The Minimum Wage for 16-17 Year Olds

Assessing the Impact

3.9 When considering whether it was appropriate to introduce a minimum wage for 16-17 year olds, one of our main concerns was to ensure that it did not encourage young people out of full-time education (FTE) or training. In assessing the impact of its introduction we have therefore looked carefully at what has happened to young people's participation in FTE and training since October 2004.

3.10 According to the Labour Force Survey (LFS), in the third quarter of 2005 the UK population of 16-17 year olds was around 1.58 million (0.81 million males and 0.77 million females). Just over 73 per cent were in FTE - over two-thirds of males and three-quarters of females - as shown in Figure 3.1. The rate of participation in FTE has been fairly stable for a number of years. However, due to the increase in the population of 16-17 year olds, the actual number in FTE increased by 109,000 between the second quarter of 1998 (a year prior to the introduction of the National Minimum Wage) and the third quarter of 2004 (the period before the 16-17 year old rate was introduced), and by a further 26,000 between the introduction of the 16-17 year old rate in October 2004 and the third quarter of 2005.

Figure 3.1

Proportion of 16-17 Year Olds in Full-time Education by Gender, UK, 1998-2005

Source: LFS, calendar quarters, seasonally adjusted, UK, 1998-2005.

3.11 The data suggest that the introduction of the 16-17 year old minimum wage rate in October 2004 has not had an initial negative impact on participation in FTE. Indeed, the number of 16-17 year olds in FTE increased by 42,000 if we compare the fourth quarter of 2004, the period immediately after the introduction of the minimum wage, with the same period in 2003. However, we note that there was a particular dip in participation in FTE in the third quarter of 2003 and therefore care needs to be taken when using this comparison.

3.12 However, the minimum wage cannot be considered in isolation from other influences on young people's decisions about participation in education, training or employment. Establishing the extent of any impact of the minimum wage for 16-17 year olds is complicated because the timing of its introduction closely coincided with the initial roll-out of the Education Maintenance Allowance¹ (EMA) to 16 year olds in August 2004 in Scotland and in September 2004 in England, Wales and Northern Ireland. The roll-out of the EMA is being staged over a three year period. Sixteen year olds were eligible to apply in year one (2004/05), 16 and 17 year olds were eligible in year two (2005/06) and 16 to 18 year olds will be eligible from year three (2006/07). Take-up of the EMA by 16 year olds in its first year of being available across the UK was 255,435, but information on the impact it has had on the level of participation in FTE is not yet available. However, the Department for Education and Skills (DfES) commissioned an evaluation of the EMA pilot projects run in England in 2004 which estimated that the EMA increased participation in FTE at ages 16 and 17 by 6.1 percentage points (Maguire and Maguire, 2004).

¹ The Education Maintenance Allowance is a weekly payment directly to a young person of £10, £20 or £30 a week depending on household income (which must be below £30,000 per year to qualify). The funding is available during term time for any academic or vocational course (up to level 3) which involves at least 12 hours of guided learning per week.

Trainees

3.13 The vocational training available to young people can take a variety of forms, including apprenticeships, preparatory schemes such as Entry to Employment (in England), National Vocational Qualifications (NVQs) or Scottish Vocational Qualifications (SVQs). Assessing the impact the minimum wage for 16-17 year olds might have had on those in training is difficult due to the lack of reliable data on the number of 16-17 year olds who have left school and are undertaking vocational training. The information we have gathered on government-supported vocational training suggests that in the 2004/05 academic year there were just under a quarter of a million² 16-17 year olds undertaking vocational training in the UK, a similar number to that in the same period in the previous year and prior to the 16-17 year old minimum wage being introduced.

3.14 The Learning and Skills Council (LSC) has announced that the EMA will be extended in England from April 2006 to replace the current Minimum Training Allowance (MTA) available to unwaged apprentices. It will also be available to young people on its Entry to Employment programmes, which aim to prepare 'hard to reach' young people for apprenticeships, employment and further education, and to participants on Programme Led Pathways. A key benefit from this change is that, unlike the MTA, the EMA will not affect other family benefits (such as Housing Benefit) and will therefore increase the financial support for young people from lower income households and those living independently to the same level as is available for those who chose to remain in FTE.

² The 2004/05 figure for 16-17 year olds in vocational training is provisional.

3.15 The extension of the EMA in England and the LSC's introduction in August 2005 of a contractual requirement for waged apprentices in England to receive a minimum of £80 per week from their employer should provide further incentives to young people to take up vocational training. We do not believe that the minimum wage will discourage them from this course and entice them into employment that offers little or no training. During our consultation we met a group of 16 and 17 year olds living independently at Forest YMCA who expressed the view that most young people would not be encouraged to abandon their long-term career goals and leave education or training even if they were entitled to the adult rate of the minimum wage.

Labour Market Position of 16-17 Year Olds

3.16 In this section we look in detail at the labour market status of those in FTE and those not in FTE, considering any changes that have occurred between the periods prior to and after the introduction of the 16-17 year old minimum wage, as well as looking at the trends that have emerged over a longer period.

3.17 It is important to note, however, that small sample sizes and a high proportion of proxy responses for this age group mean that the data used in our analysis need to be treated with caution. For example, in the LFS, our main source of information on economic activity, there is a sampling error of around ± 40,000 in the number of 16-17 year olds in FTE (which is about ± 2.5 percentage points of the proportion in FTE). Small deviations from trends should be treated with particular caution, so we concentrate more on broad trends.

3.18 In 2005 the population of 16-17 year olds reached 1.58 million and accounted for about 4 per cent of the total working age population. The Government Actuary's Department predict that the population of this age group will rise by a further 100,000 up to 2008, after which it will start to decline.

3.19 Half of all 16-17 year olds were economically active in the third quarter of 2005 (around 822,000), as shown in Figure 3.2, with a similar proportion of males and females. (The term 'economically active' includes those who are employed and those seeking and available for work but excludes non-working students.) Fewer than three in ten 16-17 year olds were not in FTE. Around 40 per cent of the 16-17 year olds who were in FTE were economically active. Since the introduction of the 16-17 year old rate, employment rates for all 16-17 year olds have fallen slightly as inactivity rates have risen marginally, but these changes are part of a longer running trend.

Figure 3.2

Labour Market Status of 16-17 Year Olds by Education Status, UK, Third Quarter 2005 Compared With Third Quarter 2004

Source: LFS, calendar quarters, seasonally adjusted, UK, 2004-2005.

3.20 Around 35 per cent of those in FTE are employed, with young females in FTE more likely to have jobs than young males (just under 40 per cent of female 16-17 year olds compared to 30 per cent of males). In Figure 3.3 we see that there has been an overall downward trend in employment rates for 16-17 year olds in FTE since the second quarter of 1998, with a particularly sharp decline between the fourth quarter of 2002 and the fourth quarter of 2003, after which they picked up slightly. However, in terms of the level of employment this accounts for only 13,000 fewer 16-17 year olds in FTE who were employed in the third quarter of 2005 than in the second quarter of 1998.

Figure 3.3

Employment Rates of 16-17 Year Olds in Full-time Education by Gender, UK, 1998-2005

Source: LFS, calendar quarters, seasonally adjusted, UK, 1998-2005.

3.21 We now turn to look at the labour market position of 16-17 year olds not in FTE. The population of this age group not in FTE has stayed reasonably constant at around 430,000 since the second quarter of 1998. Figure 3.4 shows that between the second quarter of 1998 and the third quarter of 2005, the employment rate for 16-17 year olds not in FTE has fallen by around 15 percentage points, with the level of employment down by some 67,000 (40,000 males and 27,000 females). This downward trend began in the late 1990s.

Figure 3.4

Employment Rates of 16-17 Year Olds Not in Full-time Education by Gender, UK, 1998-2005

Source: LFS, calendar quarters, seasonally adjusted, UK, 1998-2005.

3.22 Although the unemployment rates for male and female 16-17 year olds not in FTE have fluctuated considerably since 1998 (as seen in Figure 3.5), the overall trend has been upward. Young males not in FTE are significantly more likely to be unemployed than young females. Since the introduction of the 16-17 year old minimum wage and the third quarter of 2005 the overall rate of unemployment for 16-17 year olds not in FTE rose by 2.2 percentage points. However, during this same period the unemployment rate for females decreased by nearly 4 percentage points, but increased for males by nearly 6 percentage points.

3.23 It is interesting to note that although all economically active 16-17 year olds form a relatively small proportion of the total economically active people of working age - only about 2.6 per cent - they comprise over 10 per cent of the unemployed. This highlights their particular vulnerability in the labour market.

Figure 3.5

Unemployment Rates of 16-17 Year Olds Not in Full-time Education by Gender, UK, 1998-2005

Source: LFS, calendar quarters, seasonally adjusted, UK, 1998-2005.

3.24 The inactivity rate for 16-17 year olds not in FTE is also increasing, a trend which began in the fourth quarter of 1998, as shown in Figure 3.6. Overall, 28 per cent of 16-17 year olds not in FTE are inactive, a quarter of males and a third of females.

Figure 3.6

Inactivity Rates of 16-17 Year Olds Not in Full-time Education by Gender, UK, 1998-2005

Source: LFS, calendar quarters, seasonally adjusted, UK, 1998-2005.

3.25 Table 3.1 shows the percentage breakdown of 16-17 year olds not in FTE and inactive by the reason they have given for inactivity. Over a third of inactive 16-17 year olds are students doing part-time studies, with the proportion in this group increasing significantly since 1998. However, there is a further third that state their reason for inactivity as that they 'would not like work'. We are concerned about this group as, although not large, it has been growing. The remainder of the inactive are made up of those who have caring responsibilities, those who are sick or disabled and those who would like work but are not classified as unemployed (i.e. not actively seeking work or are unavailable to start work within two weeks).

Table 3.1 Proportion of Inactive by Reason Among 16-17 Year Olds Not in Employment or Full-time Education, UK, 1997-2005

Source: LPC estimates based on LFS Microdata, seasonal quarters, not seasonally adjusted, UK, 1997-2005.

Notes:

1. Four quarter averages.

2. Inactive are defined as those not in paid work or full-time education.

3.26 The circumstances that have led to the increase in the 'would not like to work' category are unclear despite efforts to investigate this further. But we can gain a better insight into the reasons given by some young people in this category by looking at the research we commissioned by Dickerson and Jones (2004) for our 2004 Report. The research obtained details of the main reasons for unemployment or inactivity among 16-17 year olds not in education or training, based on data from sweep 1 of the 2002 Youth Cohort Study (YCS). The main reasons given by respondents were that they needed more qualifications and skills to obtain a job, education or training place; they had not yet decided what sort of job or course to do; and/or they had not found a suitable job or course. DfES commissioned research by the Centre for Research in Social Policy (2005) supported the Dickerson and Jones findings on the reasons why some young people are not in education, employment or training. Given these findings, we would expect the time spent by young people in this category to be short, and that they would return to education to obtain the necessary qualifications or go into employment, probably with a training element.

3.27 To assist us to understand the relationship between the labour market status of 16-17 year olds and their particular circumstances and characteristics, we look to other data sources for information. Table 3.2 provides information on the main activities of 16 and 17 year olds in England and Wales by their individual characteristics, using data from the 12^th Cohort of the YCS (DfES, 2005b, 2005d). The results are from the survey of 16 year olds carried out in Spring 2004 (eight months after respondents had completed compulsory education), with the same respondents being surveyed a year later aged 17.

3.28 According to the YCS, around 72 per cent of 16 year olds and two-thirds of 17 year olds were in FTE. About another 16 per cent of 16 year olds and a fifth of 17 year olds were in government-supported training or full-time employment. The remainder were in part-time employment (4 per cent), out of work (6 per cent) or doing something else, for example looking after family or home (3 per cent). Young females were more likely to be in FTE than young males at both ages. However, young males were much more likely to be in government-supported training. Of those who were out of work at 16, a third were in employment by the age of 17, 12 per cent were in government-supported training and a further 19 per cent had re-entered FTE.

3.29 Participation in FTE at ages 16 and 17 was strongly linked to performance in year 11. At age 17 more than nine in ten of the cohort group who achieved eight or more GCSE grades A*-C were in FTE at age 17, compared with less than a third of those who achieved fewer than five GCSE grades D-G. Low achievers were more likely to be out of work than other groups.

3.30 The YCS showed that 9 per cent of both 16 and 17 year olds were not in education, employment or training. The rates were similar for males and females of both ages. Young people whose parents had routine occupations were over four times more likely to not be in education, employment or training than those from higher professional families.

3.31 The overall picture of the labour market position of 16-17 year olds shows that the trends in employment, unemployment and inactivity of those in and those not in FTE that were apparent before the introduction of a 16-17 year old minimum wage in October 2004 have continued since its introduction. However, the data highlight that the labour market position for those not in FTE has been weakening over a number of years. Employment rates have continued on a downward trend and the rates of unemployment and inactivity have continued to increase. It is difficult to explain the reasons for these trends, but the introduction of the minimum wage for 16-17 year olds does not appear to have further adversely affected their position in the labour market.

Table 3.2 Main Economic Activity by Characteristics of 16-17 Year Olds, England and Wales, 2004-2005

Source: DfES estimates based on the Youth Cohort Study, England and Wales, 2004-2005.

Note: '-' represents a non-zero quantity of less than 0.5 per cent, a cell size of less than 5 or an insufficient base.

3.32 This view is supported by the earnings data that we examine next, and by the testimony of the majority of respondents to our consultation who indicated that the minimum wage has had little or no negative impact and that it has not created a substitution effect in favour of older workers. We consider the views of stakeholders later in this Chapter.

Earnings

3.33 The April 2005 Annual Survey of Hours and Earnings (ASHE) shows that the most common rate of earnings for 16-17 year olds was between £4.00 and £4.50 per hour. It can been seen in Figure 3.7 that in Spring 2005 around 4 per cent (20,000) of 16-17 year olds were paid below £3.00 per hour. These estimates should not, however, be used as a measure of non-compliance. It is not possible to determine from the ASHE data whether an individual is eligible for the minimum wage. For example, it is not possible to identify those on apprenticeships or on certain accredited training who are exempt from the National Minimum Wage, or those who are in receipt of accommodation for which an employer is entitled to deduct an offset.

3.34 Figure 3.7 illustrates the hourly earnings distribution for 16-17 year olds in April 2004 (prior to the introduction of the £3.00 minimum wage rate) and April 2005 (after its introduction). We can see there was an upward shift in the distribution over this period. In April 2005 the most pronounced peak in the 16-17 year olds' earnings distribution was at £4.00, with a number of further spikes between £4.10 and £5.00. It highlights that most 16-17 year olds earn well above £3.00.

Figure 3.7

Distribution of Gross Hourly Earnings Excluding Overtime for 16-17 Year Olds, UK, 2004-2005

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

Notes:

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

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

3. 16-17 label shows the 16-17 year old rate in April 2005.

3.35 The median hourly earnings for 16 year olds in April 2005 was £4.32 and for 17 year olds it was £4.64, an increase of 8 per cent and 6.7 per cent respectively compared to April 2004. Looking at both ages together, the median hourly earnings was £4.55 in April 2005, an increase of 6.2 per cent when compared to April 2004.

3.36 Table 3.3 shows the distribution of pay for 16 and 17 year olds. The proportion of 16-17 year olds earning less than the youth and adult minimum wages grew between 2004 and 2005. Just under 30 per cent of 16-17 year olds earned less than the youth Development Rate in 2005 (£4.10), up from just over a quarter in 2004 (£3.80). In both years, around 60 per cent of 16-17 year olds earned less than the adult minimum wage - slightly above in 2005 and below in 2004.

Table 3.3 Distribution of Gross Hourly Earnings Excluding Overtime for 16-17 Year Olds, UK, 2004-2005

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

3.37 A research survey commissioned by the Department of Trade and Industry (DTI) early in 2005 (Continental Research, 2005) provides some further information on the earnings of 16-17 year olds. Although the main aim of the survey was to ascertain the level of awareness of the minimum wage for 16-17 year olds, it included some questions on the minimum wage more generally. A few questions sought information on current rates of pay for 16-17 year olds. Of the 216 workers aged 16-17 surveyed, 65 per cent of whom were working students, 2 per cent said they were being paid less than £3.00 per hour, while the most common hourly rate of pay was between £4.00 and £4.99 per hour. All the 75 employers employing 16-17 year olds said they were paying them a minimum of £3.00 per hour. Some employers reported paying different rates for 16-17 year olds depending on the job and skills required. The most common rate of pay for 16-17 year olds used by these employers (83 per cent) was between £5.00 and £6.00 per hour, while 40 per cent said that they had a pay rate of between £3.00 and £4.00 per hour and 27 per cent said they had a pay rate for 16-17 year olds of over £8.00 per hour.

3.38 The British Hospitality Association advised us that in August 2005 it had carried out a survey of 50 of its members, who collectively had a total of 7,650 employees. Thirty-seven of the 50 firms employed at least one 16 or 17 year old. Of these, two paid a lowest rate of £3.00 per hour, but most paid £3.25 or more, with 21 paying a lowest rate of £4.00 per hour or more. In a survey carried out by the Union of Shop, Distributive and Allied Workers (Usdaw) of 800 of its 16-17 year old members, the average wage of the 92 respondents who gave pay details was £4.25 per hour.

Beneficiaries of the Introduction of the 16-17 Year Old Minimum Wage

3.39 Based on the revised 2004 ASHE data, we now estimate that up to 37,000 jobs benefited from the introduction of the £3.00 per hour minimum wage for 16-17 year olds in October 2004 (6 per cent of all jobs held by this age group). However, this figure is the upper estimate as it includes those on apprenticeships and on pre-apprenticeship programmes who were exempt from the minimum wage and, taking these into account, is likely to reduce significantly the actual number of beneficiaries. Our latest estimate of beneficiaries is lower than the estimates given in our 2004 and 2005 Reports. This downward revision is in line with what we have found when calculating the number of beneficiaries for upratings of the adult rate and youth Development Rate. The reasons for this revision are explained in Chapter 2 (paragraphs 2.59 and 2.60), but it is also important to note that, although we have used the same methodology in calculating the number of 16-17 year old beneficiaries that we use for the adult and youth Development upratings, the 16-17 year olds estimates have to be treated with extra caution due to the small sample sizes.

Employment of Young People by Occupation and Industry Sector

3.40 We look next at the industry and occupational structure of employment for 16-17 year olds which is fairly heavily concentrated in low-paying sectors. Analysis we carried out for our previous reports showed that nearly 80 per cent of full-time students with jobs were employed in either the retail or hospitality sectors. These sectors are also important employers of 16-17 year olds who are no longer in full-time education, as is the construction industry.

3.41 Analysis of the industries and occupations employing young people in 2005 shows that employment of 16-17 year olds in the retail sector exceeds by far that of any other sector, accounting for 45 per cent of all employed 16-17 year olds. The hospitality sector is the next largest employer of this age group (at over 21 per cent). Sales and retail assistants alone accounted for nearly 37 per cent of 16-17 year old employees. The views of employers in these sectors about the impact of the minimum wage on their recruitment and training of young people were therefore particularly relevant. During the year we consulted widely and met a number of employers in these sectors during our Commission visits. The predominant view expressed during our meetings with such employers was that the 16-17 year old rate has had very little impact as most were paying young workers significantly above £3.00 per hour.

Figure 3.8

Employment of 16-17 Year Olds by Industry Sector and Occupation, UK, Winter 2004-Autumn 2005

Source: LPC estimates based on LFS Microdata, seasonal quarters, not seasonally adjusted, UK,

Winter 2004-Autumn 2005.

Note: Four quarter averages.

3.42 We now consider the views of those who responded to our consultation on the minimum wage for 16-17 year olds.