When the National Minimum Wage was first introduced in April 1999, the adult rate set (£3.60 per hour) reflected the Commission's deliberately cautious approach. As a result, about one million low-paid workers benefited with no measurable adverse effects on employment or inflation.
From 1999 to 2002 the minimum wage increased roughly in line with average earnings, and again no adverse effects were observed. The number of beneficiaries, however, appeared fewer than originally intended. That was the background that led the Commission in its Fourth Report, in March 2003, to conclude that it would be appropriate to increase the minimum wage faster than average earnings for a number of years. As a result, between October 2002 and October 2004 the adult minimum wage was increased by 15.5 per cent while average earnings increased by 8 per cent.
In the 2005 Report, published in February 2005 and making recommendations for October 2005 and October 2006, we concluded that some further increase above average earnings remained appropriate, but also recommended that we should review the October 2006 rate in January 2006 to check whether economic conditions had changed in a way that made the level proposed inappropriate. This report sets out the conclusions of that review, along with an analysis of issues relating to 16-17 year olds, salary sacrifice schemes and the accommodation offset.
Our review of economic conditions revealed some factors which could argue for a slight reduction in the October 2006 increase. These are described in Chapter 2 of this report. In particular we noted that, since average earnings growth has been slightly less than anticipated, the 2005 and 2006 increases together will result in slightly faster progress towards raising the minimum wage relative to average earnings than was anticipated at the time of the 2005 Report. The Commission concluded, however, that the divergence of economic outcomes from those anticipated was not sufficient to justify a reduction in the recommended 2006 increases. We therefore confirm our original recommendation. We do, however, consider that the phase in which the Commission is committed to increases in the minimum wage above average earnings is complete and, looking forward, the Commission will start with no presumption that further increases above average earnings are required.
Over the four years 2002 to 2006, the adult minimum wage will have increased by 27.4 per cent while (on latest forecasts) average earnings will have increased by 17 per cent. This has been an appropriate upward adjustment from the cautious level at which the minimum wage was originally set, but the Commission has always recognised that the minimum wage cannot increase faster than average earnings indefinitely.
When the minimum wage was initially introduced it did not apply to 16 and 17 year olds. At the time of our Fourth Report (2003), however, the Commission was struck by evidence that a minority of 16-17 year olds were paid extremely low wages unaccompanied by training, and in February 2004 we recommended the introduction of a minimum wage for 16-17 year olds at a level of £3.00. We have seen no evidence to suggest that the introduction of the wage has had any adverse effects on employment or created incentives for young people to leave full-time education. It has, however, benefited some young people by outlawing clearly exploitative wages. The Commission continues to believe that the 16-17 year old rate should be focused on the prevention of very low wages, and that caution should be exercised in any increases. However, given that it was introduced at a cautious level and that it was not uprated at all in 2005, we recommend that the rate can and should be increased to £3.30 in October 2006.
Two other issues have been the focus of detailed Commission attention over the last year. One is 'salary sacrifice schemes'. Here we have concluded, for reasons set out in Chapter 4, that it is not appropriate to change the minimum wage regulations so as to allow cash earnings to fall below the level of the minimum wage.
The other issue concerns the accommodation offset, on which the Commission has deliberated at length. The fact that we have needed to do so reflects the significant changes within the UK labour market being caused by increased inward migration. This migration has created issues relating to accommodation provision by labour providers ('gangmasters') which were not even considered in the first six years of the Commission's work. Our proposed resolution of the issues raised is set out in Chapter 4. More widely, however, the Commission is aware that the impact of migration on the UK labour market may be an increasingly important factor for it to consider as it develops future recommendations.
On those and other issues, however, it will be for the new Chairman, Paul Myners, to lead the Commission. My own four years as Chairman have been hugely interesting, and I have been proud to play a role in the development of the minimum wage. Since its introduction in 1999 the minimum wage has been a major success. It has significantly improved the wages of many low earners; it has helped improve the earnings of many low-income families; and it has played a major role in narrowing the gender pay gap. But it has achieved this without significant adverse effects on business or employment creation.
That success reflects the excellent hard work which the Commission Secretariat put into our analysis, and the commitment of Commission members to constructive and fact-based debate, seeking to arrive at a consensus. I have greatly enjoyed working with my fellow Commissioners and the Secretariat over the last four years, and wish them and the new Chairman all success as they guide the future development of the National Minimum Wage.