Review of 2005 Upratings - Beneficiaries and Coverage

2.53 The rate of growth of average earnings is a crucial input into the estimation of the number of beneficiaries of the minimum wage. Estimating the number of beneficiaries, as a way to gauge the impact of the minimum wage, is not altogether straightforward, and we begin by looking at the latest ONS estimates of those paid below the minimum wage. The scale of the impact of the minimum wage will be related to the number of workers affected. A larger than expected number of beneficiaries would indicate that the effect had been greater than we had anticipated.

2.54 We start, however, by looking at potential coverage - the maximum number of jobs that could possibly be affected. We can see from Table 2.3 that in April 2005, 327,000 jobs paid below the minimum wage. This total consisted of 249,000 jobs held by adults (aged 22 and over), 57,000 held by youths (aged 18-21) and 20,000 held by 16-17 year olds.

Table 2.3 Estimates of Jobs (in Thousands and Percentages) Paid Below the Applicable National Minimum Wage and the October 2005 Upratings

Source: ASHE with supplementary information, UK, 2005.

Notes:

1. The minimum wage for 16-17 year olds was £3.00 in April 2005 and October 2005.

2. The minimum wage for 18-21 year olds was £4.10 in April 2005 and £4.25 in October 2005.

3. The minimum wage for those aged 22 and over was £4.85 in April 2005 and £5.05 in October 2005.

2.55 In April 2005, around 1.2 million jobs held by adults aged 22 and over (or just over 5 per cent of the workforce) were paid below £5.05 an hour, the adult minimum wage rate implemented in October 2005. Nearly 130,000 young workers (aged 18-21) were paid below the October 2005 youth Development Rate of £4.25 an hour. We made no recommendation on the uprating of the 16-17 year old rate for October 2005 and it remained at £3.00.

2.56 The coverage estimates provide a fairly crude measure of how many jobs were likely to benefit from the October 2005 upratings. In order to estimate more accurately how many workers actually benefited from the minimum wage increases in October 2005, we need first of all to estimate what would have happened to the wages of the low-paid if the minimum wage had remained at its October 2004 rate of £4.85 an hour for adults and £4.10 for young workers aged 18-21.

2.57 It is likely that low-paid workers would have experienced at least some increase in their hourly wages in the absence of a minimum wage increase. We cannot know precisely how much their wages would have increased in the absence of the minimum wage, so we use two assumptions for the counterfactual growth in earnings. We assume either that wages would have grown in line with average earnings or that they would have grown in line with price inflation⁴. We consider the beneficiaries of the 2005 upratings to be those who would otherwise have gained a smaller pay rise between April 2005 (when the pay data was collected) and October 2005, when the new minimum wage rates came into effect.

2.58 Table 2.4 compares our latest estimates of beneficiaries, using the 2005 ASHE and the latest information on earnings and prices, with those made at the time of the 2005 Report using the information then available. These estimates follow the familiar pattern explained in the 2005 Report. As we use data closer to the implementation date of the minimum wage upratings, we find that the estimated number of beneficiaries is revised downwards.

⁴ A recent article (Butcher, 2005) showed that the earnings of the lowest-paid rose considerably less than those of the better paid in the period (1992-1997) immediately prior to the introduction of the National Minimum Wage. Indeed, between 1992 and 1997, wage growth for the lowest decile (13.9 per cent) was closer to the growth in retail prices (12.6 per cent) than the growth in average earnings (19.0 per cent).

Table 2.4 Estimates of Jobs (in Thousands and Percentages) Benefiting from the October 2005 National Minimum Wage Rates

Hourly rates Estimated number (thousands) and percentage of jobs benefiting

Source: LPC calculations based on ASHE with supplementary information, UK, 2004 and 2005.

Notes:

1. The estimates of beneficiaries made at the time of the 2005 Report assumed 21 year olds would be entitled to the adult rate. In these estimates they are assumed to qualify for the youth Development Rate.

2. The 2005 Report estimates are based on ASHE 2004 data and assumptions used in that report. Latest estimates are based on ASHE 2005 data.

3. Estimates of adult jobs and the total number of beneficiaries are rounded to the nearest 100,000. Estimates of youth (18-21) jobs and 16-17 year old jobs are rounded to the nearest 10,000.

4. Estimates of the percentage of gainers are rounded to the nearest 0.1 per cent.

5. Estimates in December 2005 based on average earnings growth including bonuses of 2.05 per cent between April 2005 and October 2005.

6. Estimates in February 2005 based on average earnings growth including bonuses of 2.1 per cent between April 2004 and October 2004 and forecast increase of 4.5 per cent in 2005.

7. Estimates in December 2005 based on RPIX price inflation of 1.2 per cent between April 2005 and October 2005.

8. Estimates in February 2005 based on RPIX price inflation of 1.2 per cent between April 2004 and October 2004 and forecast increase of 2.3 per cent in 2005.

9. If all 16-17 year olds had been paid the minimum wage in April 2005, there would not be any beneficiaries among this age group as the minimum wage did not increase in October 2005 for 16-17 year olds. However, we estimate that up to 20,000 16-17 year olds have benefited from the £3.00 rate in 2005 as they were paid below the minimum wage in April 2005.

2.59 Using the earnings assumption, we now estimate that 0.9 million jobs benefited from the 2005 upratings compared to the 1.3 million estimated at the time of the 2005 Report. This apparent fall, however, probably reflects the fact that some employers will have anticipated the forthcoming October 2005 minimum wage prior to the ASHE survey date in April 2005 and that workers who benefited prior to April 2005 do not show up in these estimates.

2.60 If no employers had anticipated the forthcoming October 2005 upratings, we would have estimated that more low-paid employees would have benefited from the upratings to the minimum wage than was anticipated at the time of the 2005 Report, as a consequence of average earnings growing more slowly than expected at the time of the 2005 Report.