the lowest qualifications. Figure 5.8 shows that there was no change in the employment rates of 18-19 and 20-21 year olds with qualifications at GCSE level and above, but the employment rates for 18-19 year olds with no qualifications increased by 3.7 percentage points. This shows that the labour market has improved marginally for those without any qualifications, suggesting that the October 2003 upratings have not adversely affected their employment opportunities. The Figure also clearly demonstrates the higher employment rates for those with qualifications.

Figure 5.8

Employment Rates of Young People Not in Full-time Education by Qualification Level, Autumn 2002-Summer 2003 Compared with Autumn 2003-Summer 2004

Source: LFS, averaged over Autumn-Summer quarters, 2002-2004.

5.14 Comparing the average of four quarters from Autumn 2003-Summer 2004 with the average of four quarters from Autumn 2002-Summer 2003, Figure 5.9 shows that employment levels were largely unchanged for 20-21 year olds not in FTE, but increased among their counterparts aged 18-19. Employment levels for 18-19 year olds not in FTE rose by 16,000 (mirroring the increase in population) among those with no qualifications and 14,000 (while the population increased by 18,000) for those with qualifications. Since the introduction of the minimum wage six years ago, employment levels for 18-19 year olds not in FTE have risen by 4,000 for those with no qualifications (the corresponding population increased by 11,000) and by 13,000 (the corresponding population increased by 31,000) for those with qualifications.

Figure 5.9

Employment and Population Levels of Young People Not in Full-time Education by Qualification Level, Thousands, Autumn 2002-Summer 2003 Compared with Autumn 2003-Summer 2004

Source: LFS, averaged over Autumn-Summer quarters, 2002-2004.

5.15 To summarise, since 1998 there have been slight increases in employment rates for 18-21 year olds and a fall in unemployment rates. However, in the period between Summer 2001 and Autumn 2003 there was a significant worsening in the labour market position of 18-21 year olds, particularly for those aged 18-19. The reasons for this are unclear. This decline appears to have halted since the October 2003 upratings and there is no evidence of an adverse employment effect among those with the lowest qualifications.

Labour Market Position of 16-17 Year Olds

5.16 The minimum wage for 16-17 year olds (above compulsory school age) was introduced in October 2004 to prevent exploitation, while neither encouraging young people out of education nor harming the supply of training jobs. It is too early to assess its impact, but in this section we consider trends in the labour market performance of 16-17 year olds.

5.17 According to the LFS, the population of 16-17 year olds fell between Spring 1998 and Winter 2000, but has since grown by around 150,000 (four quarter moving average), a rise of 10.5 per cent. Small sample sizes and proxy responses mean that data on labour market activities for 16-17 year olds need to be treated with caution, with emphasis placed more on trends over time rather than small deviations in particular years. But it can be seen from Figure 5.10 that the number of 16-17 year olds in FTE has been on an upward trend. Among those not in FTE, since Winter 2000 there has been a slight fall in the number of employed 16-17 year olds but the number not in employment has increased by just above a third (38.2 per cent for men and 31.0 per cent for women). Figure 5.11 shows that the proportion of 16-17 year olds neither in FTE nor employment has been rising, while the proportion employed but not in FTE has fallen.

Figure 5.10

Number of 16-17 Year Olds by Education and Labour Market Status, Thousands, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

Figure 5.11

Proportion of 16-17 Year Olds by Education and Labour Market Status, 1998-2004

Source: LFS, four quarter moving average, 1998-2004.

Demand for Young People

5.18 In Chapter 3 we assessed the effects of the National Minimum Wage in low-paying sectors and found that, in the year to September 2004, the overall number of employee jobs had increased in many of these sectors. In this section we consider whether these increases led to higher employment rates for young people and if there is any evidence of low-paying sectors altering their demand for young people.

5.19 Low-paying sectors are important employers of young people. About 70 per cent of employed 18-21 year old students work in retail and hospitality, attracted by the availability of work which can be fitted around their studies. Employment of 18-21 year old non-students is distributed more evenly across sectors, with 27 per cent in retail, 12 per cent in manufacturing and 10 per cent in both construction and hospitality. Figure 5.12 shows there has been an increase in the number of 18-21 year olds working in low-paying sectors such as retail and hospitality but a fall in the level of employment in manufacturing (a generally higher-paying sector). These changes are in line with general trends for the UK economy.

Figure 5.12

Employment Levels for 18-21 Year Olds by Industry Sector, Thousands, Autumn 2002-Summer 2003 Compared with Autumn 2003-Summer 2004

Source: LFS, averaged over Autumn-Summer quarters, 2002-2004.

5.20 It is possible that the National Minimum Wage, by changing the relative price of different types of labour, could lead firms to substitute employment either towards or away from young people. In order to determine whether there has been any such substitution effect, we examined the change in employment share by age group and compared it with the change in population share by age group. As can be seen in Figures 5.13 and 5.14, the employment data do not indicate any adverse substitution effects for 18-24 year olds either in the year to Summer 2004 or indeed since the introduction of the minimum wage.

Figure 5.13

Change in Employment and Population Share by Age, Autumn 2002-Summer 2003 Compared with Autumn 2003-Summer 2004

Source: LFS, averaged over Autumn-Summer quarters, 2002-2004.

Figure 5.14

Change in Employment and Population Share by Age, Autumn 1998-Summer 1999 Compared with Autumn 2003-Summer 2004.

Source: LFS, averaged over Autumn-Summer quarters, 1998-2004.

5.21 In our own survey of employers, the overwhelming majority of those who were affected by the October 2003 upratings reported that it had not changed the likelihood of their employing workers in different age groups. Table 5.1 shows there to be no difference in the proportion of employers who were more or less likely to employ 18-21 year olds as a result of the October 2003 upratings.

Table 5.1 Have the October 2003 Increases Made You More or Less Likely to Employ Workers in Different Age Groups?

Source: Low Pay Commission survey, 2004.

Base: All firms affected by the October 2003 upratings of the National Minimum Wage in any way.

5.22 Commissioned research and consultation responses provide no indication that firms are responding to the minimum wage by seeking to substitute employment either towards or away from young people. Neathey, Ritchie and Silverman (2004) reported little evidence of a link between the minimum wage and decisions to employ young workers of various ages. Their case study findings 'indicated that employment of young people is often based on pragmatic considerations such as the availability of labour. However, some employers showed a preference for slightly older workers as compared to those in the lowest age group (16-17), and were often seeking to increase the proportion of slightly older workers in their workforce.'

'No evidence of business substituting 18-21 year olds i.e. cheaper workers in place of adults.'

Federation of Small Businesses evidence

5.23 In summary, the decline in the labour market position of 18-21 year olds between Summer 2001 and Autumn 2003 appears to have halted. We have not observed any evidence of a substitution effect, nor of a decline in employment levels among those young people with the lowest qualifications. And the outcome of our consultation exercise supports the view that the minimum wage is more likely to have had an impact on young people's hourly earnings than on their employment prospects.

Back to top

Beneficiaries

5.24 Our 2004 report estimated that the number of jobs held by 18-21 year olds which would benefit directly from the October 2003 uprating of the youth Development Rate (i.e. those jobs where the wage needed to increase by more than the growth in average earnings or prices to comply with the minimum wage) was between 70,000 and 90,000. Between 110,000 and 130,000 jobs were forecast to benefit from the October 2004 uprating of the youth Development Rate. These estimates have proven to be reasonably accurate. We now calculate that about 70,000 jobs for those aged 18-21 (around 4.3 per cent of all jobs for this age group) directly benefited from the October 2003 uprating of the youth Development Rate, and 120,000 jobs (around 6.3 per cent of all jobs for this age group) gained from the October 2004 uprating.

5.25 Our 2004 report estimated that about 40,000 jobs would benefit from the introduction of the £3.00 per hour minimum wage for 16-17 year olds in October 2004. We now estimate that up to 45,000 jobs (7.5 per cent) benefited from the 16-17 year old rate, although this is likely to be an upper estimate given that the exemption for apprentices and those on pre-apprenticeship programmes will significantly reduce the number of beneficiaries.

Back to top

Earnings

5.26 Figure 5.15 shows that 18-21 year olds also continue to benefit from upratings of the adult rate. The main peaks in the hourly earnings distribution for Spring 2004 are at the then adult rate of £4.50 per hour and a mezzanine level of £5.00 per hour. Nearly three times as many jobs for 18-21 year olds pay the adult rate as pay the youth Development Rate. According to the Annual Survey of Hours and Earnings 2004 with supplementary information (ASHE 2004a), in Spring 2004 7.0 per cent of jobs of 18-21 year olds were paid at or just above the then adult rate of £4.50, compared with just 2.5 per cent paid at or just above the then youth Development Rate of £3.80.

Figure 5.15

Hourly Earnings Distribution for Employees Aged 18-21, 2002-2004

Source: ONS central estimate methodology using ASHE and LFS without supplementary information, Spring 2002-2004. ONS ASHE with supplementary information for 2004a.

Notes:

1. Gross hourly earnings excluding overtime.

2. NMW label shows the adult NMW rate in April of the given year. YDR label shows the youth Development Rate in April of the given year.

'Workers under 21 years old are not prepared to accept the lower level NMW (especially in London) as they feel that it does not apply to them despite having minimal experience or training. This creates barriers to employment of younger staff.'

English Community Care evidence

5.27 We have indicated in previous reports that an increasing proportion of employers tend to make use of the flexibility offered by the youth Development Rate immediately following a sizeable uprating of the adult rate. The data suggest that this pattern continued following the October 2003 upratings. Table 5.2 shows that in Spring 2004 the proportion of young people's jobs paying below the adult rate increased to 16.0 per cent, compared with 14.1 per cent in Spring 2002. Conversely, the smaller October 2002 upratings had seen a reduction in the proportion of young people's jobs paid below the adult rate (11.0 per cent in Spring 2003). This includes around 35,000-45,000 (just over 2.0 per cent) earning less than the youth Development Rate. These young people may be earning below the youth Development Rate for legitimate reasons; for example, they may be serving an apprenticeship.

5.28 Table 5.3 looks at those young workers paid in April below the minimum wage rates due to be implemented later that year. As expected, coverage of those paid below the forthcoming youth Development Rate and the adult rate increases when the minimum wage upratings are higher, such as in 2001 and 2004 when around a third of all 18-21 year olds were paid below the forthcoming adult rate. The proportion falls to between a fifth and a quarter when the scheduled minimum wage upratings are smaller.

Table 5.2 Employees Aged 18-21 Earning Below the Youth Development Rate and the Adult Rate

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

Note: YDR = Youth Development Rate.

Table 5.3 Employees Aged 18-21 Earning Below the Forthcoming Youth Development Rate and the Adult Rate

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

Note: YDR = Youth Development Rate.

5.29 Table 5.4 shows that lowest decile hourly earnings rise with age, which reflects the level of skills and experience and the fact that young people are disproportionately represented in low-paying sectors. In April 2004 the lowest decile hourly earnings for 18 and 19 year olds were £3.85 and £4.18 per hour respectively, compared with £4.45 per hour for 20 year olds, £4.50 per hour for 21 year olds and £4.75 per hour for 22 year olds. Between 2003 and 2004 there was a slight widening in the lowest decile hourly earnings of 21 and 22 year olds, perhaps reflecting a greater use of paying adult rates from the age of 22.

Table 5.4 Gross Hourly Earnings (Excluding Overtime) for Young People by Age, 2002-2004

Source: ASHE, 2002-2004 without supplementary information.

5.30 In summary, we have seen that the October 2003 uprating of the youth Development Rate directly benefited about 70,000 jobs held by 18-21 year olds, and this number increased to 120,000 following the October 2004 uprating. A maximum of 45,000 jobs directly benefited from the introduction of the 16-17 year old rate in October 2004. In addition, many young people also gained from the uprating of the adult rate. However an increased proportion of jobs held by 18-21 year olds was paid below the adult rate following the October 2003 upratings. The reasons for this increase are considered in more detail in the next section.

Back to top

Age-related Pay

5.31 On 12 October 2004 the Government asked the Low Pay Commission to investigate whether there was any evidence of an increase in employers paying lower rates to 18-21 year olds, and to provide an economic explanation for any such change. This followed concern expressed by a number of trade unions that some employers were increasingly paying workers aged 18 to 21 lower rates than adults aged 22 and above.

'It is clear that some companies have used NMW age rates as a justification for re-introducing age rates, against the long-term trend towards their decline, in order to reduce costs. However, we are continuing to negotiate them out of our collective agreements, using arguments around equity and recruitment and retention.'

GMB evidence

5.32 Evidence from trade unions and youth organisations about employers introducing or re-introducing age-related pay largely referred to findings from Incomes Data Services (IDS). Research we commissioned from IDS (2004a and 2004b) highlighted diverse approaches to age-related pay in response to minimum wage upratings. IDS found that a number of companies had abolished age-related pay entirely (typically firms that cater for younger customers, such as fashion retailers). They also found that, increasingly, rates for workers aged under 18 had been combined into a single junior rate for the grade. But IDS also observed that the fast food industry, nurseries and some pubs and restaurants in particular were moving in the opposite direction. Most of the organisations introducing age-related pay said they had changed their practices specifically as a result of the minimum wage legislation. But such firms also needed to ensure that staff recruitment was not jeopardised and IDS commented that some of the same companies relaxed their policy of age-related pay in harder-to-recruit locations.

5.33 In our latest survey a fifth of respondents reported using age-related pay, with use most common in the hospitality, retail and hairdressing sectors. Although the results are not directly comparable, this is 2 percentage points higher than in the 2002 survey. The most common reasons given were to take account of employees' level of experience and the National Minimum Wage (cited by 71 and 55 per cent of firms respectively). There is some evidence to suggest that firms using age-related pay are raising the age threshold for paying their adult rates to 22 - 6 per cent of firms responding to the 2004 survey reported having age-related pay structures with adult rates starting at age 22, compared with 4 per cent of firms responding to the 2002 survey. Questions about the use of age-related pay are open to interpretation and so firms were also asked about the age from which workers were entitled to adult rates. Just over half the firms that provided information reported paying their adult rates from the age of 18 or below, with 78 per cent paying from age 21 or younger.

5.34 Our survey is likely to provide an upper estimate of the use of age-related pay, since we targeted the sectors most likely to be affected by the minimum wage and respondents are more likely to have been significantly affected than non-respondents. The Greater Manchester Low Pay Unit's (GMLPU) annual survey (2003) of job vacancies and rates of pay in Greater Manchester Jobcentres indicates a much lower use of age-related pay. GMLPU found that only 1.6 per cent of 7,280 vacancies surveyed in April 2003 gave age-related rates, with about half of these paying the adult rate from the age of 22. The GMLPU 2002 survey found that 4.3 per cent of vacancies gave age-related rates.

5.35 We commissioned IDS (2005a) to conduct a small research project on the changing use of age-related pay since the introduction of the minimum wage, including investigation of the reasons for introducing any changes and the manner in which changes were implemented. The report focuses on 31 employers - 21 companies and 10 industry agreements - all of whom had used age-related pay for 18-21 year olds at some point since 1999. It did not consider 16-17 year olds since the minimum wage for this age group was only introduced in October 2004.

5.36 The report emphasised that age-related pay was not widespread, particularly for those aged 18 and over. Even in the minority of companies using age-related pay, IDS (2005a) state that 'it is often just for the lowest-paid job in the company, the minimum or recruitment rate that is not in widespread use, or just for new recruits in the first few months of employment'. There was also no clear trend in the use of age-related pay. In the sample of 31 employers with age-related pay between 1999 and 2004, eight employers raised the age at which adult rates were paid (including one which subsequently reversed the policy) and six employers lowered the age at which adult rates were paid. Among the eight employers who raised the age threshold for paying adult rates, seven took it up to age 22 and the other to age 21, before lowering it again.

'Recent research would indicate that the NMW may have served to institutionalise 22 as the threshold for payment of full adult rates of pay, so that younger workers (particularly those aged 21) in some firms are no longer treated as adults for pay purposes, even though in the past this would have been the case.'

Institute for Employment Studies evidence

5.37 IDS found that 'every case of raising the age for adult rates was part of a move to offset the cost of meeting the minimum wage'. This approach was common among fast food employers, which are large-scale employers of young people. A number of companies concerned about the cost of minimum wage upratings have re-examined their pay structures and questioned the case for paying adult rates from the age of 18. Where companies have concluded that the threshold for paying adult rates should be increased, IDS report that 'typically, employees aged 22 and over received the increase necessary to take them to the new NMW while younger employees received lower increases or a pay freeze'.

5.38 IDS found that the reasons for lowering the age threshold for paying adult rates were more varied, with employers citing a number of issues. The main factors highlighted were: as a result of a general review of the pay system; because the previous system was considered anomalous or unfair; to make the company more competitive in the labour market; and to reward staff skills and contributions effectively. There was little evidence on the impact of reducing the age threshold, although one employer reported a marked reduction in staff turnover after an overhaul of the pay system that included removing age-related pay for the over 18s.

5.39 The earnings data considered earlier in the Chapter show that the number of young people's jobs being paid below the adult rate of the minimum wage increases after large upratings. Table 5.5 demonstrates that this applies to both young men and young women, but in general young women are more likely to be paid below the adult rate of the minimum wage than young men.

Table 5.5 Employees Aged 18-21 Earning Below the Adult Rate

Source: ASHE, 1999-2004 without supplementary information.

5.40 The earnings data suggest that an increasing proportion of employers make use of the flexibility offered by the youth Development Rate following a sizeable uprating of the adult rate. This is supported by research, which indicates that a number of fast food restaurants, nurseries and some pubs and restaurants have introduced age-related pay to help offset the cost of minimum wage upratings. Consultation also highlighted the possibility that use of the youth Development Rate will increase following further upratings of the adult minimum wage. But even so, the use of age-related pay is not widespread and, even in the minority of companies where it does apply, its use is often limited to particular jobs or as an induction rate. Conversely, some firms are still lowering the threshold for paying their adult rates, largely for reasons of equity and to be more competitive in the labour market.

'Whilst it is not something that the industry would undertake of its own volition, the evidence clearly shows that future large increases would force retailers to place their 18-21 year old employees on the development rate, utilising this valuable flexibility in coping with NMW increases.'

British Retail Consortium evidence

5.41 The introduction of the minimum wage has affected the previous general move away from the use of age-related pay. Where age-related pay exists, it has also resulted in age 22 being increasingly established as the threshold for payment of full adult rates of pay, whereas previously lower ages tended to be used. It is therefore important that the youth Development Rate only applies to those who need its coverage and we consider this issue in the next section.

Back to top

Role of the Youth Development Rate

5.42 Trade unions and youth organisations continue to argue strongly against a lower rate for 18-21 year olds, and some also urge that the adult rate be paid from the age of 16. They view the youth Development Rate as discriminatory and stress that workers should be paid equally for work of equal value. Several organisations proposed that age rates should gradually be removed from the minimum wage structure and replaced by a Development Rate linked to accredited training.

5.43 Employers' associations remain overwhelmingly supportive of the youth Development Rate. For example, the CBI wrote that the youth Development Rate was an accepted tool to maintain higher levels of employment partly to make up for lower productivity among younger and inexperienced workers. The British Retail Consortium highlighted the flexibility that the youth Development Rate offered retailers and the Association of Licensed Multiple Retailers commented that it provided members with an incentive to embark on training in-house rather than simply recruiting those with existing skills.

'Workers should be paid equally for work of equal value. A lower rate should only apply to those on fully accredited training rather than being justified solely on the grounds of their age.'

Coalition of Youth Organisations evidence

Low Pay Commission Research

One hotel commented that they would be more likely to develop staff below 20 years of age internally, but would prefer to buy in skills of people over 20 years of age. The reason for this being that if they were to recruit a young person over 20 years old then they must have experience to warrant their higher wage costs.

Neathey, Ritchie and Silverman, (2004). Employment of Young People in Retail and Hospitality

5.45 The existence of the youth Development Rate also permits a higher level of the adult rate, with the alternative being a single lower rate for all ages. Our previous reports have recognised the argument that the youth Development Rate lacks equity, but in our view a lower rate plays an essential part in assisting young people to gain experience of work, receive coaching and develop workplace skills. We also noted in our fourth report (2003) that the conditions were not in place to enable use of the youth Development Rate to be conditional on accredited training, without creating a risk to youth employment. Employers would be less willing to take on young workers if they had to either provide accredited training or pay the adult rate.

5.46 Some respondents queried whether the youth Development Rate is compatible with the Equal Treatment Directive (2000/78/EC) due to be implemented in the UK from October 2006. The Directive will make age discrimination in employment and vocational training unlawful unless, within the context of national law, it is objectively justified by a legitimate aim (including employment policy) and is an appropriate and necessary means of achieving that aim. The Department of Trade and Industry's consultation document Equality and Diversity: Age Matters (2003) made clear the Government's view that the National Minimum Wage was objectively justified in the terms of the Directive, and that is also the Commission's point of view. We are strongly convinced there is a need for a youth Development Rate which is lower than the adult rate and that adverse consequences for the employment rate of young people would result if employers were not able to pay some young people below the adult minimum wage level.

5.47 It is, however, important that the youth Development Rate should only apply to those age groups where the dangers of adverse employment effects exist. Figure 5.16 shows that unemployment rates are significantly higher for 18 and 19 year olds compared with 20 year olds and above, and Figure 5.7 showed that the adverse trends in employment between 2001 and 2003 were concentrated among the 18 and 19 year olds. There is therefore a very strong case for a lower youth rate for 18 and 19 year olds. Above that level, the precise optimal cut-off point can be debated. On the basis of the employment and unemployment rate data, arguments could be made for any one of the 20^th, 21^st or (as now) 22^nd birthday.

'The youth Development Rate is important not just to give employers a chance to train workers in the skills they need, but also to overcome the initial problems young employees may face simply adjusting to the world of work.... The youth Development Rate has continued to be an important tool in companies' employment strategies, and one which may become more important as the adult rate increases.'

CBI evidence

Figure 5.16

Unemployment Rates of Young People Not in Full-time Education by Age and Gender, Autumn 2003-Summer 2004

Source: LFS, averaged over Autumn-Summer quarters, 2003-2004.

5.48 Our judgement is that the 21^st birthday is the most appropriate, and that the employment prospects of 21 year olds do not need to be protected by the youth Development Rate. In April 2004, lowest decile hourly earnings for 21 year olds were at the same level as the adult rate of the minimum wage. Of all the organisations which gave evidence, only the hairdressing sector opposed entitling 21 year olds to the adult rate. Firms' wage-setting behaviour shows that paying the adult rate from the age of 21 would have limited impact on business. Latest ONS data show that in Spring 2004 around 40,000 21 year olds were paid less than £4.50 per hour (6.7 per cent of men and 8.8 per cent of women), and some of these are likely to be apprentices or in receipt of accommodation. We therefore again recommend that 21 year olds should receive the adult rate of the National Minimum Wage.

Trainees

5.49 In our previous reports we have consistently stressed the importance of training. Our initial reports expressed the hope that the minimum wage would encourage firms to increase their support for training and workforce development. However, in practice we found that the minimum wage plays a limited role compared with the many other factors (particularly Government initiatives to promote workforce development) that determines firms' training strategies. The minimum wage can act as a spur to encourage some firms to train their workers as a way to improve efficiency. And it is also important that the minimum wage does not reduce the provision of training. In this section we look at the impact of two minimum wage rules designed to provide some recognition of the costs of training, namely the older workers' Development Rate and the exemption for apprentices.

5.50 The older workers' Development Rate applies to workers aged 22 and over starting a new job with a new employer and doing accredited training on at least 26 days during the first six months of the employment. Our first report (1998) recommended its creation to provide an incentive for employers to train new staff, but subsequent reports have found that uptake has been low. Evidence suggested there was little awareness of its existence and that the complexity and costs associated with operating accredited training schemes also deterred use. Volume Two of our third report (2001) stated that there might be a case for abolition if low take-up continued, but we needed a longer period before we could provide advice. In the fourth report (2003) we decided, on balance, to advise retention of the older workers' Development Rate for the time being, noting that some firms found it a helpful support to adjust to the minimum wage.

5.51 Use of the older workers' Development Rate remains very low. Our survey found it was employed by only 4 per cent of respondents, with use greatest in the hairdressing (10 per cent of firms) and childcare (5 per cent of firms) sectors. The CBI Employment Trends Survey 2004 found that, among those firms who reported that they would feel an impact from the October 2004 uprating, only 2 per cent were planning to make more use of the older workers' Development Rate. Research commissioned from IDS (2004b) on the impact of the October 2003 uprating stated 'there was no reported use of the adult Development Rate ... which suggests that either employers do not understand the criteria for this, or are unable to meet it'. Cronin and Thewlis (2004) conducted interviews with 53 firms on adjustments to the minimum wage and found only one company using the older workers' Development Rate - a recruitment, travel and training company (with a specific human resource function).

'Some companies would like to make use of the rate but the six-month reference period is too short to allow an employee to become fully trained. Companies may prefer to recruit an apprentice where employees are exempt for the first 12 months.'

CBI evidence

5.52 During consultation only the CBI and the Association of Licensed Multiple Retailers explicitly supported retention of the older workers' Development Rate. The CBI suggested that the older workers' Development Rate provided companies with much-needed flexibility and that use would increase if the minimum wage rose significantly. Other organisations - including employer and training organisations - believe there is little likelihood of greater uptake. It was suggested that employers were reluctant to offer lower rates of pay to mature staff undergoing training and that there were few opportunities to meet the requirements outside of apprenticeships. Representatives from the National Association of Master Bakers, the National Hairdressers Federation and the Hairdressing Employers' Association told us that extending the 12 month apprenticeship exemption to cover those aged 26 and over would provide a greater incentive to train older workers than the older workers' Development Rate. Similar views were expressed by a number of trade associations during our visit to Scotland.

5.53 The second minimum wage provision intended to support the provision of training is the exemption for apprentices. Currently apprentices are exempt from the minimum wage if they are under age 19, or under age 26 and in the first 12 months of their apprenticeship. For the purposes of the minimum wage, apprentices are workers who either have contracts of apprenticeship or are taking part in specified Government training programmes.

5.54 Prior to the introduction of the 16-17 year old rate, apprentices below age 26 were effectively exempt for the first 12 months when the minimum wage would otherwise apply. We recommended in our 2004 report that the exemption from the minimum wage for apprentices aged under 19 should be retained and were pleased that the Government accepted our recommendation. This means that people starting an apprenticeship aged 16-17 can be exempt from the minimum wage for longer than 12 months.

5.55 During consultation we received a range of views regarding the future treatment of apprentices. The National Hairdressers Federation and Hairdressing Employers' Association believe that the current exemption period is too short and recommended that consideration be given to exempting workers (regardless of age) from the minimum wage for the duration of their apprenticeship or accredited training. The Trades Union Congress and the Transport and General Workers Union suggested that we should review the exemptions for apprentices and other forms of accredited training in an interim report next year and consider whether they were still warranted. The Scottish Low Pay Unit and the joint submission from UNISON and YMCA England proposed that the exemptions for apprentices should be abolished, primarily on the basis that the current rules could be abused and that low wages for apprentices contributed to low completion rates.

5.56 In recent years there have been a number of developments relating to apprenticeships. In May 2004 reforms to the apprenticeship system in England were announced. The changes include replacing Foundation Modern Apprenticeships and Advanced Modern Apprenticeships with 'Apprenticeships' (level 2) and 'Advanced Apprenticeships' (level 3) respectively, and planning to open up apprenticeships to adults by removing the arbitrary 25 year old age limit. In March 2004 the Government announced plans for the HM Treasury, the Department for Education and Skills and the Learning and Skills Council to work with employers in England to achieve a minimum level for trainee pay in the range of £70-£80 per week. Subsequently the Learning and Skills Council (2004) recommended to work-based learning providers that employed learners should receive at least £70 a week on starting work-based learning, with incremental rises based on competence, achievement and productivity. From August 2005 it will become a contractual requirement on providers to ensure that all learners receive at least £80 per week. In Scotland and Wales the requirement for starters to be aged under 25 has already been abolished, although funding continues to be prioritised for 16-17 year olds.

5.57 We believe that the current exemption for apprentices is generally working well. We note that some concern has been raised about reported examples of employers classifying their workers as apprentices but not providing any training. In our view such cases should be addressed through enforcement. Many firms use the current exemption and it is clear to us that without it the provision of training would be reduced in some sectors, particularly hairdressing.

5.58 Our 2004 report recommended that apprentices aged under 19 should be exempt from the minimum wage on the basis of current pay arrangements for younger apprentices and the fact that many 16-17 year old apprentices are still working towards level 2 rather than more advanced qualifications. It is too early to assess whether the introduction of the minimum wage for 16-17 year olds (above compulsory school age) has affected training opportunities for this age group, and we therefore believe that the exemption from the minimum wage for apprentices aged below 19 should be retained.

5.59 We understand that the Government believes that the exemption from the minimum wage for apprentices under age 19 is compatible with the Equal Treatment Directive (2000/78/EC). We agree but the same may not be true of the current age 26 cut-off for the 12 months exemption from the minimum wage. The minimum wage was introduced at a time when Government apprenticeship programmes were only available to those below the age of 25. Accordingly, the National Minimum Wage Regulations 1999 provide that the 12 months exemption from the minimum wage only applies to those below the age of 26. The original age limit for undertaking apprenticeships was somewhat arbitrary (driven by EU funding) and has since been abolished in Scotland and Wales. In addition, the Learning and Skills Council has provided for adult apprenticeships to be piloted in England from January 2005 and the upper age limit for apprentices in Northern Ireland is to be reviewed.

5.60 We are unaware of any grounds to justify objectively the retention of the requirement for apprentices to be aged below 26 for the 12 months exemption from the minimum wage to apply. But there continues to be a need to exempt apprentices in their first year of employment from the minimum wage to take account of their lower productivity. We therefore consider that all apprentices aged 19 and over in the first 12 months of employment should be exempt from the minimum wage. This would benefit those seeking to return to the labour market, particularly those wishing to retrain in a new career. Such a change would also further reduce the case for retaining the little used older workers' Development Rate. It would therefore be logical to abolish the older workers' Development Rate at the same time as extending the 12 months exemption from the minimum wage to all apprentices aged 19 and over. However, before taking a final decision it would be appropriate to wait a year and consider the emerging results of the Learning and Skills Council's pilot of adult apprenticeships. Our provisional conclusion is that the older workers' Development Rate should be abolished from October 2006, and that, simultaneously, the 12 months exemption from the minimum wage should be extended to cover all apprentices aged 19 and over. We recommend that the Government invite the Commission to review these provisional conclusions and make firm recommendations on these matters by February 2006.

Back to top

Conclusion

5.61 The number of jobs held by 18-21 year olds that benefited from the youth Development Rate increased from 70,000 to 120,000 following the October 2004 uprating. In addition, many more young people gained from the uprating of the adult rate. In the year to Summer 2004 there was little change in the employment position of 18-21 year olds, but this followed a two-year period where the labour market position of 18-21 year olds worsened, particularly for those aged 18-19. We found no evidence, however, that the period of declining employment rates could be explained by the minimum wage.

5.62 We have again recommended that 21 year olds should receive the adult rate of the National Minimum Wage. We have also provisionally concluded that the older workers' Development Rate should be abolished from October 2006 and that, simultaneously, the 12 months exemption from the minimum wage should be extended to cover all apprentices aged 19 and over. We wish to make firm recommendations on the training provisions by February 2006.

5.63 Some of the concern relating to the training provisions stems from low awareness of the rules and the fear that the exemption for apprentices can be abused if the rules are not enforced effectively. In the next Chapter we look at compliance and enforcement of the minimum wage and consider the developments that have taken place to increase awareness and tackle areas of non-compliance.