Conclusion and Recommendations

2.77 In our 2005 Report, which made recommendations for October 2005 and October 2006, we stated that we believed it appropriate to increase the minimum wage slightly faster than average earnings growth over that two-year period, but we also recommended that we should review the October 2006 rate in January 2006 to check whether economic conditions had changed in any way that made the previous level proposed inappropriate.

2.78 Our review of economic conditions has revealed some factors which could argue for a slight reduction in the October 2006 increase: economic growth in 2005 has been less dynamic than we anticipated in January 2005, and forecast growth for 2006 has also been shaded down. Consumption spending has been relatively subdued, with negative implications for low-paying sectors, in particular retail. Average earnings have increased somewhat less than we anticipated over the last year (by 4.1 per cent not 4.5 per cent) and forecasts for 2006 now suggest a similar shortfall. And the slowdown in average earnings appears to be greater if we focus on the private sector alone, and particularly on some of the most affected sectors.

2.79 Conversely, we noted that employment continues to grow, both in the overall economy and in the low-paying sectors, and that corporate profitability continues its cyclical improvement.

2.80 Given these facts, we acknowledge that there could be a case to shave the 2006 increase by a small amount. In particular, since average earnings growth has been slightly less than anticipated, the 2005 and 2006 increases 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 recommendation.

2.81 Although some Commissioners believed that this overshoot was sufficient to justify a reduction in the 2006 rate to, for instance, £5.30 or £5.25, we concluded that the divergence of economic outcomes from those anticipated was not a sufficient basis on which to agree a reduction in the 2006 increase. We therefore confirm our original recommendations that in October 2006 the adult rate of the minimum wage should be increased to £5.35 and the youth Development Rate should be increased to £4.45.

2.82 However, we do now consider that the phase in which the Commission is committed to increases in the minimum wage above average earnings growth is complete and, looking forward, we have no presumption that further increases above average earnings are required. In addition, we note that it will be particularly important over the next year to look in detail at trends in average earnings by sector, analysing for instance, whether private sector average earnings growth continues to lag behind that in the public sector and reviewing in the light of that analysis the appropriate average against which to consider increases in the minimum wage, which primarily affects private sector employees.