The Impact of the National Minimum Wage

One of the key ways to measure the impact of the minimum wage is by means of its 'bite' ­ defined as the ratio of the adult minimum wage to the median hourly wage. The bite has grown from 47.6 per cent of median earnings when it was introduced in April 1999, to around 53 per cent in October 2006. Prior to the 2005 Report, the adult minimum wage increased by 35 per cent, while average earnings grew by 26 per cent. When we were preparing our 2005 Report, independent forecasts indicated that the minimum wage increases we were proposing for October 2005 and October 2006 would be slighly higher than average earnings growth. In the event, average earnings grew by less than predicted ­ 8 per cent compared with the forecast 9.2 per cent ­ and, as a result, the bite of the minimum wage increased faster than anticipated. There is little evidence that this had any significant negative impact on employment, profits or prices over the period in question, although it is too early to assess fully the impact of the October 2006 upratings. As with average earnings, the forecast growth in the UK economy for 2005 and 2006 was not fully realised. Although predicted to grow at around 2.5 per cent in both 2005 and 2006, the economy slowed sharply in 2005 before it recovered in 2006. At the same time, price inflation grew faster than had been forecast, with the effect that the minimum wage grew less in real terms than had been expected.

In terms of coverage, using the average earnings assumption, we now estimate that the 2005 minimum wage upratings covered about 0.8 million employee jobs and that the larger increase in October 2006 covered around 1.25 million employee jobs. Estimates using the prices assumption are similar. One disadvantage of the way we traditionally calculate coverage is that it cannot allow for employers putting up wages in anticipation of statutory upratings. In a review of our coverage methodology this year, we developed an alternative approach. By downrating the minimum wage back to 1998 using the growth in average wages we can estimate what coverage would have been in 1998 before the earnings distribution had been affected by the minimum wage. Using this method, we calculated that the 2006 adult minimum wage was equivalent to nearly £4.00 in 1999, higher than the actual introductory rate of £3.60. We estimated that such an introductory rate would have covered nearly 8 per cent of adult employee jobs ­ almost double the estimated actual initial coverage of about 4 per cent.

Despite the slowdown in the economy towards the end of 2004 and throughout 2005, the UK labour market continued to create jobs. Total employment rose to a new record high of 29.03 million in the three months to November 2006. In our 2006 Report we noted that, since 2004, the private sector had experienced slower growth in wages and jobs than the public sector. This situation has been reversed in 2006 with both employment and average earnings growing faster in the private sector.

However, not all employment data are positive. Worryingly, employment in the low-paying sectors as a whole fell for the first time since the introduction of the minimum wage. Employment in these sectors has continued to be below its 2005 level throughout the first three quarters of 2006, but the fall has been weaker with each quarter suggesting that there has been some recovery. This recovery is expected to continue as the evidence suggests that consumer expenditure has picked up after the sharp decline in 2005.

The working age employment rate remained high in 2006, but it fell from the peak reached in the first quarter of 2005. This has been attributed to a number of factors, amongst which was the slowdown in the UK economy in 2005 and the increasing participation of older workers. Unemployment increased throughout 2005 and into much of 2006. The increase in the number of migrant workers and the growing number of older workers and women entering the labour marker were also widely seen as contributory factors. Since October 2006 the unemployment count has slowly flattened and started to fall.

Turning to other economic indicators, we see a mixed picture for 2005 and 2006. The evidence on profits is not consistent. The rate of return on capital employed is currently at or close to its record highs. However, these large and increasing returns are confined to the services and oil sectors. Share prices, as measured on the FTSE, have been strong and have grown substantially in the last 18 months. Profits measured by profit share of national income have also increased and looked healthy in 2006. However, excluding the volatile oil and financial sectors, the profits picture does not look so rosy. One other indicator of profit is the margin between input and output prices. In 2005 there were sharp increases in input prices, mainly as a result of increases in fuel, energy and commodity costs, but the corresponding increases in output prices were much lower. In 2006, input prices have fallen sharply, but remain higher than output prices even though output prices have increased.

Price inflation was subdued until the latter half of 2006. Despite the large increases in the price of oil, consumer inflation in the UK remained stable in 2005 and the first half of 2006. However, price inflation in December 2006 was at its highest for over a decade driven by increases in fuel and food. Labour productivity increased in 2005 and 2006, with a marked increase in the two main low-paying sectors, retail and hospitality.

Over the past two years there has been an improvement in the quality and reliability of the earnings and employment data provided to us by the Office for National Statistics, a development that we warmly welcome. The main changes are set out in Appendix 6. Unavoidably, these improvements have caused another problem ­ discontinuity. The data sets that we most use in our analyses ­ the Labour Force Survey and the Annual Survey of Hours and Earnings ­ are subject to significant discontinuities. This makes comparisons over time difficult and we urge the Office for National Statistics to do everything possible in order to produce consistent time series prior to our next report. We look forward to working with the Office for National Statistics in their continuing efforts to improve the quality of the information provided. We would also welcome additional information on the labour market performance of migrant and agency workers.

Introduction

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2.1 In this chapter we assess the impact of the minimum wage since its introduction, but focus in particular on the two most recent upratings in October 2005 and October 2006. The chapter is in six main parts:

• First, we set the scene with a short history of the National Minimum Wage followed by a brief consideration of the macroeconomic context.

• Then we look at the impact of the 2005 and 2006 upratings on earnings, coverage and differentials.

• We move next to look at the workers affected. We consider the characteristics of workers in minimum wage jobs. We look at how long people stay in minimum wage jobs. And we discuss the impact of the minimum wage on household income.

• Having established the impact on earnings, we look at the effect on the labour market, including the impact on employment, unemployment, inactivity, hours, vacancies and redundancies.

• We then look at the impact on firms, including prices, profits, productivity, training, and business start-ups and failures.

• We conclude with an overall assessment.

A Short History

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2.2 The Low Pay Commission was set up in 1997 and was asked by the Government to recommend a rate for the UK's first ever National Minimum Wage. Mindful of the international experience and the latest research at that time, we recommended that the National Minimum Wage be set initially at a cautious level. The Government accepted our recommendation and, in April 1999, introduced the new National Minimum Wage at £3.60 an hour for workers aged 22 and over. A lower rate of £3.00 was introduced for young people aged 18­21 and for adults on accredited training schemes. Table 2.1 sets out the evolution of the National Minimum Wage.

Table 2.1

The Evolution of the National Minimum Wage, 1999­2007

The Adult Rate

2.3 In the early years, we continued to take a cautious approach as we collected data and commissioned research into the impact of the introduction of the minimum wage on earnings, employment, hours, prices, profits, productivity and training. From these analyses, we satisfied ourselves that there was little or no evidence of any significant adverse impact on the economy as a whole, or on low-paid workers or on low-paying sectors as a result of the introduction of the National Minimum Wage.

2.4 Consequently, in our Third Report (2001a, 2001b), we recommended that the increases in 2001 and 2002 should raise the adult minimum wage to the level that it would have reached had it been increased in line with average earnings growth since its introduction. As the adult minimum wage had, until that point, only increased by ten pence since its introduction, and employers who provided evidence had requested a period of respite to restore differentials, it was decided to front load the increase. Accordingly, the adult minimum wage rose by nearly 11 per cent in October 2001, but by only 2.4 per cent in October 2002.

2.5 With the labour market remaining robust and the minimum wage continuing to have little discernible adverse impact on the economy, we recommended in our Fourth Report (2003) that the increases in the minimum wage for October 2003 and October 2004 should again be above predicted growth in average earnings. This time, most employers with whom we had consulted had requested that the increases be more evenly spread. Consequently, the minimum wage rose by 7.1 per cent in October 2003 and by 7.8 per cent in October 2004. This led to another step change, whereby the adult minimum wage was now growing at a faster rate than average earnings growth.

2.6 Given that the minimum wage had been raised significantly above average earnings growth between October 2001 and September 2005, we recommended in our 2005 Report that it should be increased only marginally above predicted growth in average earnings in 2005 and 2006. In evidence gathered for the 2005 Report, employers in general had requested that the increase should be back-loaded, enabling employers to adjust differentials after the large minimum wage increases in 2003 and 2004. We took account of these representations and recommended a 4.1 per cent increase in October 2005 followed by a 5.9 per cent increase in October 2006.

2.7 When we came to review our recommendation for October 2006 in the 2006 Report, we found that actual average earnings growth had been lower than had been originally forecast in the 2005 Report¹. At that time we had anticipated that average wages would increase by 4.5 per cent in 2005 whereas in fact they had only increased by 3.7 per cent². This meant that the recommended minimum wage increase relative to average earnings was greater than anticipated.

¹ Using the median of forecasts from the HM Treasury Panel of Independent Forecasts for February 2005.

² Including bonuses or excluding bonuses makes little difference. For consistency with other analyses in this chapter, we use the Average Earnings Index (AEI) including bonuses.

2.8 Further, actual economic growth in 2005 had been less robust than anticipated in the 2005 Report, and forecast growth for 2006 had been shaded down. However, although unemployment had been rising, the labour market continued to be robust with employment increasing to record levels. The latest official data available (up to September 2005) indicated that employment growth in retail and hospitality was declining, as a result of the contraction in consumer spending in 2005, but it was still positive. In the light of this evidence, the Commission agreed, on balance, that 'the divergence of economic outcomes from those anticipated was not a sufficient basis on which to agree a reduction in the 2006 increase'. Therefore, we confirmed our original recommendations for October 2006, while noting that the economy was not as strong as it had been.

2.9 The history is graphically illustrated by Figure 2.1. Before the introduction of the minimum wage, the wages of the lowest paid often lagged behind increases in inflation, let alone the average increases in wages. Figure 2.1 shows that, after a cautious start, the minimum wage quickly began to increase in real terms, rising faster than the increases in retail price inflation. And since 2004 it has been increasing faster than average earnings. By December 2006 the value of the adult hourly rate of the minimum wage had increased by 49 per cent since its introduction. Over the same period, the Retail Price Index (RPI) increased by 23 per cent and average earnings by 36 per cent.

Figure 2.1

Increases in the Adult National Minimum Wage Compared With Changes in Prices (UK) and Average Wages (GB), 1999­2006

Source: LPC estimates based on ONS data, AEI including bonuses (ONS code LNMQ), RPIX (ONS code CHMK), RPI (ONS code CHAW) and CPI (ONS code D7BT), monthly, seasonally adjusted (not seasonally adjusted for RPIX, RPI and CPI), GB (UK for RPIX, RPI and CPI), 1999­2006.

The Youth Rates

2.10 Since the introduction of the National Minimum Wage, the Youth Development Rate (covering those aged 18­21) has followed a similar upward trend to the adult rate, but at about 85 per cent of its value. Alerted to evidence that some employers were offering young people jobs for very low wages with no training or development prospects, we recommended in a special report (2004) that the National Minimum Wage be extended to cover all those over the school leaving age. Previously those under the age of 18 had been exempt. The rate for 16­17 year olds was deliberately set cautiously to avoid any adverse impact on participation in training or education while at the same time providing a wage floor to minimise exploitation.

The Economic Background

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2.11 In this section, we first look at the record of the forecasts we used to help us come to our recommendations for October 2005 and October 2006. We then give a brief overview of how the UK economy has performed in 2005 and 2006.

Forecasts for 2005 and 2006

2.12 In February 2005, when we made our initial recommendations on the minimum wage rates for October 2005 and October 2006, the economy was forecast³ to grow at around 2.6 per cent in 2005 and 2.5 per cent in 2006. It actually grew by 1.9 per cent in 2005 and looks set to grow at around 2.9 per cent in 2006. Growth in 2005, as a result of a slowdown in consumer expenditure, was well below that forecast. However, growth in 2006 has exceeded expectations. Taking 2005 and 2006 together, the economy was forecast to grow by 5.2 per cent but is now expected to have grown by about 4.9 per cent.

³ Using the median of forecasts from the HM Treasury Panel of Independent Forecasts for February 2005.

2.13 Actual inflation has turned out higher than forecast inflation in both 2005 and 2006. At the time of our 2005 Report, consumer price inflation was expected to increase by 1.8 per cent in 2005 and 1.9 per cent in 2006 (if measured by the Consumer Price Index (CPI)) and by 2.4 per cent in 2005 and 2.5 per cent in 2006 (if measured by RPI). According to the CPI, actual consumer prices rose by 2.3 per cent in 2005 and 2.4 per cent in 2006. Using the RPI, they rose by 2.5 per cent and 3.7 per cent, respectively⁴.

2.14 Average wage growth has been lower than forecast in both 2005 and 2006. Given that price inflation has been higher than anticipated, it is perhaps surprising that average wage growth has been so subdued. Taking 2005 and 2006 together, average earnings were expected to grow by 9.2 per cent over this period but they have actually grown by only 7.8 per cent.

⁴ For the year to October 2005 and the year to October 2006.

2.15 During this period, the adult minimum wage rose by 10.3 per cent ­ about two and a half percentage points more than average earnings. However, it rose slightly less than expected when set against inflation. The adult minimum wage was expected to increase by 5.3 percentage points more than RPI price inflation but it has in fact grown by 4.0 percentage points more than this measure.

The UK Economy

2.16 After experiencing falling growth from the middle of 2004 and into early 2005, Figure 2.2 shows that the UK economy picked up towards the end of 2005 and has now grown at or around trend for four consecutive quarters (up to the third quarter of 2006).

Figure 2.2

Growth in Gross Domestic Product and Household Spending, UK, 1998­2006

Source: LPC estimates based on ONS data, household final consumption expenditure (ONS code ABJR) and gross domestic product (GDP) (ONS code ABMI), calendar quarters, seasonally adjusted, UK, 1998­2006.

2.17 Household spending has been volatile over the last year or so but, when smoothed, appears to show reasonable growth, albeit not quite at the rate of expansion seen in 2003 and 2004. Government spending has also begun to slow. However, business investment has recovered and has continued to grow strongly into 2006. The composition of global growth has benefited UK trade as the European economy, the UK's major export market, has strengthened. Thus, the UK economy is now growing at or around trend and is no longer so dependent on consumer and government spending. However, the rise in short-term interest rates and the appreciation of sterling may make things more difficult for UK exporters.

2.18 Employment has continued to grow, reaching record levels in the third quarter of 2006. However, increased participation by workers over the age of retirement and those previously on incapacity benefits, along with the increasing number of migrant workers, particularly from central and eastern Europe, has contributed to a rise in unemployment since the beginning of 2005.

2.19 In the third quarter of 2006, oil and gas prices have fallen back from the large increases seen in the first half of 2006. Basic pay growth remains subdued, but inflation has risen above the Bank of England target and house prices have grown strongly.

2.20 Looking at low-paying sectors, Figure 2.3 clearly shows that the two largest low-paying sectors in terms of employment, retail and hospitality, were adversely affected by the downturn in consumer spending from the middle of 2004 to the middle of 2005. The retail sector experienced growth rates in excess of 3 per cent from the first quarter of 1998 to the end of 2004. The hospitality sector also grew strongly throughout this period with the exception of the downturn, partly as a result of the widespread foot and mouth outbreak, between the second quarters of 2000 and 2001.

Figure 2.3

Output Growth (Measured as Gross Value Added (GVA)) in the Wholesale & Retail and Hospitality Sectors, UK, 1998­2006

Source: LPC estimates based on ONS data, GVA in wholesale and retail (ONS code GDQC) and hotels and restaurants (ONS code GDQD), calendar quarters, seasonally adjusted, UK, 1998­2006.

2.21 The reduction in the growth of consumer spending from the middle of 2004 to the middle of 2005 had an adverse impact on both retail and hospitality, with annual growth rates of 6 per cent in retail and of 5 per cent in hospitality plummeting to just above zero by the middle of 2005. Consumer spending started to recover in the middle of 2005 and has strengthened into 2006, helping both retail and hospitality. In the third quarter of 2006, growth in hospitality was running at an annualised rate of 7.2 per cent. During the same period, the recovery in retail was less strong (2.1 per cent). Data from the Office for National Statistics (ONS), the CBI and the British Retail Consortium (BRC) all seem to show that, after increasing rapidly in the Spring, retail sales growth stuttered in the rest of 2006. However, recent evidence from the same sources suggests that sales for Christmas 2006 were strong. We examine the low-paying sectors in more detail in Chapter 3.

2.22 In conclusion, after growing below trend in 2005, the UK economy has recovered in 2006. Manufacturing output has picked up in recent quarters but it is the service sector that continues to lead growth buoyed by a strong performance from business services and finance. There continues to be weakness in the distributive sector, which includes retail and hospitality, although the preliminary estimates for the fourth quarter show a substantial acceleration in annual output growth in the sector.

Average Earnings and Pay Settlements

2.23 We next look at average earnings growth and pay settlements in the economy. Despite the recent rise in price inflation, wage inflation continues to be moderate whether using the official ONS measures (the Average Earnings Index (AEI) including or excluding bonuses) or pay settlement data from independent private sector sources. The ONS does not collect data on pay settlements. The main providers of such data are Incomes Data Services (IDS), Industrial Relations Services (IRS), the Labour Research Department (LRD) and EEF, The Manufacturers' Organisation.

2.24 Trends in median pay settlement growth as measured by these independent organisations and official average earnings growth are shown in Figure 2.4. Price inflation (as measured by RPI) is also shown. AEI growth is typically about one percentage point higher than the median level of pay settlements, which in recent years have tended to be similar to RPI. Average earnings including bonuses have grown at around 4 per cent since the beginning of 2004, compared with around 3 per cent for pay settlements. The AEI captures the totality of changes in all elements of pay such as bonuses, pay progression, interim adjustments and pay restructuring outside the annual pay review, as well as changes in workforce composition. Pay settlements, on the other hand, only capture consolidated increases in basic pay and performance-related pay rises.

Figure 2.4

Comparison of Growth in Average Earnings (GB) with Median Pay Settlements and Price Inflation (UK), 1998­2006

Source: ONS, AEI including bonuses (ONS code LNNC), RPI (ONS code CZBH), IRS, IDS, LRD and EEF pay databank records, monthly, seasonally adjusted, UK (GB for AEI), 1998­2006.

Notes:

1. The AEI growth rates shown 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.

2. The RPI growth rates are percentage changes over a year earlier. These figures are not seasonally adjusted.

3. The IDS monthly series began in December 2002.

4. Pay settlements are medians over 3 months.

2.25 Average wages including bonuses grew by 4.1 per cent in the year to November 2006. If we exclude the impact of bonuses, earnings growth has been declining slowly since the end of 2004. In the three months to November 2006, earnings excluding bonuses grew by 3.7 per cent. These increases are lower than the 4.5 per cent increase that had been forecast when we recommended our minimum wage upratings for 2005 and 2006 in February 2005. Since the beginning of 2003, median pay settlements have remained broadly static at around 3 per cent on all measures. Over the same period RPI has fluctuated just below this level.

2.26 There are various explanations for the subdued rate of growth in average earnings and pay settlements. One plausible explanation is that the recent increases in non-labour (energy) costs have forced businesses to keep a lid on wage increases in order to compensate for the higher input costs. It has also been argued that sluggish domestic demand may be the reason behind companies' reluctance to raise wages. Weakening demand, as well as the threat that domestic jobs could move offshore, may have also forced workers to avoid or delay demands for higher wages in an environment of uncertain job prospects. Another argument that has been voiced recently is that the increased flow of migrant workers into the UK has exerted downward pressure on wages. Recent research on migration by Gilpin, Henty, Lemos, Portes and Bullen (2006) and Blanchflower, Saleheen and Shadforth (2007) finds no evidence of such a relationship. However, Dustmann, Frattini and Preston (2007) do find evidence of such an impact but only at the bottom end of the earnings distribution.

2.27 Price inflation has edged up further recently, driven mainly by increases in utility and petrol prices. The latest inflation data for December 2006 show RPI (4.4 per cent) twice as high as in the same period a year earlier and higher than average earnings growth including or excluding bonuses. Indeed, RPI increased faster than the consensus forecast average earnings growth for 2007 (4.3 per cent). Excluding mortgage interest payments, inflation as measured by RPIX was 3.8 per cent, and the CPI was 3.0 per cent, well above the Government's inflation target (2.0 per cent). Higher inflation may be starting to have an impact on pay negotiations. IDS (2007) noted that there had been a small upward shift in the lower and upper quartile of its pay settlements.

Impact of the National Minimum Wage on Earnings

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2.28 In this section we look at the impact of the minimum wage on earnings, concentrating particularly on the October 2005 and October 2006 upratings. First, we look at the 'bite' of the minimum wage, how it has changed relative to various points on the hourly earnings distribution. We then look at whether the minimum wage has affected the distribution of hourly earnings among the low-paid. We next look at coverage in order to estimate the number of jobs covered by the October 2005 and October 2006 upratings. Differentials are then analysed. Finally, we investigate the characteristics of those covered by the 2006 October upratings.

The 'Bite' of the Minimum Wage

2.29 We start by looking at how the minimum wage has changed since its introduction relative to various points on the hourly earnings distribution. In terms of the median, the adult minimum wage went above half median hourly earnings for the first time in 2005 but it is still below 40 per cent of the mean. Table 2.2 shows that the 'bite' of the minimum wage measured against the mean or the median had fluctuated, noticeably increasing after the large increase in October 2001 (ASHE 2002 data in the table), but was no higher in 2003 than it had been at the introduction of the minimum wage. Between 2001 and 2005, however, the 'bite' measured against the median increased by nearly six percentage points although it remained flat in 2006.

⁵ We note in the data that some employers have rounded weekly pay or annual pay. For example, some employers have rounded weekly pay down to £200 (from £202) but have also stated that they pay £5.05 an hour and the employee works 40 hours a week.

Table 2.2

The National Minimum Wage as a Percentage of Various Points on the Earnings Distribution, UK, 1999­2006

Source: LPC estimates based on the Annual Survey of Hours and Earnings (ASHE) without supplementary information, low-pay weights, UK, April 1999­2004 and ASHE with supplementary information, low-pay weights, UK, April 2004­2006.

Note: Direct comparisons before and after 2004 should be made with care due to changes in the data series.

Impact on the Distribution of Earnings

2.30 We now consider the hourly earnings distribution for adult workers (aged 22 and over). The hourly earnings distributions for younger workers are considered in Chapter 5.

2.31 The impact of the adult minimum wage can clearly be seen in Figure 2.5. There is a concentration of the adult workforce at the National Minimum Wage in all three years considered. This concentration is greatest in April 2006, when nearly two per cent of all jobs were paid at £5.05 an hour. There is also a much larger spike for jobs paid immediately below the minimum wage than in previous years; this may be a result of rounding to £5⁵.

Figure 2.5

Hourly Earnings Distribution for Employees Aged 22 and Over, UK, 2004­2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, 2004­2006.

2.32 In April 2006, there were peaks in the adult earnings distribution at around £5.05 (the then National Minimum Wage) and £5.50, and also at £6.00 and £6.50 (not shown). Similar peaks at rounded values are observed for 2004 and 2005. These peaks lend support to the idea that firms, particularly those in the low-paying sectors, have a 'mezzanine' level: that is, firms do not want to be seen as 'minimum wage employers' and thus set their pay rates slightly higher.

Coverage

2.33 We now consider how many workers are directly affected by the National Minimum Wage. We start this section by noting the number of jobs that were paid below the existing and forthcoming minimum wage rates. We show how this has varied since the introduction of the minimum wage. We next estimate the number of jobs that were covered by the 2005 and 2006 upratings. We also produce coverage estimates using an alternative methodology.

Jobs Paid Below the Minimum Wage in April 2006

2.34 ONS data consistently show that some workers are being paid below the minimum wage. Annual Survey of Hours and Earnings (ASHE) estimates for April 2006 show that 336,000 jobs were held by people aged 16 or over with hourly pay below the appropriate National Minimum Wage rate. This represents 1.3 per cent of all UK jobs. Most of these jobs were part-time and held by women.

2.35 These figures should not be interpreted as the number of workers being denied their legal right to the minimum wage. Some workers may legitimately be paid below the minimum wage. For example, it is not possible to identify those who are exempt from the minimum wage because they are apprentices. If employers provide accommodation, they are entitled to offset minimum wage pay by up to £4.15 per day. We go on to discuss issues of compliance and enforcement in Chapter 6.

Table 2.3

Number of Jobs Paying Below the National Minimum Wage, All Employees, UK, 1998­2006

Source: ONS low pay methodology estimates for 1998­2003 are based on a central estimate of the Labour Force Survey (LFS) and ASHE, without supplementary information. ONS low pay methodology estimates for 2004­2006 use only ASHE with supplementary information.

Notes:

1. Figures for Spring 1998, before the National Minimum Wage was introduced, are for the number of jobs paid at less than £3.00 per hour (aged 18­21) or £3.60 per hour (aged 22 and over).

2. Rate is £3.00 per hour (aged 18­21) or £3.60 per hour (aged 22 and over).

3. Rate is £3.20 per hour (aged 18­21) or £3.70 per hour (aged 22 and over).

4. Rate is £3.50 per hour (aged 18­21) or £4.10 per hour (aged 22 and over).

5. Rate is £3.60 per hour (aged 18­21) or £4.20 per hour (aged 22 and over).

6. Rate is £3.80 per hour (aged 18­21) or £4.50 per hour (aged 22 and over).

7. Rate is £3.80 per hour (aged 18­21) or £4.50 per hour (aged 22 and over).

8. Rate is £3.00 per hour (aged 16­17) or £4.10 per hour (aged 18­21) or £4.85 per hour (aged 22 and over).

9. Rate is £3.00 per hour (aged 16­17) or £4.25 per hour (aged 18­21) or £5.05 per hour (aged 22 and over).

10. Numbers for 1998­2003 are rounded to the nearest 10,000.

2.36 Table 2.3 shows that there was an increase in the numbers of jobs paying below the minimum wage in 2006 compared with 2005 but these are fewer than after the large minimum wage upratings of October 2001 (as shown by the April 2002 data). Rounding of weekly pay or annual pay and slow adjustment by employers are more likely causes than an increase in non-compliance.

Jobs in April Paid Below the Forthcoming October Minimum Wage

2.37 Table 2.4 shows that the percentage of jobs held by adults aged 22 and over paid below the minimum wage in April each year, which was 1.2 per cent in 2006, has tended to fluctuate just below that level. But on average, in April each year, a further 4 to 5 per cent are paid below the hourly rate at which the minimum wage is due to be fixed in six months' time. As we would expect, this percentage is higher when a large increase in the minimum wage is planned. The percentage covered in 2006 is similar in magnitude to that of 2001, when the minimum wage increased by over 10 per cent. A similar analysis is conducted for young workers in Chapter 5.

Table 2.4

Jobs Held By Adults (Aged 22 and Over) Paying Below the Existing National Minimum Wage and the Forthcoming National Minimum Wage, UK, 1999­2006

Source: ONS central estimates using ASHE without supplementary information and LFS for 1999­2004. LPC estimates using ASHE with supplementary information, low-pay weights, UK, 2004­2006.

Jobs Covered By the 2005 and 2006 Upratings

2.38 In order to estimate how many workers are covered by a minimum wage uprating we first calculate how many workers are expected to have received a wage increase between April and October to bring them from below to at least the October minimum wage level. These workers are not included in our estimates. Calculating this estimate, however, requires an assumption about what wage increases would have been in the absence of the National Minimum Wage. We make an estimate using two alternative assumptions: that the earnings of the low-paid would have risen in line with average earnings during this period; or that they would have increased in line with prices.

2.39 To estimate the numbers covered using either of these assumptions, we calculate a 'downrated' equivalent value in April of the October minimum wage rate (rounded up to the nearest 5 pence). As Table 2.5 indicates, in our 2005 Report using data from April 2004, we estimated that around 1.3 million jobs would be covered by the October 2005 upratings using the earnings assumption. In the subsequent 2006 Report, using data from April 2005, we revised our estimates downwards to 0.87 million. Using revised data for 2005, released in October 2006, we now estimate that about 0.83 million jobs will have been covered by the 2005 upratings.

Table 2.5

Estimated Coverage of the 2005 Upratings Using the Earnings and Prices Assumptions, UK

Sources: LPC 2005 Report (2005), LPC 2006 Report (2006), LPC estimates based on ASHE with supplementary information, low-pay weights, UK, 2004­2005.

Note: Youths are aged 18­21 and adults 22 and over in these estimates.

2.40 Table 2.6 shows that in our 2005 Report, using data from April 2004, we estimated that around 1.29 million jobs would be covered by the October 2006 upratings using the earnings assumption. In the subsequent 2006 Report, using data from April 2005, we revised our estimates marginally to 1.28 million. The latest estimate using April 2006 data is that 1.25 million jobs were covered by the 2006 upratings. But, crucially, many more may have received the benefit of an anticipatory wage increase before April. While these workers clearly benefited from the minimum wage uprating, they will not be captured within our coverage estimates.

Table 2.6

Estimated Coverage of the 2006 Upratings Using the Earnings and Prices Assumptions, UK

Sources: LPC 2005 Report (2005), LPC 2006 Report (2006), LPC estimates based on ASHE with supplementary information, low-pay weights, UK, 2004­2006.

Notes:

1. The youth rate was not recommended to be increased in October 2006 until the 2006 report.

2. Youths are aged 18­21 and adults 22 and over in these estimates.

2.41 The above estimates generally follow the now familiar pattern in that, at each iteration, the estimate of the total number of beneficiaries has been revised downwards. It is likely that this is mostly explained by wage anticipation, i.e. employers choosing to award the October increase before the April survey date. It should also be noted that, as price inflation has risen and wage inflation has been more subdued, our latest estimates suggest coverage of around 5 per cent for the 2006 upratings whether we use the earnings or the prices assumption.

Alternative Method of Looking at Coverage

2.42 Over the past year, we have looked for an alternative way of calculating coverage in order to address the issue of employer anticipation. We devised a method whereby we attempt to 'downrate' the minimum wage not to the latest data, but to data that would have been unaffected by the introduction of the National Minimum Wage ­ that of Spring 1998. Assuming that wages for all would have grown in line with average earnings, the minimum wage for October 2006 is imposed on the 1998 earnings distribution by downrating it in line with the change in average earnings between April 1998 and October 2006, as shown in Figure 2.6.

2.43 Using this technique, the 2006 October adult minimum wage (£5.35) would have been equivalent to £3.96 in 1999, when the minimum wage introduced at that time was £3.60. The value of the 2006 October minimum wage would have been £3.80 in 1998, when the introductory level of the minimum wage (£3.60 in 1999) would have been equivalent to £3.45. The 2006 minimum wage (£5.35) downrated in 1998 terms would have covered more than 1.65 million jobs held by adults aged 22 and over (around 7.7 per cent of all such jobs) in 1998. This level of coverage is considerably more than that estimated for the introduction of the minimum wage (about 4 per cent) or the October 2006 upratings using 2006 data (around 5 per cent).

2.44 Although this method manages to overcome the problem of employer anticipation, it is not without drawbacks. For example, there is still an issue about which downrating series is most appropriate. Further, any inferences made are subject to the assumption that the hourly earnings distribution has not changed significantly since 1998. In fact, there have been significant changes to the UK labour market (apart from the National Minimum Wage) since 1998, although recent research by Dickens and Manning (2006) suggests that it is only the impact of the minimum wage that has changed the shape of the earnings distribution.

Figure 2.6

October 2006 National Minimum Wage Downrated to the 1998 Hourly Earnings Distribution, UK

Source: LPC estimates based on ONS central estimates (ASHE without supplementary information 1998 and LFS Spring 1998) and AEI including bonuses (ONS Code LNMQ), monthly, seasonally adjusted, UK, April 1998­October 2006.

Impact on Differentials

2.45 An important factor when assessing the impact of the National Minimum Wage is the extent to which differentials for workers earning just above this level are restored following an uprating. This not only affects the number of workers who might indirectly gain from above-average increases in the minimum wage, it also affects firms' total wage bills. The further up the earnings distribution that these differential impacts occur, the greater the number of people who gain from higher wages, but the higher the cost to firms and the greater the potential impact on inflation.

2.46 This section looks at how those at the bottom end of the earnings distribution have fared compared with those at the median and those higher up the earnings distribution over the period 1992 to 2006. Supplementing analysis in Butcher (2005), Figure 2.7 shows how hourly earnings have increased, compared with the median, in different time periods. The hourly wages for those at the bottom decile of the earnings distribution rose by about 14.0 per cent, around 3.0 percentage points less than at the median, between 1992 and 1997. In this period prior to the introduction of the minimum wage, it can be generally concluded that for those below the median, hourly earnings grew less than at the median. In contrast, hourly wages grew faster for those at percentiles above the median.

Figure 2.7

Increase in Hourly Earnings Minus the Increase in Median Earnings by Percentile for Employees Aged 22 and Over, UK, 1992­2006

Source: LPC estimates based on unweighted New Earnings Survey (NES), April 1992­1997 and 1998­2003, ASHE without supplementary information, low-pay weights, UK, April 1998­2004 and ASHE with supplementary information, low-pay weights, UK, April 2004­2006.

Note: Comparisons have been made here for illustrative purposes only as no consistent earnings time series is available from 1992 to 2006. This analysis uses NES, ASHE without supplementary information and ASHE with supplementary information.

2.47 The hourly wages of those at the bottom of the earnings distribution increased substantially between 1998 and 2006. The largest increases occurred between 1998 and 2000 following the introduction of the minimum wage. Significant gains, largely attributable to the minimum wage upratings, have also been made for those at the bottom of the distribution between 2000 and 2006. It should be noted, however, that there are limitations in the data series and care should be exercised in making such comparisons. A more detailed description of the data is given in Appendix 6. Using consistent data, earnings at the bottom decile increased by about 30 per cent between 1998 and 2004 compared with around 25 per cent for those at the median.

2.48 Analysing the extent of the differential impact, Figure 2.7 shows that in the period since the introduction of the minimum wage, earnings increases up to about the 30^th percentile were higher, on average, than the increase at the median but generally lower than the direct minimum wage impact. This suggests that those earning just above the minimum wage have seen their differentials squeezed compared with those on minimum wages.

2.49 Denvir and Loukas (2006) and IDS (2006b) found that the recent minimum wage upratings had affected company pay structures, removing pay grades and squeezing differentials. However, in a more econometric study, Lam, Ormerod, Ritchie and Vaze (2006) looked at the impact of the minimum wage on company pay policies. They found that when the minimum wage was introduced and had been uprated, companies generally responded by maintaining the cash differentials between different pay grades. This implies that wage inequalities would be reduced as the percentage earnings increase would be higher for those at the minimum wage. They noted that the minimum wage 'does appear to be reducing inequality at the bottom of the wage distribution'.

Who is Paid the National Minimum Wage?

2.50 We next investigate the characteristics of those covered by the 2006 October upratings in terms of gender, hours worked, age, occupation, sector, region, size of firm and whether firms are in the public or private sector.

2.51 For the purposes of analysing the composition of minimum wage jobs, in this chapter we define a minimum wage job to be one that, in April 2006, paid the equivalent of the forthcoming October 2006 minimum wage downrated by the growth in average earnings back to April 2006. That is, a job held by an adult aged 22 and over paying £5.25 or less; by a young person aged 18­21 paying £4.40 or less; or by a 16­17 year old paying £3.25 or less. In April 2006, there were about 1.3 million jobs thus defined ­ about 5.1 per cent of all jobs in the UK labour market. Figure 2.8 shows that the majority of minimum wage jobs are part-time (60 per cent) and that two-thirds are held by women.

Figure 2.8

Minimum Wage Jobs by Hours and Gender, UK, 2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006.

Note: Minimum wage jobs defined as those held by adults (aged 22 and over) paying £5.25 or less, by youths (aged 18­21) paying £4.40 or less and by 16­17 year olds paying £3.25 or less in April 2006.

Figure 2.9

Minimum Wage Jobs by Age and Gender, UK, 2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006.

Note: Minimum wage jobs defined as those held by adults (aged 22 and over) paying £5.25 or less, by youths (aged 18­21) paying £4.40 or less and by 16­17 year olds paying £3.25 or less in April 2006.

2.52 We can see from Figure 2.9 that the distribution of coverage by age is generally U-shaped. About 7 to 8 per cent of jobs held by workers aged 16 to 21 years old are minimum wage jobs compared with around 10 per cent of those held by 22­24 year olds. This percentage then falls with age to around 4 per cent of jobs held by those aged 35 to 54, before increasing to about 6 per cent for those nearing pension age and about 14 per cent for those aged 65 and over. Coverage among ethnic minorities and those with disabilities is included in Chapter 4.

2.53 Figure 2.10 shows coverage of minimum wage jobs by size of firm. In general, the proportion of minimum wage jobs declines with size of firm. Just over 10 per cent of jobs in micro firms (with 1 to 9 employees) and seven per cent in other small firms (with 10 to 49 employees) were estimated to be paying around the minimum wage. Only 4 per cent of jobs in large firms were minimum wage jobs. The gender pattern is similar across all firm sizes, with women more likely to be in minimum wage jobs than men.

Figure 2.10

Minimum Wage Jobs by Size of Firm and Gender, UK, 2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006.

Note: Minimum wage defined as those held by adults (aged 22 and over) paying £5.25 or less, by youths (aged 18­21) paying £4.40 or less and by 16­17 year olds paying £3.25 or less in April 2006.

2.54 Figure 2.11 shows the percentage of jobs that were paid around the minimum wage in April 2006 by region, country and gender. The preponderance of women is again apparent. Unsurprisingly, the proportion of minimum wage jobs in the South East of England and London is lower than the national average. However, there are also fewer minimum wage jobs in the South West even though it contains many low-paying areas (as measured by the mean or median). The highest percentages are in the North East of England, the East Midlands and Northern Ireland. Similar patterns are found using residence-based regions.

Figure 2.11

Minimum Wage Jobs by Region (Work-based Government Office Region) and Gender, UK, 2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006.

Note: Minimum wage jobs defined as those held by adults (aged 22 and over) paying £5.25 or less, by youths (aged 18­21) paying £4.40 or less and by 16­17 year olds paying £3.25 or less in April 2006.

2.55 There are slight gender variations. The highest proportion of men working in minimum wage jobs is found in Northern Ireland. But Northern Irish women are less likely to be employed in minimum wage jobs than women in most other regions.

2.56 We look next at minimum wage jobs by occupation and then by industry. We examine this in more detail in Chapter 3 and in Appendix 5 we present a detailed guide to low-paying sectors and occupations. Figure 2.12 shows that minimum wage jobs account for over 20 per cent of all the low-paying jobs in hairdressing, hospitality and cleaning.

Figure 2.12

Minimum Wage Jobs by Low-paying Occupation and Gender, UK, 2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006.

Note: Minimum wage jobs defined as those held by adults (aged 22 and over) paying £5.25 or less, by youths (aged 18­21) paying £4.40 or less and by 16­17 year olds paying £3.25 or less in April 2006.

2.57 Figure 2.13 demonstrates that the picture is very similar if we examine minimum wage jobs using our industry-based groupings. More minimum wage jobs are to be found in the retail sector than any other sector. Just over 365,000 retail jobs, representing about 12 per cent of jobs in the sector, were estimated to be paid at or below the minimum wage.

Figure 2.13

Minimum Wage Jobs by Low-paying Industry and Gender, UK, 2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006.

Note: Minimum wage jobs defined as those held by adults (aged 22 and over) paying £5.25 or less, by youths (aged 18­21) paying £4.40 or less and by 16­17 year olds paying £3.25 or less in April 2006.

2.58 While the retail sector had the highest number of minimum wage jobs, Figure 2.13 shows that the sectors with the largest proportion of jobs affected were cleaning, hospitality and hairdressing. In all three sectors, over 20 per cent of employees were in minimum wage jobs in April 2006. Compared with retail, the absolute numbers in hairdressing were very small. Hospitality, on the other hand, had over 200,000 workers who were in minimum wage jobs.

2.59 There are few minimum wage jobs in the public sector. Figure 2.14 shows that most minimum wage jobs are in the private sector and are held by women.

Figure 2.14

Minimum Wage Jobs by Public, Non-profit or Private Sector and Gender, UK, 2006

Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006.

Note: Minimum wage jobs defined as those held by adults (aged 22 and over) paying £5.25 or less, by youths (aged 18­21) paying £4.40 or less and by 16­17 year olds paying £3.25 or less in April 2006.

Persistence of Low-paid Employment

2.60 Whether minimum wage jobs are stepping-stones to better-paid employment or whether they are part of a cycle between no work and low-paid work is an important question that we have attempted to answer by commissioning two research projects on this topic for this report. If minimum wage jobs generally were transitory and provided a platform for climbing the career ladder it would be less of a concern than if we found that minimum wage workers generally moved from unemployment to a variety of short-term minimum wage jobs. Sloane, Murphy, Latreille, Jones and Jones (2007) built on the previous results of Sloane, Murphy, Latreille, Jones and Jones (2004) using the panel dataset from the New Earnings Survey to look at the duration of minimum wage jobs. Bryan and Taylor (2006) also investigated the persistence of low pay but used the British Household Panel Survey (BHPS) for their analyses. Both studies also confirmed our findings above that minimum wage employment is associated with being part-time, female, young, working in small private sector firms and in particular industries (for example, retail and hospitality) and with less skilled occupations.

2.61 Sloane et al (2007) found results consistent with their previous findings that used the LFS and concluded that 'the time spent in minimum wage employment was quite short'. Indeed, their results suggest that fewer than five per cent of minimum wage workers remain in such jobs for more than two years. Bryan and Taylor (2006) also found that minimum wage jobs were transitory for most workers but, less reassuringly, they found that up to 40 per cent of those who had been in minimum wage jobs moved between such jobs and out of the labour market over the period of their analysis.

Household Earnings and the Minimum Wage

2.62 The analyses above have looked at the impact of the minimum wage on individual earnings. In this next section we give a brief account of how the minimum wage interacts with household income.

2.63 So far, we have looked at individual gross hourly earnings before tax. An individual's take-home pay, however, is subject to tax and National Insurance Contributions (NICs). Further, individuals may be eligible for in-work benefits, such as Working Tax Credit and Child Tax Credit, and a range of other state benefits, such as Housing Benefit, Council Tax Benefit and Child Benefits. Most of these benefits are means-tested based on household income, so an individual's eligibility will depend not only on their own earnings, but also on the earnings of other members of the household and on household circumstances such as the level of rent, the number of children, childcare costs and whether any household member is disabled. It is important therefore to take into account marginal deduction rates (MDRs) ­ how much of each additional pound earned is lost through tax and benefit changes ­ when looking at the impact of the minimum wage on household income.

2.64 It is not easy to generalise about the impact of the minimum wage on household earnings as it will depend on the circumstances of each household. When the adult minimum wage was £5.05, gross weekly income would have been £176.75 for a 35 hour working week. Using HM Treasury estimates, this gross income was equivalent to a net income of £172.26 for a single person working full-time with no children, once the tax and benefits system had been taken into account. However, the equivalent sum for a couple with one child (one partner working full-time and the other not working) was £265.59. Again, assuming a 35 hour working week, gross weekly income would have increased to £187.25 when the minimum wage increased to £5.35. However, the high MDRs faced by both household types meant that they would only have a net gain of £3.15 a week, compared with the gross increase of £10.50.

2.65 Analysis by HM Treasury, shown in Figure 2.15, suggests that minimum wage earners appear to be concentrated in the third to sixth decile of household incomes for all working age households. As a result of a hypothetical 25 pence increase in the minimum wage (results would be similar for the actual 30 pence increase in October 2006), about 2.3 million households (9.3 per cent) would gain on average about £4.30 a week. Those in the bottom half of the income distribution gain less on average in monetary terms, and those in the bottom 20 per cent also gain proportionately less than those in the third to seventh deciles. There are two main reasons for this. First, lower income individuals face higher MDRs, particularly on housing and council tax benefits. Second, many minimum wage workers are in dual-earner households in which at least one earner is full-time. These dual-earner households are not generally at the lower end of the income distribution.

2.66 The minimum wage cannot possibly help those households that contain no wage earners and are entirely dependent on benefits. Restricting analysis to those households with at least one person in work, Figure 2.15 shows that the minimum wage is indeed targeted most at those at the bottom of the earnings

distribution. This is in line with the findings of Bryan and Taylor (2004) and the Institute for Fiscal Studies (2003).

Figure 2.15

Distributional Impact of a Hypothetical 25 Pence Increase in the Minimum Wage, UK, 2006­2007

Source: HM Treasury estimates based on Family Resources Survey (FRS) data for 2004/05, uprated to 2006/07.

Note: These figures take account of changes in tax credits, benefits, taxes and National Insurance but do not take any account of likely behavioural change caused by a rise in hourly pay, such as changed levels of employment or hours worked. They also do not include the effect of the £25,000 disregard in tax credits, which allows income to rise between one year and the next by up to £25,000 before tax credits begin to be withdrawn. This means that the reductions in tax credits would in practice be significantly smaller, at least in the initial tax year.

Consumption

2.67 In research commissioned for this report, Wadsworth (2007) investigated how those employed in minimum wage jobs were affected by changes in the prices of those goods and services that they produced. He found that average disposable income in households with an adult minimum wage earner was around half that of households with earners earning more than the minimum wage. Despite this, he found little difference in their spending patterns. He did find evidence that it was not only minimum wage households that purchased minimum wage goods and services, although they did spend relatively more on them than other households.

2.68 In conclusion, the National Minimum Wage has increased substantially faster than average wage growth since its introduction, raising the absolute and relative pay of those at the bottom of the earnings distribution. Given this, we now turn to look at the impact of the minimum wage on the economy ­ the labour market (but focusing on employment and hours), prices, profits, productivity, training and entrepreneurship.

Impact of the National Minimum Wage on the Labour Market

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2.69 Traditional economic theory suggests that employment will tend to fall if the minimum wage is set above the competitive wage. Firms can attain this reduction by either reducing the number of workers employed, the extensive margin, or they can cut the number of hours worked, the intensive margin. Other economic theories, such as efficiency wages (where higher wages induce greater productivity), offer the possibility that employment might actually rise in response to a wage floor. In this section, we first look at aggregate employment (and unemployment) before looking in more detail at those workers and sectors who are most affected by the minimum wage. We then summarise the research evidence before investigating the impact of the minimum wage on hours.

2.70 Since the introduction of the minimum wage, the UK labour market has performed well, with employment levels increasing by almost two million. In 2005 and 2006, however, labour market performance has been mixed. The economy has continued to create jobs, with employment levels reaching an all-time high in November 2006, but at the same time unemployment has increased using both official measures (headline unemployment and the claimant count) and the employment rate has fallen.

2.71 The simultaneous increase in employment and unemployment levels ­ a trend that started towards the end of 2005 ­ can be explained by the recent strong growth in the UK workforce driven by rising labour market participation (reductions in inactivity levels, particularly among older workers); and international immigration, particularly from the central and eastern European economies that joined the European Union (EU) in May 2004. These issues are explored further below.

Employment, Unemployment and Inactivity

2.72 Employment levels have continued their upward path in 2006. Driven by the inflow of migrant workers and by people moving out of inactivity, Figure 2.16 shows that employment levels rose to 29.0 million in November 2006 ­ up 274,000 on the same month a year ago. There are now around 1.2 million workers who are over the state retirement age. According to the LFS, the number of employees also rose by 156,000 over the year to 25.0 million in November 2006. Working age employment levels also increased, up 188,000 to 27.8 million in the year to November 2006. Although the working age employment rate remained relatively flat at around 74.5 per cent during the same period and it has fallen since 2005, it remains high by historical standards. Figure 2.16 also shows that employment growth since the fourth quarter of 2005 has not been as strong as that experienced in the first three quarters of 2005.

Figure 2.16

Level and Change in Total Employment of those Aged 16 and Over, UK, 1998­2006

Source: LPC estimates based on LFS data, total employment level of those aged 16 and over (ONS code MGRZ), monthly, seasonally adjusted, UK, 1998­2006.

Note: Three months to the end of the month shown.

2.73 Unemployment had been on an upward trend since the beginning of 2005 but, as shown in Figure 2.17, a peak appears to have been reached in the middle of 2006. According to the official International Labour Organisation (ILO) measure of unemployment⁶, there were around 1.6 million people of working age classified as unemployed in November 2006, about 138,000 more than a year earlier. The unemployment rate increased by 0.4 percentage points, to 5.6 per cent, during the same period but it remains well below the rates experienced in the 1980s and 1990s. An alternative measure of unemployment, the claimant count, shows a similar pattern, with the number of people claiming Jobseeker's Allowance increasing by some 47,000 in the year to November 2006.

⁶ Those actively seeking work in the last four weeks and who are available to start work within the next two weeks.

Figure 2.17

ILO Unemployment Level, ILO Unemployment Rate and Claimant Count Rate, UK, 1998­2006

Source: ONS, LFS, working age unemployment level (ONS code YBSH), ILO unemployment rate (ONS code YBTI) and claimant count rate (ONS code BCJE), monthly, seasonally adjusted, UK, 1998­2006.

Note: ILO unemployment level and rate is for the three months to the end of the month shown. Claimant count rate is for the month shown.

2.74 Two main explanations are offered to account for the recent increases in unemployment. The first gives inward migration a prominent role. The second attributes the increase in unemployment to a recent reduction in economic inactivity and consequent rise in labour market participation. Both explanations seem to suggest that developments in the supply-side of the economy, rather than weak demand, are the primary factor driving up unemployment.

2.75 The UK working age population has grown sharply in recent years. A large part of this increase can be attributed to the arrival of migrant workers from the Accession countries (A8) following the EU enlargement in 2004. According to ONS figures, the UK population increased by some 375,000 between 2004 and 2005 (the last year for which data are available). More than two-thirds of this increase was due to inward migration. Migrant workers from the Accession countries accounted for around 36 per cent of the total migration inflows and 40 per cent of National Insurance numbers issued to migrants.

Figure 2.18

Change in Population and Migration Levels, UK, 1991­2005

Source: ONS population statistics, UK, 1991­2005

2.76 The official figures suffer from a number of problems and are likely to underestimate the true extent of the migration flows into and out of the UK and the resulting change in labour supply. The available data, however, do seem to suggest that the steady increase in migrant workers from the A8 countries in the last two years has boosted the size of the UK workforce. New jobs have been created, but the number of people finding employment has failed to keep pace with the expansion of the workforce, pushing up the unemployment figures. However, Gilpin et al (2006) found no evidence that the rise in claimant unemployment at the Local Authority District level was associated with an increase in A8 migrants in those areas.

2.77 Another factor that explains the simultaneous increase in employment and unemployment levels is the recent decline in economic inactivity. Inactivity rates for all age groups fell in the year to November 2006, except for 16­17 year olds whose inactivity rates have continued to increase. People over the pension age experienced the largest decline in inactivity rates in the last year, driven mainly by women returning to work and continuing the trend seen in recent years.

2.78 There has also been a drop in the number of economically inactive people who are long-term sick and on incapacity benefit. People who come off incapacity benefits are defined as being available for, and seeking, work which means that they would appear in official statistics as unemployed until they found employment. This, it has been argued, partly explains the recent increases in the unemployment figures at a time when employment levels also appear to be increasing.

2.79 So far we have looked at the labour market in aggregate and have observed no discernible impact of the minimum wage on employment. However, we are most likely to see a minimum wage impact by looking at those groups of workers or sectors most affected by the minimum wage. We start by looking at employment rates of certain groups of workers, before going on to discuss the impact on low-paying sectors.

Groups of Workers

2.80 Since the end of 2004, there have been notable divergences in the employment experiences of the different groups of workers considered here. Working age employment rates for ethnic minority groups and those with disabilities have increased. In contrast, employment rates for those without any educational or training qualifications and for young people under 25 have declined sharply. More detailed analysis of these groups is given in Chapters 4 and 5.

Figure 2.19

Employment Rates for Different Groups of Workers, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 1998­2006

Notes:

1. The break between Summer 2004 and Q4 2004 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care.

2. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications: thus comparisons between the periods before and after should be made with care.

Low-paying Sectors

2.81 So far we have used data from the LFS, a household survey that considers the number of people in jobs. This section concentrates on trends in jobs in the low-paying sectors of the economy using information from the ONS employee jobs series, an employer-based survey.

Figure 2.20

Percentage Change in Employee Jobs in the Whole Economy and Low-paying Sectors, GB, 1999­2006

Source: ONS employee jobs series, not seasonally adjusted, GB, 1999­2006.

2.82 In September 2006, there were around 26.1 million employee jobs in Great Britain ­ about 32 per cent (8.3 million) of these were in the low-paying sectors. Since the introduction of the minimum wage in 1999, the number of jobs in the low-paying sectors has increased by more than 0.4 million (5.2 per cent), while jobs in the economy as a whole have increased by some 2.0 million (8.1 per cent)⁷. Figure 2.20 shows that there was a fall in employee jobs in the low-paying sectors as a whole for four consecutive quarters to September 2006. This contrasts with the growth observed in the economy as a whole.

⁷ Due to the highly seasonal nature of the employee jobs series in the low-paying sectors, comparisons of like-for-like months are made, e.g. September 2006 with September 1998.

Table 2.7

Change in Employee Jobs in the Low-paying Sectors, Thousands, GB, 1998­2006

Source: ONS Employee jobs series, not seasonally adjusted, GB, 1998­2006.

Note:

1. See Appendix 5 for a detailed explanation.

2.83 Since the introduction of the minimum wage, the sectors that have experienced the largest increases in jobs to September 2006 have been retail (with more than 240,000 new jobs created since September 1998) and hospitality (more than 190,000 new jobs have been created). This equates to jobs growth of 8 and 12 per cent respectively. The low-paying sectors that have grown the fastest since the introduction of the minimum wage have been leisure, travel and sport (34 per cent), security services (25 per cent) and hairdressing (25 per cent). The low-paying sectors as a whole grew by some 5 per cent over the same period. We examine employment in the low-paying sectors in greater detail in Chapter 3.

Public and Private Sector

2.84 We now turn to look at the public and private sectors. Our earlier discussion has shown that hourly wages in the private sector are more affected by the minimum wage. Figure 2.21 summarises annual changes in average earnings and employment in the public and private sectors since 2000. Throughout 2005 public sector earnings had grown faster than in the private sector. However, this has been reversed in 2006 as stronger earnings growth in private sector services (particularly financial services) and manufacturing has been accompanied by a considerable weakening in earnings growth in the public sector.

2.85 Employment in the public sector grew at a consistently faster rate than in the private sector between 2000 and 2004, driven mainly by the recruitment of frontline staff in the health and education sector. This trend has however been reversed in 2006 ­ public sector employment has fallen in the second and third quarters of 2006, reflecting the Government's recent attempts to tighten public sector spending and meet its fiscal targets.

Figure 2.21

Annual Growth in Employment (UK) and Average Earnings Including Bonuses (GB) in the Public and Private Sectors, 2000­2006

Source: ONS, AEI including bonuses for the private sector (ONS code LNND) and public sector (ONS code LNNE) and LPC employment estimates based on LFS data, public sector employment (ONS code G7AU) and private sector employment (G7K5), calendar quarters, seasonally adjusted, UK (GB for AEI), 2000­2006.

Job Vacancies

2.86 The number of vacancies in the economy is another key indicator of the health of the labour market. Vacancies began falling towards the end of 2004 as a result of the slowdown in consumer spending in 2004 and businesses responded by lowering their demand for labour. Since then, there has been a steady improvement. The latest estimates from the ONS Vacancy Survey suggest that, in the three-month period October to December 2006, the number of vacancies in the whole economy was around 0.6 million, similar to the same period a year earlier.

2.87 Analysis by industry shows that one of the sectors that recorded the largest year-on-year decreases in job vacancies was Distribution, Hotels and Restaurants, a sector which is characterised by many low-paid workers. There were 6,700 fewer vacancies in October to December 2006 than in the same period a year earlier. However, the number of job vacancies in the sector has stabilised in recent months and even increased, after falling for 15 consecutive months in the period to March 2006.

Redundancies

2.88 Redundancies are another important indicator of the demand for labour. UK redundancy levels and rates began declining from the beginning of 2002 up to mid-2005. In subsequent months they increased, reaching a two-year high in September 2005 and since then we have seen a generally declining trend. The latest figures for the three months to November 2006 show the number of redundancies is marginally lower than a year earlier.

2.89 The latest ONS figures for vacancies and redundancies suggest that the labour market is growing in a relatively stable manner, with little change in the number of vacancies or the number of redundancies in 2006.

Research on Employment

2.90 Research on the impact of the minimum wage on employment can be broadly broken down into two groups ­ those that look at the individual probability of being employed and those that look at the impact on sectors or geographies.

2.91 Stewart (2002, 2004a, 2004b) used a variety of data sources to look at the impact of the minimum wage on individual employment probabilities. In all three studies, he found no significant effects of the introduction of the minimum wage or its initial upratings on employment for men, women, adults or young workers. Dickens and Draca (2005) also found no employment effects when they investigated the 2003 minimum wage upratings.

2.92 Galindo-Rueda and Pereira (2004) and Experian (2007) found evidence to suggest that the introduction of the minimum wage and its subsequent upratings had slowed employment growth in those counties or regions where wages needed to adjust the most in order to comply with the minimum wage. However, these effects were generally small and the most comprehensive of the studies, Stewart (2002), found no evidence of any adverse employment effects at the area level. Indeed, he found statistically insignificant positive effects even when focusing on those groups most affected.

Summary of Employment Impact

2.93 We have seen that the level of aggregate employment has continued to grow reaching record levels. An expansion in the UK labour supply, fuelled by higher participation of older workers and those previously on incapacity benefits alongside increased migration, led to a consequent reduction in the employment rate and a rise in unemployment during 2006. In other words, the growth in the number of jobs failed to keep pace with the increased supply of labour. There is some evidence that the low-paying sectors have experienced a reduction in employment. Young workers and those with no qualifications also appear to have fared worse than other groups of workers in the labour market, in terms of employment and unemployment.

Hours Worked

2.94 We now turn to look at the impact of the minimum wage on the number of hours worked. The number of hours worked gives an alternative indication of the strength of the labour market. Figure 2.22 shows that the trend in total weekly hours worked in the UK has been upward in recent years, a trend that implies that the introduction of the minimum wage and the subsequent upratings have not had any adverse impact on total hours worked in the economy.

2.95 Figure 2.22 shows that total hours worked per week in the UK were 925.6 million during the three months to November 2006, up 3.7 million from the same period a year ago. This rise in hours was mainly driven by increases in the hours worked by female workers.

Figure 2.22

Average and Total Actual Weekly Hours Worked, UK, 1998­2006

Source: ONS, LFS, total and average hours worked series (ONS codes YBUS, YBUV), monthly, seasonally adjusted, UK, 1998­2006.

Note: Three months to the end of the month shown.

2.96 Looking at trends in average weekly hours worked, the latest figures suggest that people on average are working around 1.5 hours less than they did 10 years ago. The downward trend also implies that the growth in total hours worked depicted in Figure 2.22 has been driven by gains in employment.

Research on Hours

2.97 The minimum wage does not appear to have had much impact on the aggregate number of hours worked in the economy. Connolly and Gregory (2002) investigated how the hours of low-paid women had been affected by the introduction of the minimum wage. They found a three year effect greater than the one year effect, albeit both were insignificant. This longer run effect was also picked up by Stewart and Swaffield (2004). They found no statistically significant evidence of an immediate impact of the minimum wage but, allowing for longer run adjustments, they did find evidence to suggest that the introduction of the minimum wage had led to reductions in the working week of about 1 to 2 hours for both male and female workers affected by the minimum wage.

2.98 In an analysis of second job holding, Robinson and Wadsworth (2004) concluded that the minimum wage had neither caused individuals to give up, or reduce hours in, their second jobs (due to increased earnings in their first jobs) nor had it encouraged more people to take additional jobs (if hours in their main job had been reduced).

Impact of the National Minimum Wage on the Firm

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Prices

2.99 In this section we examine the impact on firms, starting with prices. One way firms might respond to the minimum wage is by increasing prices. We begin by looking at how aggregate consumer prices have changed before discussing the ability of businesses to pass on any increase in their costs. Concluding this section, we summarise the available research.

2.100 The ONS produces a variety of measures of consumer price inflation. The RPI is the most familiar general-purpose measure in the UK. It measures the average change from month to month in the prices of goods and services purchased by most households in the UK. Its derivative, the RPIX, excludes mortgage payments. The measure adopted by the Government for its UK inflation target (2.0 per cent) is the CPI. Figure 2.23 shows how these indices have changed since 1998. There does not appear to be any correlation between the minimum wage and aggregate price changes whatever measure is chosen. Consumer price inflation on all three measures has picked up since the beginning of 2006 and, in December 2006, was at its highest for over a decade.

Figure 2.23

Consumer Price Inflation ­ A Comparison of Measures, UK, 1998­2006

Source: ONS, CPI (ONS code D7G7), RPI (ONS code CZBH) and RPIX (ONS code CDKQ), monthly, not seasonally adjusted, UK, 1998­2006.

2.101 Turning to whether businesses are able to pass on their costs to other businesses, the experimental ONS Services Producer Price Index (SPPI) provides a measure of how business prices change. It shows that, between 2002 and the middle of 2006, annual business price inflation grew from about 2 per cent to around 3.5 per cent. However, it fell in the third quarter of 2006 to about 3 per cent, reflecting a slowing down in fuel price increases affecting a number of corporate service industries.

2.102 Draca, Machin and Van Reenen (2005) investigated the impact of the minimum wage on prices but found no statistically significant impact on a range of goods and services that might be associated with the minimum wage. In a similar analysis, Wadsworth (2007) also found no evidence of any significant price increases for goods and services produced by minimum wage workers in the periods that corresponded immediately to the introduction and uprating of the minimum wage.

2.103 However, Wadsworth noted that this did not mean that prices had not been affected and extended his analysis to check whether firms took longer to adjust prices. He found that, in the period since the introduction of the minimum wage, the price of a basket of minimum wage goods and services had risen faster (by 0.8 percentage points) than the all-items RPI. He did qualify this finding by noting that a general basket of UK produced goods and services had also experienced higher price inflation.

2.104 In his report, Wadsworth also found that for some minimum wage goods and services, such as dry cleaners, canteen meals and pub drinks, demand was very sensitive to price changes (price elastic). For these goods and services, it would be more difficult for businesses to pass on increased costs in price increases. For other minimum wage goods and services, such as take-away food, domestic services and hotel services, demand was less sensitive to price changes (price inelastic).

2.105 He concluded that 'the relative rate of inflation of minimum wage goods and services did increase in the period after the minimum wage was introduced and that prices rose faster for those goods and services whose demand is relatively more price inelastic'.

Labour Costs

2.106 The cost of labour to employers is not confined to wages. Figure 2.34 shows that changes in unit wage costs, which measure the cost of wages and salaries per unit of output, and changes in unit labour costs, which include non-wage costs as well, differ over time. From the first quarter of 2005 to the beginning of 2006, unit wage costs fell (as pay settlements and average wage increases were subdued) while unit labour costs rose (due to increased NICs and greatly increased pension contributions by employers). This divergence between the two measures appears to have abated in 2006 as the growth in unit labour costs has fallen.

Figure 2.24

Unit Wage and Labour Costs, UK, 1998­2006

Source: ONS, unit wage costs (ONS code LOJE) and unit labour costs (ONS code DMWN), calendar quarters, seasonally adjusted, UK, 1998­2006.

Profits

2.107 Instead of passing on the costs of the minimum wage in higher prices, firms might try to absorb these costs by reducing their profit margins. In this section, we look at aggregate measures of profitability before summarising the available research on the impact of the minimum wage on profits.

2.108 Although there is no single measure of profitability available to properly capture the financial health of UK businesses, a number of indicators point to strong corporate financial performance in 2006. Profitability in the UK economy as measured by net rates of return on capital stood at record levels in the third quarter of 2006. The very high profitability figures in the service sector are not matched, however, by the manufacturing sector. Despite the recent improvement in manufacturing output, this measure of profitability is at its lowest since 1992.

2.109 The increase in the FTSE-100 index to a level consistently above 6,000 also points to improved profitability. There has been an improvement in company financial balances ­ retained profits after allowing for taxes, investment and other costs ­ since the beginning of 2002. National accounts data also show that companies are currently significant net lenders to the rest of the economy ­ Government and households.

Figure 2.25

Non-oil Private Sector Profit Share, UK, 1980­2006

Source: Bank of England estimates of the non-oil profit share based on ONS data and Bank of England calculations, UK, 1980­2006.

Note: Non-oil profit share defined as non-oil private sector profits as a share of non-oil private sector output.

2.110 However, the profit share in the non-oil private sector stood at 23.1 per cent in the third quarter of 2006, below the long-term (1980 to 2006) average of 25.2 per cent. This is highlighted in Figure 2.25 which shows that, excluding the oil sector, UK profits as a share of GDP fell throughout the latter part of the 1990s before rebounding from the end of 2001 through to the end of 2004. It then declined before picking up in 2006. However, since the introduction of the minimum wage in 1999 UK non-oil private sector profits as a share of GDP have been below the long-term average since 1980.

2.111 Further, price margins appear to have been squeezed in 2005 and for most of 2006. Producer input prices have consistently been above producer output prices during this period.

2.112 Draca et al (2005) analysed two data sets to assess the impact of the minimum wage on profits. Using a sample of UK firms drawn from the Financial Analysis Made Easy database, they found evidence that profit margins had fallen by about 8­11 per cent on average in those firms most affected by the introduction of the minimum wage. Analysing a sample of care homes, they found that those homes which had had to raise their wages the most experienced the largest fall in profits. On average, they found that the introduction of the minimum wage had reduced profits by around 23 per cent for the average care home. However, they found no evidence from either sample that this reduction in profits had led to an increased likelihood of the business closing down. Experian (2007) looked at the impact of the minimum wage on sectoral profits but found no statistically significant effect. We next look at whether firms adjust to the minimum wage by increasing productivity.

Productivity and Training

Productivity

2.113 There are a number of ways that firms can increase labour productivity. First, capital could replace some labour. Second, the quality of capital might be increased by introducing new technology. Third, workers could be monitored or motivated to put in extra effort. Fourth, employers could adjust the work organisation to improve the capital/labour mix. Finally, employers could invest in improving the quality of labour through education and training. Each of these would lead to an increase in labour productivity. This section looks at aggregate and sectoral measures of labour productivity before discussing recent research findings that have looked at the impact of the minimum wage on productivity.

2.114 Data for the third quarter of 2006 show that labour productivity (defined as output per worker) is continuing to improve. Productivity growth has now increased for the fourth consecutive quarter, after reaching a four-year low in the second quarter of 2005. In the third quarter of 2006, it stands at 2.3 per cent ­ 1.6 percentage points higher than a year ago. This increase is due to output growth accelerating faster than employment growth during this period. Figure 2.26 shows that this has been driven by strong performance in the services sector, especially in distribution, hotels and catering.

Figure 2.26

Growth in Productivity for the Whole Economy, Total Services and Distribution (including Retail and Hospitality), UK, 1998­2006

Source: ONS, output per job for the whole economy (ONS code LNNP) and experimental series for total services and distribution, seasonally adjusted, UK, 1998­2006.

2.115 There is little evidence of an impact of the minimum wage on productivity. Forth and O'Mahoney (2003), Draca, Machin and Van Reenen (2005) and Machin, Manning and Rahman (2003) using various data sets found positive but not significant impacts on labour productivity. However, Galindo-Rueda and Pereira (2004) did find evidence that labour productivity (but not total factor productivity) increased significantly faster in those firms most affected by the minimum wage. This finding was statistically significant for firms in the services sector but not in manufacturing.

Training

2.116 Theoretically, the impact of the minimum wage on training is ambiguous. Firms could use training in order to increase the productivity of the workforce thereby enabling them to cope better with minimum wage increases. On the other hand, some firms may reduce training as they regard it as an unnecessary cost. Analysis by Aralampulam, Booth and Bryan (2004) using the BHPS found some evidence to suggest that the introduction of the minimum wage had led to a statistically significant, albeit small, increase in training. Dickerson (2007) was commissioned to conduct a similar analysis using a larger dataset, the LFS. He found that there was no evidence to suggest that employers had reacted to the introduction of the minimum wage or its subsequent upratings by increasing, or indeed decreasing, the amount of employer-provided training. This result held for men, women, adult workers and young workers, and was robust to different measures of wages and alternative comparison groups.

Entrepreneurship ­ Births and Deaths of Firms

2.117 Another way of looking at the impact of the minimum wage on firms might be to look at the levels and changes in both business start-ups and business failures. An increase in the minimum wage might make it less attractive to start a business as the wage costs could increase as a result. Further, increases in the minimum wage might squeeze profits leading to an increased number of business failures. In this section, we look at the aggregate and, where possible, sectoral picture of business start-ups and failures, and company insolvencies. We then summarise the available research on the impact of the minimum wage on company formation and closure.

Business Start-ups and Failures

2.118 Figure 2.27 shows the net change in business start-ups and closures, proxied by the number of businesses registering and de-registering for Value Added Tax (VAT). Looking at the economy as a whole, the stock of VAT-registered enterprises has increased in every year since 1995. In 2005, there were some 178,000 registrations and 153,000 de-registrations, resulting in a net increase of around 25,000 in the stock of VAT-registered enterprises.

2.119 In the low-paying sectors, the period since 2003 has seen the number of business start-ups outstripping that of business closures, suggesting that the large minimum wage upratings that have taken place since 2003 have not had any adverse impact on entrepreneurial activity. In 2005, the low-paying sectors that saw the largest net increase in the stock of VAT-registered business were retail (4,000) and hospitality (4,400). The largest net fall was in the agriculture sector (2,800).

Figure 2.27

Net Change in the Stock of VAT Registered Enterprises in the UK, 1994­2005

Source: Small Business Service, business start-ups and closures: VAT registrations and deregistrations, annual, UK, 1994­2005.

Insolvencies

2.120 Another indicator linked to entrepreneurial activity and behaviour is the number of insolvencies in the economy. Insolvencies have hit record levels during the course of 2006. However, recent sharp increases in the number of insolvencies have been driven almost entirely by increases in individual insolvencies. Company liquidations on the other hand have remained relatively stable. In the year to the fourth quarter of 2006, they decreased marginally.

2.121 In research that looked at business creation, Galindo-Rueda and Pereira (2004) found, using the Annual Respondents Database, that around the time of the introduction of the minimum wage, business creation was slower in those areas of the country where wages needed to adjust most to comply with the minimum wage. However, they were unable to replicate this finding using data from VAT registrations. They found that a slowing of business start-ups preceded the introduction of the minimum wage but noted that this may have been caused by anticipatory effects. However, also using VAT registrations, Experian (2007) found evidence that the rate of company formation was lower in those regions which were most affected by the minimum wage.

Recession

2.122 The National Minimum Wage has been in existence throughout a period of unprecedented continuous growth. Aware of this and interested in what might happen in a less positive climate, we commissioned research to investigate the impact of the 1990s recession on the low-paying sectors. IDS (2006a) found that the 1990s recession had mainly affected the manufacturing, construction and financial services sectors and that the low-paying sectors had been little affected in terms of employment or earnings. It found that employment had fallen but was reasonably stable unlike the most affected sectors which experienced sharp falls in employment. Earnings in the low-paying sectors had kept pace with consumer price inflation, helped by the Wages Councils which set minimum wages and working conditions in many of the low-paying sectors. The report pointed out, however, that the lessons of the last recession may not apply to a recession that had other causes.

Conclusion

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2.123 We have shown that the minimum wage has clearly affected the distribution of hourly earnings and that the recent minimum wage upratings increased its 'bite' to more than half median earnings for the first time in 2005. Research we have commissioned has also concluded that the minimum wage is more pervasive than before and is affecting the pay structures of more companies than previously.

2.124 We have shown that the minimum wage has so far not affected aggregate employment. However, there is evidence to suggest that, during 2006, employment has fallen in the low-paying sectors as a whole and in retail and hospitality in particular. There is also evidence to suggest that the employment levels of young workers and those without education or training qualifications continue to fall. Unemployment has risen for those groups most affected by the minimum wage. This may reflect the large increase in labour supply driven by strong inward migration and increased participation by older workers, those previously on incapacity benefits and women.

2.125 Our commissioned research has also found tentative evidence that employment growth had been slower in those regions most affected by the minimum wage. However, in general, research has found the impact on employment to be insignificant.

2.126 The total number of hours worked in the whole economy also continues to grow, but there is some evidence that hours have been reduced in the low-paying sectors. Previous research suggested that the minimum wage may have led to reductions in the working week of an hour to two hours for both low-paid men and women.

2.127 Consumer price inflation is now higher than it has been for over a decade on a variety of measures. Mainly driven by increases in oil, energy costs and food, prices have risen sharply in the second half of 2006. Research we commissioned has found the first evidence that businesses may have increased prices for some goods and services produced by minimum wage workers.

2.128 Consistent with subdued growth in average wages, profits in the UK in 2006 look buoyant, with the rate of return at record levels for services. The FTSE index has continued to climb. However, profit margins in manufacturing have been squeezed as input prices have increased faster than output prices. Excluding the volatile oil sector, gross operating surplus as a percentage of private sector gross domestic product has increased since the beginning of 2006 but is well below its average level since 1980. Previous research has found that profits fell in some low-paying sectors as a result of the introduction and subsequent upratings of the minimum wage.

2.129 Labour productivity in the UK has increased sharply since the beginning of 2005 with noticeable increases in both hospitality and distribution (which includes retail). Research has found that the minimum wage has contributed to some increases in labour productivity but has had little or no effect on total factor productivity.

2.130 Company start-ups outnumbered company failures in the low-paying sectors between 2003 and 2005. Research found that the introduction of the minimum wage may have reduced the number of businesses entering the low-paying sectors, but none has found that it increased the number of company failures.

2.131 In summary, the UK economy and labour market appear to be in reasonably good health. However, there are tentative signs that the minimum wage is having a greater impact, particularly on the low-paying sectors. We now go on to investigate this further in Chapter 3.