Review of the Macroeconomy

Independent Forecasts for 2005

2.4 In general the UK economy has not performed as well as had been predicted at the time of our 2005 Report but it did continue to grow in 2005, albeit more slowly than anticipated. Consumer price inflation, as measured by the Consumer Price Index (CPI), has been higher than expected mainly due to increasing oil and fuel prices, but this has not been reflected in increased wage inflation as average earnings, measured by the Average Earnings Index (AEI) including bonuses, have increased more slowly than forecast. Table 2.1 sets out these changes, comparing the actual 2005 data with the forecasts for 2005 we used when we arrived at our recommendations for the 2005 Report.

Table 2.1 Independent Forecasts and Actual Outcomes of Growth in Gross Domestic Product (GDP), Prices, Employment and Average Earnings for 2005

Source: HM Treasury (2005a) and Office for National Statistics (ONS).

Notes:

1. Forecasts used in the 2005 Report were the medians taken from the HM Treasury February 2005 'Forecasts for the UK Economy'.

2. Gross domestic product (GDP) is measured by ONS code ABMI but this is not yet available for 2005. Actual GDP growth for 2005 is therefore taken from the preliminary GDP estimate (ONS code IHYP).

3. Retail Price Index excluding mortgage interest payments (RPIX) is measured by ONS code CDKQ and the Consumer Price Index (CPI) is measured by ONS code CJYR.

4. Average earnings are measured using Average Earnings Index (AEI) including bonuses for GB (ONS code LNNC). Actual average earnings growth in 2005 is for the year to the third quarter of 2005.

5. Employment is defined as workforce jobs and is measured by ONS code DYDC.

2.5 When we deliberated last year on our recommendations for an increase to the adult rate and the youth Development Rate, we referred to the Treasury Panel of Independent Forecasters. It can be seen from Table 2.1 that the outcome for 2005 is not now thought to have been as favourable as was forecast at the time of our deliberations. Expected growth in UK output, as measured by gross domestic product (GDP), has been reduced by about a third from 2.6 per cent to just 1.8 per cent. In spite of this, employment growth has been much stronger than anticipated.

GDP and Consumption

2.6 Examining GDP growth more closely, Figure 2.1 shows that after strong growth in 2003 and early 2004, GDP growth declined sharply before bottoming out by the middle of 2005 and picking up thereafter. The latest data show that the economy continued its recovery by growing at 0.6 per cent in the fourth quarter of 2005, up from 0.4 per cent in the third quarter. This recovery was led by distribution, hotels and catering, which grew by 1.2 per cent in the fourth quarter, up from 0.2 per cent in the third quarter of 2005. However, GDP growth for the whole year in 2005 was 1.8 per cent, the slowest annual increase since 1992. But the consensus among independent forecasters is that the economic prospects for 2006 and beyond look more encouraging and the UK economy is expected to return to trend growth by 2007.

2.7 Figure 2.1 shows a similar pattern for household consumption, although the decline in growth started about six months later than the decline in GDP. Growth of household consumption expenditure slowed to an annual rate of growth of 1.6 per cent in the third quarter of 2005, lower than the long-run trend of around 2.7 per cent established since 1960. However, this constitutes a slowdown in the rate of growth, not the outright contraction that would occur during a period of economic recession. Moreover, data for the second and third quarters of 2005 suggest that this fall in consumer spending has also bottomed out and there are signs of recovery, albeit gradual. The recent data on retail sales and firmer housing market offer support for the view that consumer spending is reviving.

Figure 2.1

Growth in GDP and Consumer Spending, UK, 1996-2005

Source: ONS, UK GDP at market prices chained volume measure (ONS code ABMI) and household consumption expenditure (ONS code ABJR), quarterly, seasonally adjusted, UK, 1996-2005.

2.8 As much of the debate on falling output in the UK has centred on retail sales, we have examined a number of measures of retail sales growth. Figure 2.2 shows that on all four measures considered here, retail sales growth is weaker than it has been since early 1999. This is not indicative of outright recession, although few analysts are expecting a rebound to the previously high levels of activity in the near-term. Data from the Office for National Statistics (ONS), the CBI and the British Retail Consortium (BRC), whether using total sales or like-for-like sales, show similar trends, although data from the CBI did not initially show the same recovery that the other measures appear to find since April 2005. The CBI data did, however, show a significant 'bounce' in December 2005, indicating that Christmas sales were reasonably firm. The large increase in year-on-year sales in March 2005 followed by a larger drop in April 2005 is likely to be the result of the fact that Easter (when retail sales are normally relatively high) was in April in 2004 but in March in 2005.

Figure 2.2

Comparison of ONS, BRC and CBI Retail Sales Data, UK, 1998-2005

Source: ONS retail sales (value of retail sales, not seasonally adjusted, ONS code EAIH), BRC Retail Sales Monitor (value of retail sales) and CBI Distributive Trades Survey (retail sales volumes; balance of views), monthly, UK, 1998-2005.

Note: The growth rates presented are percentage changes in the latest month compared with the same month a year ago.

2.9 Initial indications from various retail organisations suggest that Christmas 2005 sales have been higher than expected. Indeed, retail sales data from ONS have confirmed that some recovery has been taking place. In the three months to December 2005 retail sales, after stripping out the effect of price rises, rose by 1.6 per cent compared with the previous three months. Compared to the same period of the previous year, sales volumes increased by 2.8 per cent. However, this recovery towards the end of the year was not sufficient to prevent a low rate of growth being recorded for the year as a whole. The total value of retail sales only rose by 1 per cent during 2005, which was the lowest annual increase recorded since the Second World War. The previous record low rate of increase was 2.6 per cent, recorded in 2003.

2.10 The data showing the value of sales do not, however, tell the whole story. One reason the value of retail sales grew so slowly was because of the increasing market share of cheap imports from countries such as China and India, which had the effect of lowering prices for some goods. It does not follow, of course, that profits fell as a consequence. Because of falling retail prices for some goods, the volume of retail sales may be a better guide to conditions in the sector. In 2005, the volume of retail sales rose by 2 per cent, down from 6 per cent in 2004. At the same time, however, retailers probably also lowered prices in order to support volumes during the difficult trading conditions encountered during part of 2005.

2.11 Data from the other large low-paying sector - hospitality - show that the sector grew strongly in 2003 and 2004. During 2005 the rate of growth declined in each of the first three quarters, but, unlike the rest of the economy, the rate of growth only dipped below the sector's long-term trend rate of growth during the third quarter (almost certainly as a response to the bombings in July 2005 in London) before rebounding strongly again in the fourth quarter.

Profits and Investment

2.12 Despite the downturn in the economy, profits do not appear to have been adversely affected and have generally been growing since the first quarter of 2001. Figure 2.3 shows the gradually improving rate of return (both gross and net) for non-financial companies, excluding the volatile oil sector. However, it should also be noted that during 2005, the financial and oil sectors were in fact the best performing sectors of the UK economy, thus Figure 2.3 understates the upswing in profitability currently taking place in the UK economy as a whole.

2.13 It is not possible to deduce from such broad movements in profitability what effect the minimum wage has been having on particular sectors of the UK economy, still less the effects on individual firms. However, there is no evidence to suggest that a generalised profits squeeze of any form has been taking place. Current fluctuations in profits seem to be consistent with the largely trendless cycles in profits that have been taking place over the last two decades.

Figure 2.3

Gross and Net Rates of Return on Capital Employed of Non-oil Private Non-financial Corporations, UK, 1989-2005

Source: ONS, gross and net rates of return of non-oil private non-financial corporations (ONS codes LRXO and LRXP), quarterly, seasonally adjusted, UK, 1989-2005.

Notes:

1. The rates of return presented are ratios of operating surpluses compared to capital employed, expressed as percentages.

2. Intuitively, the reader might expect the gross rate of return to be greater than the net rate of return. However, in the net rate of return calculations, net operating surplus is derived by subtracting capital consumption (depreciation) from the gross operating surplus and net capital is net of accumulated capital consumption (depreciation). The latter depreciation is much greater than the former leading the net rate of return to exceed the gross rate of return.

'The conditions for business investment over the next two years remain favourable.'

NIESR, National Institute Economic Review, January 2006

2.14 Despite healthy levels of profitability, the level of investment, or new capital formation by firms, has recently been very low, even compared with previous periods of below-trend growth. This is a phenomenon that is by no means confined to the UK economy, but one the UK shares with other developed economies. There is currently an abundance of savings, or funds available for investment, and since these are not being absorbed by firms wishing to borrow to invest, real interest rates¹ have fallen to the lowest levels for a generation. To a certain extent it is firms themselves doing the saving, as they attempt to make provision to shore up deficits in their pension funds, deficits which are, in turn, exacerbated by low interest rates.

¹ Real interest rates are defined as the difference between nominal interest rates and inflation.

Labour Market - Employment

2.15 Despite the slowdown in consumption and retail sales and the disappointing data on output growth, particularly in manufacturing, the labour market remained remarkably robust in 2005. However, it should be noted that employment is often a lagging indicator of the state of the economy. Since the adult minimum wage was uprated to £4.85 in October 2004, total employment has risen and currently stands at near record levels. Employment rates, on the other hand, are broadly flat as the working age population has also grown, mainly as a consequence of the large increases in net migration. Unemployment, whether measured in levels or rates, by job seekers or benefit claimants, also continues to be low but has increased during 2005.

2.16 By the end of the third quarter of 2005 there were 27.8 million working age people in employment. Between the October 2004 and October 2005 minimum wage upratings, total working age employment increased by 281,000, an increase of 1.0 per cent, which is similar to the growth reported in recent years. The working age employment rate increased marginally from 74.7 per cent in the third quarter of 2004 to 74.9 per cent in the third quarter of 2005, as shown in Figure 2.4. The most recent data, however, show a slight downturn in the labour market. Although total employment for all those aged 16 and over increased by 221,000 over the year to November 2005, it fell by 22,000 in the quarter to November 2005. The fall in employment, coupled with the migration-led increase in population, led to a fall in the working age employment rate to 74.5 per cent in the three months to November 2005.

Figure 2.4

Working Age Employment and Unemployment Rates, UK, 1992-2005

Source: ONS, Labour Force Survey (LFS), employment rate (ONS code MGSU) and unemployment rate (ONS code YBTI), quarterly, seasonally adjusted, UK, 1992-2005.

2.17 Claimant unemployment has now risen for 11 consecutive months. The rise has been gradual, but over the year to December 2005 the cumulative increase was nearly 85,000 bringing the total to just under 0.91 million. Headline unemployment (using the International Labour Organisation (ILO) definition) was up to 1.53 million in the three months to November 2005 - the biggest increase since the three months to February 1993. In the three months to November 2005, it was also up 121,000 on a year earlier and was at its highest level since February 2003. Increasingly, however, government economists do not draw a strong distinction between the unemployed and those on incapacity benefits, but instead view both categories as containing people who could be drawn into work under the right circumstances. Hence the Government's preferred indicator of the state of the labour market is employment.

2.18 The robustness of the labour market is confirmed by another measure of labour market activity - the total number of hours worked in the economy. The total number of weekly hours worked in the third quarter of 2005 was 942.8 million, an increase of nearly 15 million on the third quarter of 2004. The latest data confirm this robustness with total weekly hours worked at 942.7 million in the quarter to November 2005. The decline in average hours worked per week appears to have bottomed out at around 32 hours (increases in part-time hours have offset the decline in full-time hours in recent quarters).

The owner of a small business in the Reading area told us that migrant workers are becoming more and more important because "people round here wouldn't get out of bed for the minimum wage".
Low Pay Commission visit to Reading

2.19 The number of job vacancies is a potential leading indicator of the demand for labour. The data indicate that the trend is generally downwards. However, the number of vacancies in the three months to December 2005 was up 6,300 on the three months to November 2005. The level of job vacancies has been declining since reaching a peak in the three months to January 2005 but remains slightly higher than throughout 2001 to 2003. The fact that vacancies remain at a relatively high level, despite the surge in inward migration (according to ONS there was a net inward migration to the UK of 223,000 in 2004), is testimony to the ongoing strength of the UK labour market. There were 606,500 job vacancies on average in the three months to December 2005, down 12,700 from the three months to September 2005 and down 40,000 from the same period a year earlier. These falls have been concentrated in manufacturing and services (down 20 and 5 per cent respectively since the 2004 minimum wage upratings). In the service sector, the recent softening in consumer spending is reflected in the vacancy data for wholesale, retail and hospitality, where vacancies were down 21,300 in the three months to December 2005 compared to the same period in the previous year (a fall of nearly 11 per cent). However, they were higher than for most of 2003.

Low-paid Groups

2.20 Turning our attention to those groups of workers most affected by the minimum wage, we find that in the period since the October 2004 minimum wage upratings some of these groups appear to have experienced a slight deterioration in terms of their employment and unemployment outcomes. In particular, young people have continued to experience the toughest time in the labour market.

2.21 Figure 2.5 shows employment rates for different age groups. Since the October 2004 upratings and in the year to the third quarter of 2005, employment rates for those aged under 25 have fallen, as inactivity rates, particularly among students, have risen. Unemployment rates for those under 25 have also increased over the last year. In contrast, the employment rates of older workers have been rising. We discuss the position of 16-17 year olds in the labour market in more detail in Chapter 3.

Figure 2.5

Working Age Employment Rates for Different Age Groups, UK, 1992-2005

Source: ONS, LFS, employment rates by age series (ONS codes MGSU, YBUA, YBUD, YBUG, YBUJ and YBUM), quarterly, seasonally adjusted, UK, 1992-2005.

2.22 Figure 2.6 shows recent changes in the working age employment rates of women, ethnic minority groups, those with a work-limiting disability, young people and those without any educational or training qualifications. The employment rate for women fell between Autumn² 2004 and Autumn 2005 by 0.1 percentage points to 69.9 per cent, while the employment rate for men fell by 0.4 percentage points to 78.9 per cent.

² Autumn covers the months September to November.

Figure 2.6

Working Age Employment Rates for Different Groups, UK, 1998-2005

Source: LPC estimates based on ONS LFS Microdata, seasonal quarters, not seasonally adjusted, UK, 1998-2005.

Note: The definition of ethnic groups in the LFS changed in Spring 2001 in line with the 2001 Census classifications; thus direct comparisons before and after should not be made.

2.23 Between Autumn 2004 and Autumn 2005 there were significant falls in employment rates for young people and those with no qualifications. Although employment rates for those without any qualifications were stable between Summer³ 2004 and Summer 2005, they fell by 2.1 percentage points between Autumn 2004 and Autumn 2005. Employment rates of young people aged 18-21 fell by 1.9 percentage points between Autumn 2004 and Autumn 2005, which continues the downward trend observed since the Summer of 2001. Employment rates for people with a work-limiting disability actually increased in the Summer and Autumn quarters of 2005 but are still below the peak of 40.8 per cent observed in Spring 2004. Employment rates for ethnic minorities have fallen slightly since the 2005 minimum wage upratings but have been fairly constant since Summer 2003.

2.24 Although inactivity rates for those with work-limiting disabilities have fallen since Autumn 2004, their employment rates have also fallen. Recent changes to the benefits system have been designed to induce more people with disabilities to seek work and thus their unemployment rates may have risen as a result.

³ Summer covers the months June to August.

Low-paying Sectors

2.25 As discussed in previous reports, were there to be an adverse employment impact as a result of the minimum wage, in all likelihood it would be more evident in the low-paying sectors than in the economy as a whole. Figure 2.7 shows how the number of employee jobs has changed in the main low-paying sectors since 1998.

Figure 2.7

Change in Employee Jobs in Low-paying Sectors, GB, 1998-2005

Source: ONS Employee Jobs series, seasonal quarters, not seasonally adjusted, GB, 1998-2005.

Note: The ONS series on residential social care was discontinued in June 2005. Available data for the social care sector covers both residential and non-residential care.

2.26 In general the number of employee jobs has increased over time in most of these sectors. Only in three industries has the number fallen - the manufacture of textiles, clothing and footwear; cleaning; and agriculture. The declines in employment in agriculture and textiles are well-documented and stem from reasons unrelated to the minimum wage. The decline in the number of cleaning jobs occurred mainly before 2000, bottomed out in 2002 and 2003 and has started to reverse in the last two years.

2.27 These changes are shown in more detail in Table 2.2. It can be seen that since the introduction of the minimum wage, there has been growth of over 10 per cent in the number of jobs in both retail and hospitality. There is no strong evidence in the labour market to support the contention that recent increases in the minimum wage have had a detrimental effect on the number of jobs.

Table 2.2 Number of Employee Jobs in Low-paying Sectors, GB, 1998-2005

Source: ONS, employee jobs series, not seasonally adjusted, GB, 1998-2005.

Note: The ONS series on residential social care was discontinued in June 2005. The social care sector data given here covers both residential and non-residential care.

2.28 ONS data show that over 38,000 net new jobs have been created in the low-paying sectors since September 2004. The data also indicate that, despite the many negative stories about recent difficulties in the retail sector, there has been no net job loss. On the contrary, around 22,500 net new jobs have been created in that sector since September 2004.

2.29 The net reduction of about 1,600 jobs in the hospitality sector is small but conceals a big shift from part-time to full-time working. Growth in net full-time employee jobs of 48,800 was accompanied by a loss of just over 50,000 net part-time jobs. Moreover, about 216,000 net employee jobs have been created in the sector since September 1998. This constitutes a rise of 13.8 per cent in the number of jobs in hospitality since September 1998.

Inflation

2.30 The evidence suggests that the labour market has not contributed towards inflationary pressures in the economy. There are three commonly used measures of price inflation, and although these can differ quite markedly, Figure 2.8 shows they are all presently sending similar messages about inflation. In December 2005, annual growth in the Retail Price Index (RPI) was 2.2 per cent; the Retail Price Index excluding mortgage payments (RPIX) was 2.0 per cent, as was the CPI, which was at the Bank of England's target of 2.0 per cent.

2.31 Where the measures have produced different inflation rates in the past, the differences have been largely the result of different treatments of housing costs. The CPI excludes all housing costs, whereas the RPI includes them and the RPIX excludes only those related to mortgage interest payments. The differences are thus driven by items such as Council Tax bills, interest rates, housing depreciation and buildings insurance. Pay settlements tend to be more closely geared towards RPI than the other measures, and this has been less responsive than CPI to higher energy costs.

2.32 At the same time that GDP growth has slowed in response to higher energy costs, these have also pushed up inflation, as measured by the CPI, but only from around 1.6 per cent in June 2004 to 2.0 per cent in December 2005. The encouraging inflation picture is also reflected in the fact that the key retail price index, RPIX, rose more slowly than expected despite the energy price rises. This suggests that the degree of slack that opened up in the economy as a result of slower than expected output growth served to dampen down any inflationary pressures that might have arisen.

Figure 2.8

Consumer Price Inflation - A Comparison of Measures, UK, 1998-2005

Source: ONS, CPI (ONS code CJYR), RPI (ONS code CZBH) and RPIX (ONS code CDKQ), UK, 1998-2005.

2.33 Figure 2.9 illustrates that prices of producer inputs, spurred on by energy costs, have risen substantially faster than the prices of producer outputs, or consumer goods prices. This indicates that firms lack pricing power in the current economic environment, and are unable to pass cost increases along the production chain. This is principally the result of the drag exerted by the growing output gap as growth in economic activity has fallen below trend. Consequently, forecasters are largely agreed that inflation will remain well contained within the region of the Bank of England's current target of CPI inflation of 2 per cent. Reflecting this, and that there has been little or no pass-through from energy prices to consumer prices to wages, growth in average earnings fell below consensus expectations in 2005.

Figure 2.9

Price Inflation - Manufacturing Input and Output Prices, RPI Goods and Services, UK, 2004-2005

Source: ONS, RPI for consumer goods (ONS code DOGD) RPI for services (ONS code DOGE), producer input prices (ONS code RNNK) and producer output prices (ONS code PLLU), monthly, not seasonally adjusted, UK, 2004-2005.

Productivity and Unit Wage Costs

2.34 While inflation has remained subdued despite the pressures from energy price hikes, there has been some acceleration in labour costs. Slow growth in GDP combined with high employment has led to a decline in productivity growth, which in turn has led to an increase in unit wage costs over recent quarters. Figure 2.10 shows that productivity has fallen significantly since the second quarter of 2004 and, combined with steady growth in real earnings (earnings relative to price inflation), has resulted in a rise in unit labour costs of 3.0 per cent in the third quarter of 2005, up from a rise of just 1.0 per cent in the previous year. It should, however, be noted that productivity growth often falls sharply when growth slows at the start of a downturn, as GDP growth falls faster than employment growth. This productivity fall might be exacerbated if employers believe that the downturn is only short-term and hold on to workers they might otherwise let go.

A hotel manager told us that being made to pay more forced managers to manage better. In his hotel they had recently stripped out layers of hierarchy, as they had found that too many layers were not only unnecessary but also tended to reduce individual initiative. He concluded by saying, "After all, cooking breakfast is not rocket science and I don't see why we have to call someone who fries egg and bacon a 'chef'".
Low Pay Commission visit to Northern Ireland

Figure 2.10

Growth in Labour Productivity and Unit Wage Costs, UK, 1996-2005

Source: ONS, output per worker (ONS code A4YN) and unit wage costs (ONS code LOJE), quarterly, seasonally adjusted, UK, 1996-2005.

Note: Output per worker is the ratio of Gross Value Added at basic prices and LFS total employment. Unit wage costs are defined as average wages and salaries for employees divided by output per worker.

Pay

2.35 The influence of the disinflationary forces in the economy is reflected in the level of wage increases in the economy. The increase in unit labour costs is not the result of any acceleration in the pace of pay increases. Figure 2.11 depicts the annualised increase in average earnings (including and excluding bonuses), as measured by the AEI, and inflation, as measured by RPIX.

2.36 Average earnings growth (with and without bonuses) has moderated in recent months and is currently below the 4.5 per cent level forecast in our 2005 Report. The rising net inflow of migrant workers to the UK, particularly from Eastern Europe, may have played a significant role in subduing wage inflation. In the third quarter of 2005, annualised average earnings grew by 4.1 per cent including bonuses and by 4.0 per cent if bonuses are excluded. The latest data, for the three months to November, show a further deceleration in annual average wage growth. The measure including bonuses fell to just 3.4 per cent while the measure excluding bonuses fell to 3.8 per cent. However, independent forecasters' consensus prediction remains that average earnings including bonuses will grow by 4.2 per cent in 2006.

Figure 2.11

Comparison of Growth in Average Earnings (GB) with Price Inflation (UK), 1996-2005

Source: ONS, AEI including and excluding bonuses (ONS codes LNNC and JQDY), and RPIX (ONS code CDKQ), quarterly, seasonally adjusted, GB (UK for RPIX), 1996-2005.

Notes:

1. The AEI excluding bonuses series began in 1997.

2. The AEI growth rates presented are 3-month average percentage changes; the 3-month average change is the change in the average seasonally adjusted index value for the last 3 months compared with the same period a year earlier.

3. The RPIX growth rates are percentage changes over a year earlier.

2.37 Although the data indicate that actual earnings growth turned out to be slower in 2005 than was forecast in the 2005 Report, especially in the private sector, data on pay settlements do not generally reflect this. Pay settlement data from Incomes Data Services (IDS), Industrial Relations Services (IRS) and the Labour Research Department (LRD) show that, for most of 2004, median pay settlements were stable at 3 per cent, as shown in Figure 2.12.

Figure 2.12

Pay Settlements - A Comparison of Median Measures, UK, 1997-2005

Source: IRS, IDS and LRD pay databank records, UK, 1997-2005.

Note: The IDS monthly series began in December 2002.

2.38 Indeed, the level of pay settlements picked up in the early part of 2005, although the IRS and IDS measures had returned to 3 per cent by August 2005. The LRD measure gives greater weight to the public sector than the other measures, so it is perhaps not surprising (given that public sector average wage growth has been higher than in the private sector throughout 2005) that this measure is currently running slightly higher than the other two measures.

2.39 Some respondents to our consultation reported that recent increases in the minimum wage had forced firms to give larger than planned increases to low-paid workers on the minimum wage and to those earning slightly more in order to maintain differentials. However, we have uncovered no evidence to suggest that recent increases in the National Minimum Wage have fuelled inflation in general or wage inflation in particular.

A common view expressed at a meeting with a hospitality association was that the minimum wage was no longer just a wage floor that protected people from poverty, but was now driving the level of wages in the sector.
Low Pay Commission visit to Manchester

Earnings

2.40 The impact of the adult minimum wage can clearly be seen in Figure 2.13. There are spikes in the distribution of hourly earnings excluding overtime at the applicable adult minimum wage rates in both April 2004 (£4.50) and April 2005 (£4.85). In previous reports we found that the concentration of the workforce at the minimum wage was greater after a large increase in the minimum wage. The increase in the adult minimum wage between April 2004 and April 2005, 7.8 per cent, was greater than the 7.1 per cent increase between April 2003 and April 2004 and we can see that the proportion of employee jobs paying the minimum wage was slightly higher in April 2005 than in April 2004.

Figure 2.13

Distribution of Gross Hourly Earnings Excluding Overtime for Employees Aged 22 and Over, UK, 2004-2005

Source: ASHE with supplementary information, UK, 2004-2005.

Note: NMW label shows the adult NMW rate in April of the given year.

2.41 In our 2005 Report, we demonstrated that the minimum wage had increased the hourly wages of those at the bottom end of the earnings distribution, particularly in the period around the introduction of the minimum wage (1998-2000) but also as a result of subsequent upratings (2000-2004). Figure 2.14 shows that this improvement in the hourly wages of those at the bottom of the earnings distribution, compared with the median, has continued. However, at the lower end of the earnings distribution, only those in the bottom four percentiles appear to have had hourly wage increases significantly greater than the median between April 2004 and April 2005. For the fifth to the seventy-fifth percentiles, hourly wage increases over this period were similar to the median. However, the hourly earnings of the top 25 percentiles rose faster than the median.

The HR manager of a retail firm said that while a minority of staff benefited from the minimum wage (i.e. those at the bottom of the pay ladder) the majority of staff (i.e. those higher up the pay scale and those in higher-paying areas of the UK) had not seen their wages rise by the same amount and so could be seen as worse off.
Low Pay Commission visit to Grimsby

Figure 2.14

Increase in Hourly Earnings Excluding Overtime Minus the Increase in Median Earnings by Percentile for Employees Aged 22 and Over, UK, 2004-2005

Source: ASHE with supplementary information, UK, 2004-2005.

The Public and Private Sectors

2.42 Few employees in the public sector are paid at wages close to the minimum wage, particularly since the implementation of improved pay rates under the Agenda for Change in the NHS. It might be argued that we should therefore concentrate our analyses on the impact of the minimum wage on the private sector. This section looks at the differences in earnings and employment growth between the two sectors.

'A key indicator of inflationary pressures in the labour market is private sector regular pay.... The subdued pace of regular pay growth is likely to reflect demand conditions. But supply factors may also have been important...higher levels of net migration have boosted labour supply and eased the degree of tightness in the labour market over the recent past.'

Bank of England, Inflation Report, November 2005

2.43 It can be seen in Figure 2.15 that average earnings growth in the public sector has generally been higher than in the private sector since 2001, although apart from the second quarter of 2005, average wage growth has been similar in both sectors since the end of 2003. In the third quarter of 2005, average earnings grew by 4.1 per cent in the public sector compared with 4.0 per cent in the private sector.

Figure 2.15

Growth in Average Earnings Including Bonuses, Public and Private Sectors, GB, 1996-2005

Source: ONS, AEI including bonuses for the whole economy (ONS code LNNC), private sector (ONS code LNND) and public sector (ONS code LNNE), quarterly, seasonally adjusted, GB, 1996-2005.

Note: Growth shown is for the quarter compared with the same period a year ago.

2.44 More recently, however, average earnings growth in the private sector has been markedly slower than in the public sector - growing at just 3.3 per cent compared to 4.1 per cent in the three months to November 2005. The evidence also suggests that average wage growth in retail and hospitality has also been particularly subdued in the latter half of 2005.

2.45 Employment in the private sector, as shown in Figure 2.16, has grown in every year since 1993. Recent increases in government expenditure have led to an increase in the size of the public sector workforce. Indeed, most of the increase in jobs in the UK labour market between 2001 and 2004 was in the public sector. However, the increase in the number of private sector jobs in 2005 was more than twice the increase in public sector employment. But the growth in public sector employment in 2005 was faster than the growth in private sector employment as the public sector accounts for only a fifth of all jobs.

Figure 2.16

Annual Changes in Public and Private Sector Employment, UK, 1993-2005

Source: ONS, public sector employment (ONS code C9KD) and private sector employment (ONS code CZG8), annual, not seasonally adjusted, UK, 1993-2005.

Note: Changes based on mid-year estimates.

2.46 At an overall level, there is no evidence to suggest that the minimum wage has significantly affected wage inflation or employment growth in the private sector.