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We have identified ten industrial sectors of the economy in which low pay is common. Together they provide over eight million jobs, nearly a third of all jobs in the economy. The two largest sectors retail and hospitality account for nearly two-thirds of jobs in the low-paying sectors. Of course many of the jobs in these sectors are paid at a level well above the minimum wage. While the total number of jobs in these low-paying sectors remains substantially higher than when the minimum wage was introduced, in late 2005 and during 2006 the number of jobs in these sectors declined the first such fall in employment since the minimum wage was introduced. This occurred at a time when the level of employment in the economy as a whole has been growing. It is true that some of the low-paying sectors, such as textiles and agriculture, have been contracting in size for some time, but in 2006 employment fell in sectors which had seen some of the most rapid growth in recent years, namely retail and hospitality. It is difficult to determine what role, if any, recent minimum wage upratings have played in this decline and jobs did not reduce in all low-paying sectors. We have also identified two low-paying occupational sectors (childcare and office work). During the year to the third quarter of 2006, there was a small increase in the number of employees in low-paid jobs in childcare, while in the same period employment in low-paid office work decreased slightly. Responses to our consultation provided growing evidence that the minimum wage is having an impact on pay and differentials in the low-paying sectors. Although not new, it was one of the strongest messages coming from the organisations we met during our regional visits in 2006. Other sources of information, such as our oral hearings and commissioned research, also provided evidence of an increasing influence of the minimum wage on pay structures. We found this was particularly marked in hospitality, retail, cleaning and childcare, where a growing proportion of jobs were paid at the minimum wage. Only a small proportion of workers in agriculture are paid at the National Minimum Wage. It does, however, have a knock-on effect on differentials for the agricultural minimum rates set by the Agricultural Wages Boards. In the textiles and clothing sector, employers with incentive based pay systems reported that the minimum wage was having an increasing effect on their arrangements. The impact of the minimum wage on pay in the office work occupations and in the security and food processing sectors looks to be more limited, although in the case of the latter sector there is some evidence that it is growing. The overall impact on small firms appears to have been fairly stable between 2004 and 2006. In the year to September 2006, the social care sector experienced the largest increase in employment of all the low-paying sectors. While overall the sector has a comparatively small proportion of jobs paid at the level of the minimum wage, this proportion is far greater in the independent than the public care sector. In their evidence some independent sector care providers again stressed the difficulties they faced as a result of local authority funding failing to reflect adequately the increases in the costs of care. Such costs included the cost of minimum wage upratings. We noted this problem in our 2005 Report and recommended that the Government should make clear to local authorities that policies on commissioning care should adequately reflect the costs of provision. We recommended that the Government should monitor the approach of local authorities in this regard and examine the reasons for any uneven provision. We also said that, if appropriate, it should provide further guidance. We recognise the progress that has been made on the funding of social care, but the evidence suggests that the problem we identified in our 2005 Report persists in some areas of the UK. Moreover, we have seen no evidence of effective monitoring of local authority practice in this regard, as we recommended. We therefore reiterate our 2005 Report recommendation but with greater emphasis on the need for the Government to monitor actively how far the practice matches the policy. It would be helpful for such monitoring information to be made available to us when we next review the sector. Introduction 3.1 This chapter looks at the impact of the National Minimum Wage on small firms and on those sectors of the economy that we have identified as having a large number or a large proportion of low-paying jobs and occupations. It is in such sectors that one might expect to find the first indications of any negative impact on business arising from the operation of the minimum wage. Since our last report (2006) we have reviewed which industrial sectors (defined with reference to industrial classification) and occupational sectors (defined with reference to occupational classification) fall into this category. This has led us to include two new industrial sectors and an additional occupational sector in the scope of our work, as well as revised definitions of some of those previously featured. 3.2 As in previous reports we feature retail, hospitality, cleaning, security, childcare, social care, textiles and clothing, agriculture and hairdressing. However, in addition we now examine the leisure, travel and sport and food processing industrial sectors and the office work occupational sector. We have revised our definition of the retail sector to include the sale, maintenance and repair of motor vehicles and motorcycles, and the retail sale of automotive fuel. We have also revised our definition of the cleaning sector to include the washing and dry cleaning of textile and fur products. We have removed footwear manufacture from the sector which includes textiles and clothing. Social care, in line with changes to the Office for National Statistics (ONS) definitions, now includes non-residential as well as residential care. More detail on the revisions is set out in Appendix 5. 3.3 As well as reassessing which sectors we should look at when considering the impact of the minimum wage, we have also identified the occupations, usually associated with each of these sectors, in which low pay is common. We have supplemented our sector analysis with additional information on trends in employment and earnings in these low-paying occupations where we found this added to our understanding of the sector and the impact of the minimum wage. 3.4 In assessing the impact of the minimum wage we have drawn on a range of evidence, including ONS data on earnings, jobs and self-employment; research we commissioned by Incomes Data Services (IDS, 2006b) and the Institute for Employment Studies (Denvir and Loukas, 2006); other independent research and our biennial Employers' Survey. The full results of the survey are given in Appendix 3. We have also drawn on evidence gathered as part of our public consultation on the impact of the minimum wage. This has been supplemented by information provided during our visits throughout the UK to speak directly to employers and workers and hear first hand their views on the minimum wage. 3.5 In this chapter we begin with an overview of employment, self-employment and pay in the low-paying sectors. We then consider the impact of the minimum wage on small firms, before examining in turn each of the ten low-paying industrial sectors, and the two low-paying occupational sectors. Overview of the Low-paying Sectors 3.6 Figure 3.1 below shows the relative proportion of jobs in each of the low-paying industrial sectors. These sectors account for over eight million employee jobs, around one third of all jobs in the UK. Retail (now including the motor trade) continues to be the largest sector, accounting for two-fifths of all jobs in the low-paying sectors, followed by hospitality which has around a fifth. Figure 3.1 Employee Jobs in the Low-paying Sectors, Thousands, GB, 2006
Source: ONS employee jobs series, not seasonally adjusted, GB, September 2006. Note: Retail includes the sale, maintenance and repair of motor vehicles and motorcycles, and the retail sale of automotive fuel. 3.7 As stated in Chapter 2, since the introduction of the National Minimum Wage in April 1999, the number of employee jobs in the low-paying industrial sectors has increased by around 5 per cent or 0.4 million. However, the period from December 2005 has seen the first year-on-year falls in employment in the low-paying sectors as a whole since the minimum wage came into force (Figure 3.2). In the year to September 2006 there was a slight fall in jobs in these sectors, largely accounted for by job losses in the hospitality sector (25,000), and to a lesser extent in the retail, food processing, and textiles and clothing sectors. This is in contrast to an increase of 162,000 jobs across the whole economy in the same period. While jobs in sectors such as textiles and clothing have been in long term decline, the job losses in hospitality and retail could be seen as a sign that the minimum wage is beginning to have an impact on employment in the low-paying sectors. However, it is not possible to determine whether the minimum wage is a factor, and it is too early to know whether the recent fall in jobs in these sectors signals the beginning of a more long-term decline in employment. Downward movements have occurred in hospitality and retail in earlier periods since the introduction of the minimum wage and have proven to be temporary. We look more closely at the evidence later in the chapter. Figure 3.2 Change in Employee Jobs in the Low-paying Sectors, Thousands, GB, 19992006
Source: ONS employee jobs series, not seasonally adjusted, GB, 19992006. 3.8 Figure 3.3 shows the trend in employee jobs by low-paying sector since 1998, the year before the minimum wage was introduced. Most of these sectors have experienced a growth in jobs in particular the leisure, travel and sport; security and hairdressing sectors. But jobs in four sectors textiles and clothing, agriculture, food processing and cleaning show a downward trend. We explore these trends in more detail when we look at each sector later in this chapter. Figure 3.3 Change in Employee Jobs by Low-paying Sector, GB, 19982006
Source: ONS employee jobs series, not seasonally adjusted, GB, 19982006. 3.9 When the minimum wage was introduced, some commentators were concerned that it might lead to a rise in self-employment as a means of avoidance. Table 3.1 shows changes in self-employment in the low-paying industrial sectors. The security, food processing and textiles and clothing sectors have relatively few self-employed and, as explained in the table, the figures are too small to be reliable. Looking at the other low-paying sectors, between 1998, shortly before the introduction of the minimum wage, and 2006, there have been marked increases in self-employment in two sectors which have also experienced strong growth in employee jobs (hairdressing and leisure, travel and sport). Growth in self-employment also occurred in cleaning, a sector which saw a reduction in employee jobs over the same period. The sector that experienced the greatest proportional reduction in the level of self-employment during this period was hospitality (which at the same time experienced strong growth in employee jobs). A substantial fall in self-employment also occurred in agriculture (where a loss of employee jobs has also taken place). The evidence suggests that employee jobs have not been replaced by self-employment other than perhaps in cleaning, and such a link is only evident between 1998 and 2004. Table 3.1 Change in Self-employment in the Low-paying Sectors, UK, 19982006 Source: LPC estimates based on Labour Force Survey (LFS) Microdata, seasonal/calendar quarters, four quarter moving average, UK, 19982006. Note: 3.10 Of course not all jobs in the low-paying sectors pay at the minimum wage; around three-quarters of jobs in these sectors paid £5.50 per hour or above in April 2006. Table 3.2 below shows the proportion of jobs paying either at or below the prevailing adult minimum wage rate in each year between 2004 and 2006. Hairdressing, hospitality and cleaning have the highest proportion of jobs held by employees aged 18 and over paid at the minimum wage. For all but three of these sectors and occupations (security, hairdressing and office work) the proportions have increased over the period, illustrating the growing impact of the minimum wage. The high proportion of jobs paid below the adult rate in the hairdressing and hospitality sectors, and in the nursery nurse occupation, is likely to be due to the number of young workers who may be on the Youth Development Rate or whose pay may be affected by the apprenticeship exemptions. Table 3.2 Percentage of Employee Jobs Held by those Aged 18 and Over Paid at the Adult Minimum Wage or Below by Sector/Occupation, UK, 20042006
Source: LPC estimates based on the Annual Survey of Hours and Earnings (ASHE) with supplementary information, low-pay weights, UK, April 20042006. Note: In contrast to Table 2.3 in Chapter 2, this table also includes those aged 18 to 21. Small Firms 3.11 Small and medium-sized enterprises (SMEs) are important contributors to the economy. The 1.25 million businesses with at least one but fewer than 250 employees account for just over a third of UK employment and around two-fifths of UK turnover (Small Business Service, 2006b). In previous reports, we have noted that small firms tend to be more affected by the National Minimum Wage, as demonstrated by Figure 3.4. Around 4 per cent of jobs in small firms (149 employees) were paid at the adult minimum wage in April 2006, compared with around 2.5 per cent in medium-sized firms (50249 employees) and around 1.5 per cent in large firms (250+ employees). Figure 3.4 Hourly Earnings Distribution for Employees Aged 18 and Over by Firm Size, UK, 2006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006. Notes: 1. Firms are defined as small (149 employees), medium (50249 employees) and large (250 or more employees). 2. NMW label shows the adult minimum wage rate in April 2006. 3.12 Figure 3.5 below indicates that the proportion of jobs paying at the minimum wage in small firms has remained fairly steady, despite the 12 per cent increase in the adult minimum wage rate between April 2004 and April 2006. The slightly higher spikes at the minimum wage in the 2006 distribution may reflect the fact that the minimum wage uprating in October 2005 overtook the £5.00 hourly pay threshold. Figure 3.5 Hourly Earnings Distribution for Employees Aged 18 and Over in Small Firms, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Notes: 1. Small firms (149 employees). 2. NMW label shows the adult minimum wage rate in April of the given year. 3.13 In commenting on the impact of the minimum wage in their most recent evidence to us, the Federation of Small Businesses (FSB), the Small Business Council and the Forum of Private Business each emphasised that its effects should not be viewed in isolation; small businesses faced significant cost pressures arising from other employment regulation and from other factors such as the rising cost of energy. ' ... although smaller businesses are managing to cope with the rises in the NMW level, there is a cumulative negative effect .... Smaller businesses are already having difficulty competing with supermarkets and out-of-town shopping centres, and if they have to increase prices, these difficulties will be compounded. ' 3.14 We received similar messages directly from five small businesses invited by the Commission and the Small Business Service (SBS) to form a focus group in September 2006 to discuss their experiences of the minimum wage. They told us that small firms were finding it increasingly difficult to absorb costs arising from a number of existing statutory measures and were deeply concerned about the likely impact of planned measures including increased statutory annual leave entitlement and compulsory pension contributions. At the same time, these businesses reported intense competition from larger firms, which meant that price increases were not a viable option. We were told that this forced owners and managers in the retail and hospitality sectors to work longer hours and trim the hours worked by their staff. A further concern was the effect of reduced pay differentials on staff motivation. One hospitality sector employer reported that the wages of staff with no experience had now caught up with those of trained staff, making these employees less likely to want to remain in the industry to train and develop a long-term career. ' The NMW has caused a number of problems for us as we cannot afford to maintain the level of staffing we did previously and we have reduced the number of hours that are worked in order to keep our wage bill at a reasonable level .... Payroll costs in 2000 were 72% of total expenses and now are 86% of total expenses. '
3.15 The issue of rising costs was echoed by the Association of Convenience Stores (ACS), which wrote that small convenience stores were finding it difficult to afford cost increases and owner-managers typically increased their own hours while cutting back on staff hours. The ACS was also concerned about the long-term viability of stores that could not afford to invest in the business. The FSB reported that the minimum wage was causing firms to reduce the number of employees. A number of small bakeries recorded fears about the continuing viability of their businesses in an increasingly competitive food industry. 3.16 Surveys of small businesses indicate that the minimum wage has continued to have a notable impact. The biennial Federation of Small Businesses Survey (FSB, 2006) found that 21 per cent of small firms with employees were affected by the 4.1 per cent increase in the adult minimum wage to £5.05 in October 2005, the same proportion affected by the larger uprating in October 2003. The impact was most severe in the hospitality sector and in North East England and Northern Ireland. The SBS Annual Survey of Small Businesses 2004/05 (SBS, 2006a) found that 17 per cent of SMEs in the UK with employees had some staff on the minimum wage. ' The National Minimum Wage is having a serious impact on businesses in certain regions and industry sectors. '
3.17 Our own survey of employers in low-paying sectors found that 40 per cent of respondents from small firms with 53 per cent from medium-sized firms reported an impact (compared with 59 per cent of large firms). This is slightly lower than the proportion that reported an impact in our 2004 survey. Although our survey cannot be considered representative of firms in low-paying sectors, it does support other survey evidence indicating that the proportion of small firms affected by the minimum wage upratings in 2004 and 2005 has remained stable rather than increased. It remains to be seen whether future surveys will find a greater impact arising from the larger 5.9 per cent uprating to £5.35 in October 2006. We now turn to examine each of the lowpaying sectors and occupations. Retail 3.18 The retail sector experienced fairly strong output growth from the introduction of the minimum wage to the end of 2004. However, the rate of growth dropped sharply in 2005, rising by just under one per cent for the year as a whole, reflecting the general slowdown in consumer spending during the year. There has been a slight recovery since the fourth quarter of 2005. In the third quarter of 2006, year on year output growth stood at 2.1 per cent compared with 0.4 per cent in the same period in 2005, but substantially lower than in the same period in 2004. The British Retail Consortium-KPMG Retail Sales Monitor (BRC-KPMG, 2007) indicated that in December 2006 total sales were up 4.4 per cent compared with December 2005. However, the three-month trend rate of growth to December 2006 for total sales slowed to 4 per cent from 4.3 per cent. The British Shops and Stores Association (BSSA) suggested that the downturn in the economy and uncertainty on interest rates had affected customer confidence and resulted in a disproportionate effect on the high street. 3.19 As noted earlier in this chapter and detailed at Appendix 5, we have revised our definition of the retail sector to include the sale, maintenance and repair of motor vehicles and motorcycles, and the retail sale of automotive fuel. Under this new definition, there were over 3.3 million employee jobs in the retail sector in September 2006 (2.8 million in the retail trade and 0.5 million relating to motor vehicles and the sale of automotive fuel), accounting for around 40 per cent of all jobs in the low-paying sectors. The number of employee jobs in the sector has increased steadily since the introduction of the minimum wage, although since 2002 at a slower rate than in the years immediately after its introduction in April 1999 (see Figure 3.6). However, the year to September 2006 saw a slight fall in the number of jobs, compared with an increase of 19,000 jobs in the year to September 2005. There has also been a slight shift towards part-time employment in the year to September 2006. Figure 3.6 Employee Jobs in the Retail Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. ' For the first time in 25 years, this firm has been forced to make 10% of the workforce redundant in the last 12 months. The managing director attributes this directly to rises in the NMW above £4.85 and a forthcoming 60% increase in electricity costs for the next year. It is clear that further NMW rises will reduce employment still further. '
3.20 We can add to our understanding of the impact of the minimum wage in the retail sector by looking at employment in low-paying retail occupations (see Appendix 5 for details of these jobs). In the fourth quarter of 2003 the number of employees in these occupations reached a record high at around 2.2 million, before starting to decline. In the year to the third quarter of 2006, employment in low-paying retail occupations declined by 57,000 (nearly 3 per cent), with the number of employees in these occupations having fallen to just under 2.1 million. 3.21 Until a few years ago there was a significant disparity in the impact of the minimum wage depending on firm size, with small retail firms generally more affected than large firms. However, in our 2005 Report, we noted the increasing impact that the minimum wage was having on large retail firms. Since then a number of large retailers have reported that they had reduced staffing levels or cut staff hours in order to manage the minimum wage upratings, while generally small firms reported that they had not taken such measures, often because they had little flexibility to do so. This is borne out when we consider the number of employee jobs in the retail sector by firm size. Employment in small firms has been relatively stable since the first quarter of 2005, whereas employment in large firms fell in each quarter between the fourth quarter of 2004 and the second quarter of 2006, although in the third quarter of 2006 there was a very marginal increase. The Union of Shop, Distributive and Allied Workers (Usdaw) was of the view that, although there had been a small decline in employment between 2004 and 2005, the figures had held up quite well at a time of a relative slowdown in consumer expenditure. It also suggested that the fall in jobs might, in part, be as a result of outsourcing of non-core jobs in the retail sector such as cleaners, security guards and call centre staff. ' Some employers are offsetting minimum wage costs by making frequent changes to the working hours of staff to maximise productivity. As a result, many of the lowest paid employees are left uncertain about their earnings from week to week. '
3.22 Figure 3.7 shows the earnings distribution for employee jobs in the retail sector. There was an upward shift at the bottom end of the earnings distribution to reflect changes in the minimum wage, with over 4 per cent of retail jobs paid at the adult minimum wage in April 2006. However, as shown in Figure 3.8, the percentage of firms directly affected by upratings in the minimum wage continued to be higher in small firms. Around 7 per cent of jobs in small retail firms paid the adult minimum wage in April 2006, compared with around 5 per cent in medium-sized firms and less than 4 per cent in large firms. The earnings distribution for large firms shows that many continue to maintain a differential above the adult minimum wage. In April 2006 the highest peak in the earnings distribution for large firms was at £5.55 (50 pence above the adult minimum wage), while for both small and medium-sized firms it was at the adult minimum wage rate. 3.23 The earnings data suggest that the Youth Development Rate and 1617 year old rate continue to be little used, despite the sector having a relatively young workforce. The research we commissioned by IDS (2006b) found that, in contrast to a trend noted in its previous research, more large companies had lowered the age at which the adult rate was paid, in most cases to 18 years. Many had, however, retained a single lower rate for 1617 year olds. Figure 3.7 Hourly Earnings Distribution for Employees Aged 18 and Over in the Retail Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. Figure 3.8 Hourly Earnings Distribution for Employees Aged 18 and Over by Firm Size in the Retail Sector, UK, 2006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006. Notes: 1. Firms are defined as small (149 employees), medium (50249 employees) and large (250 or more employees). 2. NMW label shows the adult minimum wage rate in April 2006. 3.24 In their evidence this year, the British Retail Consortium (BRC) and some large retailers again expressed concern about the influence of the minimum wage on pay structures. The IDS research (IDS, 2006b) also found that the minimum wage was having an increasing impact on pay setting and structures. Many retailers had adopted one of two approaches to setting pay either setting their lowest rate at the adult minimum wage or maintaining a clear differential between their lowest pay rate and the minimum wage. The ACS advised that the pay rates of small retailers used to be at the top of the bottom earnings quartile, but that more had become minimum wage employers as they could not afford to increase pay in line with the minimum wage. 3.25 A key concern for many retailers was their ability to maintain pay differentials. The impact of successive increases in the minimum wage above growth in average earnings had, they said, lessened retailers' flexibility to set pay structures to maintain differentials that rewarded and motivated staff. One large retailer advised that as a result of minimum wage upratings, the pay gap between skilled and unskilled jobs had been reduced from 32 per cent in 1999 to 12 per cent in 2006. The impact of minimum wage increases on pay differentials in the retail sector is illustrated in Figure 3.9. During the 2004 to 2006 period, most jobs in retail paying around the level of the minimum wage received higher increases in earnings than those further up the earnings distribution. Figure 3.9 Increase in Hourly Earnings by Percentile for Employees Aged 18 and Over in the Retail Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006.
3.26 In its evidence, the BRC stated that the minimum wage had reached its 'tipping point' and called for a fundamental review to be carried out. It stressed that retailers had faced two years of strong deflationary price pressure, particularly in the non-food sector, which, combined with severe inflation in their cost base, had had a significant effect on their ability to manage further large increases in the minimum wage. The price constraints that retailers were operating under were also highlighted by other representative bodies in the sector, who emphasised that consumers were very price conscious and pointed to intense competition, resulting in ongoing price deflation. The research we commissioned by IES (Denvir and Loukas, 2006) on the impact of the National Minimum Wage (2005 upratings) found that fewer than a third of the 90 retailers that took part in its telephone survey and who had reported an impact of the minimum wage, had reported increasing prices as a result.
' Although the NMW provides a more level playing field, major multiple retailers are, through their competitive position and buyer power, able to operate on far higher gross profits than smaller businesses and better able to absorb cost increases. ' 3.27 For a number of years prior to 2003, and well before the introduction of the minimum wage, the net change in retail business start-ups and closures had been negative. However, since 2003 the number of retail businesses registering for Value Added Tax has outstripped those de-registering, and this positive net change has grown since. The BRC, however, noted concern about the increase in insolvencies in the sector. It advised that in the year to the third quarter of 2006, retail insolvencies increased by 20 per cent on the previous year and suggested that this reflected the severe cost and price squeeze on retailers, of which the minimum wage was a significant factor. On the other hand, Usdaw pointed out that the minimum wage did not feature in the top 65 reasons for business failures published by the UK Insolvency Helpline. It suggested that the survival of small retailers was far more threatened by competition from the large retailers than by the minimum wage. The ACS advised that small retailers were under constant pressure to re-invest in their businesses to keep up with consumer expectations and to compete, but it believed that those whose ability to do so was restricted as a result of the impact of the minimum wage might not be able to survive in the long-term. 3.28 The retail sector is more buoyant than it was in 2005. However, retailers are clearly finding the recent increases in the minimum wage challenging and some have reduced staffing levels or hours as a result. Overall there is no sign of any significant impact on employment levels and we cannot yet know if recent modest falls in employment in the sector indicate a significant new trend. 3.29 We now turn to look at the hospitality sector, the second largest of the low-paying sectors after retail. Hospitality 3.30 The hospitality sector has generally enjoyed good rates of growth since the introduction of the minimum wage. In 2005, however, as with retail, growth in the sector slowed considerably. There was little growth in the third quarter, probably reflecting the London bombings on 7 July 2005 and the general slowdown in the growth of UK consumer expenditure during the year. But the annual rate of growth picked up in the first quarter of 2006, exceeding 5 per cent. It then continued to rise, reaching 6 per cent in the second quarter and over 7 per cent by the third quarter. 3.31 While the number of employee jobs in the hospitality sector stood some 191,000 higher in September 2006 compared with September 1998, there was a fall of 25,000 jobs in the year to September 2006. Around half of these job losses occurred in bars. This was the fifth successive quarter in which there has been a year-on-year fall in employee jobs in hospitality (Figure 3.10). If we look at employment in low-paying hospitality occupations, we find the number of employees increased by over 90,000 (or 9.4 per cent) to 1.06 million between the third quarter of 2005 and the third quarter of 2006. This suggests that the recent falls in employee jobs in hospitality may have been in managerial and supervisory occupations, rather than affecting low-paid workers. UNISON suggested that the decline in employee jobs might be due to increased use of agency workers within the sector, which would not show up in the job figures for hospitality. However, when we raised this with employer representatives they maintained that the use of agency workers had been taking place for many years and would not explain the recent fall in employment. Figure 3.10 Employee Jobs in the Hospitality Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. 3.32 Figure 3.11 below shows clear, and growing, spikes in the earnings distribution for the hospitality sector at or around the prevailing adult rates of the National Minimum Wage. Fifteen per cent of jobs were paid at this rate in April 2006, which is higher than in any other low-paying sector except cleaning. With increases in lowest quartile earnings failing to match increases in the minimum wage between 2004 and 2006, the minimum wage is now the prevailing rate at this point in the earnings distribution. The gap between lowest quartile and median earnings narrowed from 74 pence to 57 pence between 2004 and 2006, providing some evidence of a squeeze on differentials. The shape of the earnings distribution in hospitality is broadly similar across different sizes of firms, but the proportion of jobs in April 2006 paying at the minimum wage in medium-sized firms was slightly lower than that for the whole sector, at around 12 per cent. This compares with over 15 per cent at the minimum wage in both small and large hospitality firms. Figure 3.11 Hourly Earnings Distribution for Employees Aged 18 and Over in the Hospitality Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. 3.33 The impact of minimum wage increases on pay differentials in the hospitality sector is illustrated in Figure 3.12. As in retail (Figure 3.9), jobs paying around the level of the minimum wage in the April 2004 to April 2006 period received higher percentage increases in earnings than those further up the earnings distribution. However, whereas in retail the increases between the level of the minimum wage and the median were overwhelmingly less than the median rise, in hospitality increases remained overwhelmingly greater than the median increase in this range of the earnings distribution. Figure 3.12 Increase in Hourly Earnings by Percentile for Employees Aged 18 and Over in the Hospitality Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. 3.34 Research we commissioned for this report found evidence that the minimum wage was having a substantial and growing impact in the hospitality sector. IDS (2006b) research in the hotel sector found that over two-thirds of the 20 hotels and hotel groups which responded to its survey had to increase pay rates in order to comply with the October 2005 upratings, in comparison with half of the respondents in its equivalent 2004 survey. A third of the hotels which responded to the survey increased pay rates for more experienced or supervisory staff to maintain pay differentials similar to the findings of the previous IDS survey in 2004. 3.35 The research we commissioned by IES (Denvir and Loukas, 2006) found that around 70 per cent of the 174 hospitality firms taking part in its telephone survey claimed to have been affected in some way by the minimum wage since its introduction. Of the 140 firms which responded to a later question, 90 confirmed a need to increase pay rates as a direct result of the 2005 increase in the minimum wage. 3.36 Our Employers' Survey found that 54 per cent of respondents in hospitality were affected by the October 2005 rise in the minimum wage (nearly identical to the proportion in our 2004 survey), with 57 per cent of those affected stating that their total wage bill increased by more than 5 per cent. Around half of the hospitality firms which said they had been affected reported that they had decreased overall staffing levels in response. Three-quarters of those affected reported having to raise pay rates to comply with the new minimum wage rates (higher than the 63 per cent in the 2004 survey), but lower proportions than in the 2004 survey reported having to raise pay rates above this level in order to maintain differentials perhaps reflecting the lower percentage increase in the minimum wage in October 2005 compared with October 2003.
3.37 Representative bodies also advised that the impact of the minimum wage was growing. In oral evidence the British Hospitality Association (BHA), the British Beer and Pub Association (BBPA) and Business in Sport and Leisure (BISL) said that there now appeared to be an employment effect from the minimum wage. They noted the size of recent minimum wage increases and that a rise had occurred in payroll costs in the sector, particularly as a proportion of turnover. They said that this proportion had grown in hotels from typically 25 per cent or under ten years ago, to 30 per cent in hotel chains and perhaps 35 to 38 per cent in independent operations. Rising employment costs as a proportion of turnover were also highlighted by the Association of Licensed Multiple Retailers (ALMR). It reported that when the minimum wage had been introduced it had little impact on wage rates, but a large proportion of bar staff were now earning at or just above the adult minimum wage. The BBPA also voiced concerns about the impact of the minimum wage on differentials resulting in companies finding it difficult to retain experienced staff. Businesses and employer representatives in the sector told us during our visits that firms faced difficulties in maintaining differentials, particularly for middle ranking staff, and in preserving effective pay incentives for supervisers and managers. ' We've estimated we will need to cut paid hours by 10 to 15 per cent to compensate for the increase in NMW. This takes into account the additional PAYE, NI and impact on differentials. Of course the increase comes on top of the huge cost increases of gas and electricity and business 3.38 Consultation respondents also highlighted concerns about the cumulative impact of new employment legislation and other regulatory changes which had recently been, or were due to be, implemented (such as the ban on smoking in public places, changes to the licensing and gambling laws and the increase in statutory annual leave entitlement). Employer organisations in the sector once again sought increases in the accommodation offset, and we cover this topic in Chapter 4. 3.39 There is growing evidence that the minimum wage is having an impact on pay rates and on differentials in the sector. For virtually the first time since the introduction of the minimum wage, the hospitality sector is experiencing job losses, whereas it had been enjoying strong employment growth since 1999. It is too early, however, to know how far this is a sign of a long-term trend, or whether these losses can be linked directly to the impact of the minimum wage. The fall in employment appears to be connected to the downturn in consumer spending in 2005. Output in this sector picked up in 2006 and we will see in due course whether this is enough for employment to rise once again in 2007. Leisure, Travel and Sport 3.40 This is the first time that we have included a separate analysis of this sector in our assessment of the minimum wage. 3.41 Figure 3.13 shows that the leisure, travel and sport sector has continued to experience an increase in the number of employee jobs, athough at a generally declining rate, a trend that began prior to the introduction of the minimum wage. The number of employee jobs in the sector stood at just over 641,000 in September 2006, one third higher than in September 1998. A small increase in jobs between September 2005 and September 2006 maintained this trend. 3.42 Employment in low-paying occupations in leisure, travel and sport increased by over 25,000 between the third quarter of 2005 and the third quarter of 2006. Figure 3.13 Employee Jobs in the Leisure, Travel and Sport Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. 3.43 Figure 3.14 shows that the proportion of jobs in the leisure, travel and sport sector paid at the adult minimum wage has remained at around 5 per cent over the period 20042006, although there are some signs that the minimum wage is catching up with wages in the sector. In 2004 and 2005 lowest decile earnings were just above the minimum wage, but by April 2006 this gap had been closed. The differential between the minimum wage rate and lowest quartile earnings fell by around a quarter over the 2004 to 2006 period. ' The NMW is significantly eroding our position. Our competitive edge in recruitment is weakening, and diminishing differentials are eating into retention rates .... So far we have coped with increases in the NMW, but are seriously concerned about upratings in the near future. '
Figure 3.14 Hourly Earnings Distribution for Employees Aged 18 and Over in the Leisure, Travel and Sport Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. 3.44 The IDS research (IDS, 2006b) reported that just under half of the 13 respondents to its survey, representing medium-sized and large organisations in the sector, set their lowest wage rate at the adult rate of the minimum wage and therefore had to raise pay rates in order to comply with the October 2005 upratings. Five respondents had taken action to restore pay differentials. The research also found evidence of an increasing impact of the minimum wage in the sector, with ten organisations saying they would be directly affected by the 2006 minimum wage upratings. 3.45 Our Employers' Survey found that one-third of respondents in the leisure, travel and sport sector were affected by the October 2005 upratings. Three-quarters of these had to raise pay rates to comply with the minimum wage rates, with 39 per cent raising pay to maintain their lowest pay rate above the minimum wage level. Nearly 40 per cent of those affected reported reducing overall staffing levels, while one third reported cutting basic hours or overtime. 3.46 BISL reported that the increase in the minimum wage to £5.35 in October 2006 would be felt in all sizes of business, and would in some cases result in job losses or a reduction in hours in order to maintain business viability. BISL and ALMR voiced concerns about the growing impact of minimum wage increases on differentials in the sector, with BISL expressing the view that the October 2006 rise could erode remaining differentials with implications for supervision, training and staff retention. These bodies also highlighted similar concerns to those expressed by hospitality sector employer representatives about rising costs and the cumulative impact of regulatory changes, including the proposal to increase statutory holiday entitlement (covered in Chapter 7). They also called for a rise in the accommodation offset which is covered in Chapter 4. 3.47 Our consultation suggests that the minimum wage is having a growing impact on pay in the leisure, travel and sport sector, although the earnings data indicate that this is more limited than in some other sectors. There is no evidence that this has had an effect on the overall number of jobs, which have continued to increase. 3.48 We now turn to the handling of tips, an issue which has a bearing on the earnings of staff in both the hospitality and leisure, travel and sport sectors. Tips 3.49 In previous years we have received representations from organisations expressing a spectrum of views on how tips should be handled for National Minimum Wage purposes. Some would like all tips to count towards the minimum wage, including those distributed by a member of staff acting as a troncmaster1, while others have argued that tips should not count towards minimum wage pay in any circumstances. In the 2005 Report we reiterated our belief that the current arrangements were working reasonably well and should remain unchanged. That is to say, only tips, gratuities or service charges paid by the employer to workers through the payroll should count towards the minimum wage. 3.50 Since our 2005 Report there has been further public debate and lobbying of the Government concerning the way tips are handled, including discussion about whether they should count towards the minimum wage. However, we have not received written representations on tips this year and the topic was seldom raised during our numerous visits and meetings. 3.51 There has been one recent development regarding the treatment of National Insurance Contributions (NICs) on tips used to make up minimum wage pay. HM Revenue and Customs' latest guidance (HMRC, 2006a) states that tips allocated by an independent troncmaster and passed to the employer to process through the payroll, and which subsequently appear on payslips, are not liable for NICs, even if they are used to make up the minimum wage. While this represents no change to the minimum wage position, there is a potential new incentive for employers to use tronc tips to make up minimum wage pay as no NICs may be due. But it is unclear how far in practice this will act as an incentive for employers to change their approach to tips. For many businesses, particularly small ones, the administrative burdens involved in taking advantage of the change may seem disproportionate to the perceived benefits. We will monitor whether the new guidance leads to any change of practice on the part of businesses. However, at present we do not see any need for a change to the minimum wage treatment of tips. Cleaning 3.52 There are a number of sources of information on cleaning jobs and it is difficult to obtain a clear picture of the number of workers involved or of employment trends. Some workers will not be captured within the employment figures for the cleaning industrial sector because they perform a support function in firms categorised within another industry; others may be self-employed or not recorded at all because they are working informally in a domestic setting. 3.53 According to the employee job series, jobs in the cleaning sector were falling until the middle of 2004, but have subsequently been on an upward trend. However, this may be flattening out and in the year to September 2006, the number of jobs remained static at 475,000 (Figure 3.15). Similar trends are observable using a different ONS data source. LFS data on low-paying cleaning occupations also show an increase in employment in cleaning in recent years. While this data does show a small fall overall (to 682,000 employees) in the year to the third quarter of 2006, the number of full-time employees increased by 18,000. Indeed, both data sources provide evidence of a shift towards full-time employment. According to the employee jobs series, full-time jobs increased by 42,000 in the four years to September 2006, while part-time jobs fell by 37,000. Self-employment has been more volatile, although the trend has generally been upwards, with 87,000 self-employed cleaners recorded by occupation in the third quarter of 2006. Figure 3.15 Employee Jobs in the Cleaning Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. ' ... the NMW rate is beginning to have a significant effect on wage differentials and also on service levels in the cleaning industry. ' CSSA evidence 3.54 In its evidence, the Cleaning and Support Services Association (CSSA) estimated there were close to 900,000 workers in the cleaning sector, of which around 400,000 worked for firms that provided outsourced services with the balance working in-house or in the public sector. During a meeting in 2006 the CSSA suggested that apparent declines in employment might be a result of a trend towards business services firms offering a comprehensive facilities management service (and thus their cleaning employees would be classified outside the cleaning industry). It was possible that technological improvements had led to a real reduction in the workforce. However, both the CSSA and the Business Services Association (BSA) had also observed a trend towards increased hours and more full-time working, to some extent associated with more daytime cleaning, which is also borne out by the employment data. 3.55 The minimum wage continues to exert a significant influence on earnings in the cleaning sector. Seventeen per cent of employee jobs were paid at the adult minimum wage in April 2006, which is slightly higher than in both 2004 (14 per cent) and 2005 (15 per cent) despite the smaller (4.1 per cent) uprating to £5.05 in October 2005 (Figure 3.16). The increase in the proportion of jobs paying the minimum wage in April 2006 may be explained partly by the fact that the rise to £5.05 would have raised pay rates in the 10 per cent of jobs that had paid £5.00 an hour in April 2005. While 'living wage' campaigns targeting high profile firms, particularly in the financial sector and in the City of London and Canary Wharf, have received some publicity, there is little evidence of a wider impact on the pay rates of cleaners. Around two-fifths of jobs in the sector paid £5.50 or less in April 2006 and lowest decile earnings rose exactly in line with the adult minimum wage between 2004 and 2006. While lowest quartile earnings remained 15 pence above this level in 2005 and 2006, they increased by a smaller proportion (8 per cent) than the minimum wage (12 per cent) over the two years to 2006, suggesting there may have been some squeezing of differentials at the bottom of the distribution. Figure 3.16 Hourly Earnings Distribution for Employees Aged 18 and Over in the Cleaning Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. 3.56 Evidence from firms in the business services sector and their representatives emphasised ongoing difficulties in absorbing minimum wage increases due to tight margins, typically below 4 per cent on a cleaning contract. Many clients were reportedly unwilling to accept cost increases in excess of price inflation, preferring to negotiate a lower level of service in response to upratings of the minimum wage. The CBI noted in its evidence that companies in the business services sector inevitably had to reduce the number of employees working on a particular contract in order to function at the same cost. The experimental ONS Services Producer Price Index (SPPI) shows that in both the industrial cleaning sector and the commercial washing and dry cleaning sector, prices charged to other businesses have increased at a level close to or below increases in retail prices since the introduction of the minimum wage, which would suggest that rising wage costs have not been passed on to clients, at least not in full. In the year to the third quarter of 2006, prices in the industrial cleaning sector and the commercial washing and dry cleaning sector increased by 2.1 per cent and 1.6 per cent respectively. 3.57 While the earnings data confirm that the minimum wage has had a strong influence on wages in the sector, the CSSA and BSA indicated that the hourly pay rates of their members most of which are large firms were typically in the region of 3060 pence above the minimum wage in London and in other major cities and in regions where it was more difficult to attract cleaning staff. Both organisations had observed a narrowing of differential pay rates for supervisers, which contributed to difficulties in attracting and retaining trained staff in the industry. Despite the evident impact of the minimum wage on wage levels in the sector, the various data sources indicate a fairly positive employment picture, implying that recent upratings have not led to overall job losses in cleaning. ' The way we have coped with increased wage costs from the NMW and other regulation ... is by reducing the number of workers. It is very difficult to pass on costs to our customers, who continue to expect the same level of service, and rightly so. The result is a growth in the informal economy, particularly in rural areas, undermining fair competitiveness and contributing further to putting us in a tight spot. '
Security 3.58 Employment in the security sector grew strongly in the years immediately after the introduction of the minimum wage. However, since 2004 the trend has been much flatter, with employment remaining almost static at around 161,000 in the year to September 2006 (Figure 3.17). According to the LFS, employment in low-paying security occupations has been falling since around mid-2004 and in the year to the third quarter of 2006, fell by 13,000 to 183,000. There is very little self-employment recorded in the sector. Figure 3.17 Employee Jobs in the Security Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. 3.59 Earnings in the security sector are more widely distributed than in other low-paying sectors, particularly cleaning, hospitality and retail. Four-fifths of security sector jobs paid at least £6.00 an hour in April 2006 and median hourly earnings were £7.25. Figure 3.18 below illustrates that the proportion of jobs paid at the minimum wage level increased slightly in 2005 before falling back to 4 per cent in April 2006. In contrast to some other low-paying sectors, median and lowest quartile earnings rose by the same proportion (12 per cent) as the minimum wage between 2004 and 2006 and the margin between lowest decile earnings and the minimum wage increased by 20 pence to 35 pence between April 2005 and April 2006. The BSA told us that earnings had risen quite strongly in the security sector, largely driven by the introduction of a statutory licensing system which had led to increased training and professionalism and, consequently, that the industry rate was now about £6.40 per hour. Figure 3.18 Hourly Earnings Distribution for Employees Aged 18 and Over in the Security Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. 3.60 Experimental ONS SPPI data indicate that prices charged for the provision of security services have risen strongly since the introduction of the minimum wage, which may also be a reflection of these broader changes in the industry. Prices rose by 6.6 per cent in the year to the third quarter of 2006, suggesting that some private security firms were able to pass a proportion of the costs of licensing and the minimum wage onto their customers.
3.61 In its evidence the CBI reported that wage cost pressures had led to increased use of mechanisation in the security sector security guards were being replaced by electronic surveillance. It was also concerned that decreases in jobs in the business services sector were in some cases accompanied by an increase in activity in the informal economy. We received little additional evidence from stakeholders in the sector in response to our most recent consultation. This may be a further indication that the minimum wage is not having a significant impact on large parts of the security sector. Social Care 3.62 According to Laing & Buisson (2006), the value of the UK residential care sector market has continued to grow, with increased occupancy rates and, in the 2002 to 2006 period, above inflation increases in average fee levels. However, the actual number of places in the UK in residential settings for long stay care of older and physically disabled people across the private, public and voluntary sectors has continued to decline, from a peak in the mid-1990s, to stand at an estimated 468,000 places in 2006 2,000 lower than in 2005. Figures available from the Department of Health show a rise in the number of home care contact hours funded by English local authorities, with a further increase of 5.7 per cent in the year to September 2005 (Laing & Buisson, 2006). But the number of households receiving home care has been declining due to more intense service being delivered to the most highly dependent. While most services in the sector continue to be commissioned by public authorities, they have increasingly been delivered by the independent (private and voluntary) sector. The proportion of home care hours outsourced by English local authorities rose from 5 per cent in 1993 to 73 per cent in 2005, while by April 2006 around 60 per cent of the independent sector places in UK residential care homes were paid for by local authorities (Laing & Buisson, 2006). According to the LFS, in the third quarter of 2006, there were nearly 892,000 social care employees in the independent sector (private and voluntary), with just under 440,000 in the public sector. ' ... low pay rates in the social care sector have a direct impact on staff shortages and the quality of care .... Rapid turnover, linked to poor pay and conditions, means that many care staff do not remain in post long enough to complete their NVQ qualification. ' UNISON evidence 3.63 The long-term upward trend in jobs in the social care sector has continued, in contrast to some other low-paying sectors. Figure 3.19 shows that the number of employee jobs rose by nearly 16,000 between September 2005 and September 2006, to stand at just under 1.1 million. Looking at data on low-paying social care occupations, we also find an increase in employment, with a rise of nearly 41,000 to 649,000 between the third quarter of 2005 and the corresponding period in 2006. 3.64 LFS data show that, while the period from the third quarter of 1999 to the same period in 2006 has seen a decline in employment in residential social care, over the same period, employment in non-residential care has risen substantially. These different trends in employment reflect reforms, originating in the 1990s, in public policy and funding regarding the delivery of community care. Figure 3.19 Employee Jobs in the Social Care Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006.
3.65 Figure 3.20 below shows the distribution of earnings for the sector between 2004 and 2006. Although there are spikes at or around the adult minimum wage rate in each year, the proportion of jobs paid at this rate fell very marginally between 2005 and 2006 to just over 3.5 per cent. However, in the private sector the minimum wage has a more substantial impact, with just under 6 per cent of jobs paying the minimum wage in April 2006, compared with nearly 4.5 per cent in April 2004. Evidence from our visits to care homes indicated that there were upward pressures on wages in the sector other than the minimum wage. We were told that the sector had to compete for employees with other sectors, such as retail, which could offer rates of pay above the minimum wage. The statutory obligation for a proportion of staff to hold NVQ level 2 or above, and the need to maintain pay differentials above the minimum wage for these staff, may also have affected wages. Figure 3.20 Hourly Earnings Distribution for Employees Aged 18 and Over in the Social Care Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year.' With the cost of living increase in wages and the above inflation increases in the NMW, total pay costs in Leonard Cheshire will increase by nearly 4 per cent. Average increases in fees from local authorities have only been around 2 per cent with some local authorities making no increases at all. ' 3.66 However, maintaining pay differentials may be becoming more difficult. Lowest decile earnings for the sector in April 2006 remained above the adult minimum wage, although the gap narrowed slightly from 25 pence in 2004 to 18 pence in 2006. IDS (2006b) found a growing impact of the minimum wage on the sector. A third of the 123 respondents (mainly not-for-profit and private sector businesses) to a survey of organisations operating in the sector said they had been affected by the October 2005 upratings and had had to raise pay rates in order to comply, compared with a quarter of respondents in a survey examining the impact of the October 2004 upratings, although typically the proportion of staff directly affected and the size of pay increase was small. One in ten of the organisations responding to the 2006 survey had taken action to restore differentials between the lowest and more senior grades following the October 2005 upratings. During our visits, care providers told us of a growing difficulty they encountered in maintaining differentials between rates for unskilled and skilled staff with their ability to tackle this limited by financial constraints, often associated with the level of fee income they received from local authorities. 3.67 BUPA Care Homes reported a growing number of staff receiving the minimum wage, and the erosion of differentials for higher paid staff, which had affected the motivation for staff to take up NVQ training. Leonard Cheshire, which operates in the voluntary sector, also highlighted the increased impact of the minimum wage, noting that only as a result of the 2004 and 2005 upratings did it find itself paying the minimum wage to some staff. 3.68 UNISON suggested that increases in pay in the private and not-for-profit sectors in recent years had been boosted by both the impact of the minimum wage and the Care Standards Act 2000 (which set a target of 50 per cent qualified staff by the end of 2005). Despite these increases, UNISON claimed that pay levels remained low and were having a direct impact on the sector's ability to recruit and retain staff. It argued that there was a need to raise further the level of pay and conditions in order to address this and in turn improve the quality of care. UNISON highlighted the fact that, on average, pay rates in the private and not-for-profit sectors were lower than in the public sector. The union saw the outsourcing of public services as a downward pressure on pay levels. 3.69 As in previous years, in their written submissions employers raised with us their concern that public purchasing of care did not reflect the actual costs involved, including the cost of the minimum wage. As noted above, this issue was also highlighted by many of the care homes we met during our visits throughout the UK in 2006. Our Employers' Survey found that, of those businesses in the social care sector that reported being affected by the October 2005 upratings, nearly four-fifths had public sector contracts. While nearly two-thirds of these businesses had tried to renegotiate their contracts to take account of increased minimum wage costs, 38 per cent of them stated they were not successful and 31 per cent only managed to renegotiate their contracts in part. Social care providers also pointed to an increasing regulatory burden, such as increases in Criminal Records Bureau fees, a new vetting and barring system, and the additional statutory annual leave entitlement. 3.70 In our 2005 Report we recommended that the Government should make clear to local authorities that policies on commissioning care should reflect the costs of provision, and that it should monitor the approach of local authorities, examine the reasons for uneven provision and, if necessary, provide further guidance. In response the Government stated it would make clear to local authorities that it expected contracts to reflect current minimum wage rates. In its evidence to us this year, the Government stated that it had continued to stress the need for local authorities to reflect legitimate costs when agreeing fees. It also pointed to significant additional resources provided for funding social services between between 1996/97 and 2003/04 an increase of around 22 per cent in real terms and which had continued to rise by an average of around 6 per cent per annum in real terms until 2005/06. Although the rate of increase was lower in the 2006/08 period, the Government viewed it as sufficient to fund any cost pressures councils faced in delivering their adults' social care commitments. 3.71 The Laing & Buisson / Joseph Rowntree fair price model (Laing & Buisson, 2006) divides fees into four bands, with increases in the 3.53.8 per cent band typically representing a standstill in margins (i.e. fees and costs keeping pace with each other). Laing & Buisson (2006) report that in recent years there have been above inflation increases in fees paid by many local authorities to care homes, although this was, they pointed out, from a point reached in the 1990s when the fees paid for some services had become unsustainably low. However, from 2005/06 this trend started to change. Laing & Buisson (2006) reported that the Community Care Market News (CCMN) annual survey of baseline fee rates for care of older people found that those councils responding to the survey and 'offering below inflation increases in 2006/07 significantly outnumbered those offering above inflation revisions'. While in Scotland, Wales and Northern Ireland the number of councils offering increases in fees at or above the 3.5 per cent level exceeded the number offering less than this level, CCMN found that in England the majority 61 per cent for residential care and 59 per cent for nursing care increased fees below 35 per cent. The Commission for Social Care Inspection (CSCI) in its 200506 report on social care in England (CSCI, 2006) noted the significant differences between the highest and lowest increases paid by councils to care providers, which the CSCI said were difficult to explain but it thought the variations suggested that the price increases were a reactive response to either capacity problems in the market or to budget pressures. 2 Although the workforce expanded, some caution should be exercised when making direct comparisons between the 2003 and 2005 surveys as the basis for collecting information on the number of those working in 'out of school provision' changed. 3.72 Care providers face particular constraints as to how they respond to the challenge of any increase in costs, including increased wage costs arising from minimum wage upratings. On the one hand there is a requirement for minimum (and qualified) staffing, and on the other the need for fee income from local authorities to reflect the full, and rising, costs of care. While in recent years the Government has been directing significant extra resources towards social services, the evidence from our consultation, survey, regional visits and available market data indicates that there is a geographical variation in increases for care providers with some facing a zero increase or one below the 3.5 to 3.8 per cent level identified as necessary to maintain margins in 2006/07. While we recognise the progress that has been made on funding of social care, the problem persists in some areas of the UK and care providers continue to face significant challenges in meeting their obligation to increase wages in line with the minimum wage. Although the Government has said in its evidence that local councils should reflect the legitimate costs of providers when agreeing fee rates, we have no evidence to suggest that there has been a monitoring of the practice followed by each local authority, or of any appropriate follow-up action by the Government both of which we called for in our previous recommendations. We believe that only an approach which actively monitors and reviews the practice followed by local authorities is likely to have an impact on the current geographical variation in the pattern of fee increases. 3.73 We recommend again that the Government continue to make clear that the commissioning policies of local authorities should reflect the costs of care provision. We emphasise, in particular, the need for the Government to monitor actively how far practice matches policy, to examine the reasons for any uneven provision, and, if appropriate, to provide further guidance. We suggest that it would be helpful for such monitoring information to be made available to us before we next review the sector. 3.74 In previous reports we considered the application of the minimum wage in circumstances where employees were required to sleep on the employer's premises, but might be asked to work for some or all of that period. In addition we looked at payments to staff under 'on-call' arrangements. We also commented on the issue of direct payments for social care where individuals are given public monies to purchase care services directly, and thus would become responsible for ensuring the minimum wage was paid to carers. These issues featured very little in evidence to our consultation, and although we do not focus on them in this report, we will continue to monitor developments. Childcare 3.75 According to the Department for Education and Skills 2005 Childcare and Early Years Providers Survey (DfES, 2006c), there were about 320,000 paid workers in the childcare workforce in 2005, of whom over 260,000 worked within group settings (i.e. excluding child minders). This was an increase of 32,0002 (14 per cent) for group settings on the 228,000 workers employed in 2003, reflecting the Government's strategy to develop the childcare workforce to improve the quality and availability of care for children in their early years. The survey found that growth since 2003 was mainly driven by an increase in employment in the provision of out of school care and full-day care; there was a fall in employment in sessional day care over the period. Ownership in the sector differs according to the type of provision. The majority of full day care providers are private sector, although the proportion privately owned fell in the 20032005 period from 78 to 60 per cent. The private sector also provided 30 per cent of sessional and 36 per cent of out of school provision. During the 20032005 period the proportion of organisations in the voluntary sector providing full day care (which accounted for 60 per cent of sessional and 39 per cent of out of school provision) increased to 20 per cent. In 2005 local authorities ran 9 per cent of full day care, 7 per cent of sessional care, and 13 per cent of out of school provision. Schools, colleges and others ran the balance of provision in the sector (DfES, 2006c). 3.76 As jobs in childcare are spread across several industrial sectors, such as health and education, the ONS employee job series cannot be used to identify childcare workers. However, according to the LFS, there were over 346,000 employees in low-paying childcare occupations in the third quarter of 2006. After a fall in the level of employment in these occupations in 2005, the third quarter 2006 figure marked the second successive quarter in which there had been a small year-on-year increase. 3.77 If we look at nursery nurses (Figure 3.21), the childcare occupation we believe is most likely to be affected by the minimum wage, we see that employment has risen substantially since 2001, to stand at just over 158,000 in the third quarter of 2006. The majority of nursery nurses are employed in the independent sector, predominantly in private nurseries. Figure 3.21 Nursery Nurse Employees, Thousands, UK, 20012006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 20012006. 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 quarters to calendar quarters; thus comparisons should be made with care. 2. Due to changes in Standard Occupational Classification codes, comparisons cannot be made with periods prior to 2001. 3.78 Looking at earnings in the low-paying occupations associated with childcare we find that 4.5 per cent of jobs in April 2006 paid at the minimum wage (up from 2.5 per cent in 2004), with nearly 8 per cent paying below this level. However, as we commented in our 2005 Report, it is in independent nurseries, notably in the private sector, that the impact of the minimum wage is most likely to be felt. Our consultation and research for this report has confirmed this to be the case. This point is illustrated if we examine the earning distribution for nursery nurses only (Figure 3.22 below). Nearly 6 per cent of nursery nurse jobs were paid at the adult minimum rate in 2006, compared with 3 per cent in April 2004. There is also a growing proportion of jobs paid below the adult rate of the minimum wage (rising from around 8.5 per cent in 2004 to just over 10 per cent in 2006) which reflects the common use of the Youth Development Rate and the apprenticeship exemptions in the sector. Focusing on the earnings distribution for nursery nurses in private sector nurseries only, the impact of the minimum wage becomes even clearer. In April 2006 over 10 per cent of jobs were paid at the level of the adult minimum wage, and nearly 20 per cent were paid below this level. Figure 3.22 Hourly Earnings Distribution for Nursery Nurses Aged 18 and Over, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. 3.79 IDS (2006b) found an increasing impact of the minimum wage on childcare providers. Its survey of 94 childcare organisations in the independent sector (private and voluntary), employing over 8,000 staff, found that two-thirds of nurseries had to raise pay rates to comply with the minimum wage increases in October 2005 the same proportion as in the 2004 survey. However, a higher proportion (over three-quarters) of respondents said that they would be affected by the October 2006 upratings than had been affected by the 2005 upratings. Despite two-thirds of the nurseries having taken action to restore differentials, the difference between median pay for nursery nurses and nursery assistants narrowed from 42 pence per hour in a 2004 survey to 17 pence per hour in the 2006 survey. The 2006 survey confirmed that age-related pay is widespread in the sector, with just over a third of respondents confirming they had different rates based on age. The survey also found that 14 per cent of respondent organisations had decreased staffing levels as a result of the October 2005 upratings. 3.80 The DfES survey (2006c) showed that staff turnover rates in 2005 were 12 per cent for sessional care, 17 per cent for full day care and 21 per cent for out of school provision. The National Day Nurseries Association (NDNA) stated that resolving the sector's chronic low pay was absolutely fundamental to developing the childcare workforce. Although UNISON reported a sharp rise in private sector average pay in the 2004 to 2005 period, reflecting competition for staff from public sector children's centres, the union told us that average increases were lower for those at the bottom of the scale. UNISON reported that pay for childcare occupations, whether public or independent sector, remained low when compared with earnings for similar jobs in health, social work and education. UNISON argued there was a relationship between raising pay, increasing staff retention and improving the quality of service provision citing the findings of a study it commissioned from the Centre for Economic and Social Inclusion. The Children's Workforce Development Council (CWDC) has also looked at pay and staff turnover in the sector. In its response to the public consultation on the Children's Workforce Strategy (DfES, 2006a) the Government asked the CWDC to look at the impact of reward, not just pay, on recruitment and retention in the childcare sector. The CWDC (2006) concluded that the evidence did not indicate a direct link between levels of pay and reward, and recruitment and retention across the children's workforce, as a general rule, and that there were other influencing factors including non-financial rewards such as job satisfaction. However, in some childcare occupations it did find lower pay to be a significant factor in the high turnover of staff. 3.81 The NDNA reported that minimum wage increases since 2000 had led to a significant increase in the staff costs of nurseries, with salaries now accounting for up to 80 per cent of turnover. It claimed that minimum wage upratings now directly resulted in fee increases, and these were above the rate of inflation. This is reflected in the findings from our own Employers' Survey which found that, of the 56 per cent of respondent organisations in the childcare sector that reported being affected by the 2005 uprating, 83 per cent stated it had led to price increases in line with in our 2004 survey findings. This was a common theme in the evidence we received from nurseries, with many noting the impact of price increases on affordability for parents and posing a question mark over the long-term sustainability of their business. DfES (2006c) found that between 2003 and 2005 there had been an increase in the proportion of loss-making providers for all types of provision, but with the decline in profitability highest for full day care providers, the provider most dependent on fee income rather than local authority or central Government funding. 3.82 The childcare sector has continued to expand and create new jobs, but there is growing evidence that the minimum wage is having an impact on pay and differentials for nursery staff. With staffing forming a significant proportion of overall costs, childcare businesses are particularly sensitive to increases in the minimum wage. Agriculture 3.83 Since the introduction of the National Minimum Wage, employment in agriculture has continued broadly on its long-term path of decline, reflecting structural changes in the economy. However, Figure 3.23 shows that the downward trend has flattened out more recently. Indeed, jobs increased by 10,000 to 229,000 in the year to September 2006. According to the Department for Environment, Food and Rural Affairs (Defra, 2007), the total labour force in agriculture in the UK was 534,000 in June 2006, or 169,000 excluding farm owners, spouses and salaried managers. Of these workers, 64,000 were seasonal, casual or gang labour, although this snapshot estimate is likely to be significantly lower than the total number of seasonal workers employed over the course of a year. Figure 3.23 Employee Jobs in the Agriculture Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. 3.84 Figure 3.24 illustrates the influence on the earnings distribution for agriculture of the minimum wage rates set by the Agricultural Wages Boards (AWBs) for England and Wales, Scotland and Northern Ireland respectively. In England and Wales, the Board sets a range of minimum rates to reflect skills, experience and supervisory responsibilities, with the lowest minimum rate (Grade 1) set no lower than the National Minimum Wage. For example, the spike in the April 2004 distribution at £6.00 reflects the applicable Craft and Appointment Grade minimum rate in England and Wales while the spike at £5.40 in the April 2005 distribution reflects the minimum rate for a Standard Worker (now Grade 2). Consequently, the earnings distribution lacks the pronounced peaks around the National Minimum Wage level observed in some other low-paying sectors. Lowest decile hourly earnings remained around 40 pence above the minimum wage between 2004 and 2006, rising to £5.45 in April 2006, while median hourly earnings increased to £7.00. 3.85 These higher minimum rates also help to explain why our definition of low-paying agricultural occupations captures far fewer workers than the industry based definition. There were 68,000 employees in low-paying agricultural occupations in the third quarter of 2006. Figure 3.24 Hourly Earnings Distribution for Employees Aged 18 and Over in the Agriculture Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. ' This food manufacturer employs around 1,000 employees ... with the vast majority ... on the National Minimum Wage ... given the intense competition they face ... prices [are] currently 20 per cent lower in real terms than in 1997. Offshoring production is becoming an increasingly viable option as labour costs rise, with inevitable job losses .... '
3.86 The National Farmers' Union (NFU) emphasised in its evidence that not only did the National Minimum Wage have a direct impact on agricultural wages, since in recent years it has effectively set the lowest pay rate (now called Grade 1) within the Agricultural Wages Order for England and Wales, but it has also influenced minimum pay rates for the higher grades due to the preservation at least in part of pay differentials. The NFU noted that the National Minimum Wage had little effect on pay rates in those parts of the sector that faced a shortage of skilled labour, such as cereals. However, it did have a significant impact on the labour-intensive, low-skilled and low-paid parts of the industry primarily horticulture. This sector is heavily reliant on seasonal labour to supplement the permanent UK workforce, including migrant workers from the A8 accession countries and workers from outside the European Union on the Seasonal Agricultural Workers Scheme. 3.87 The NFU also told us that wage increases were difficult to manage as, despite rising input costs, farmers faced continuing downward pressure on prices. On a Commission visit to Birmingham, a horticultural firm supplying plants to major retailers from its base in North West England told us that price freezes or even reductions were required of suppliers, who also faced increasing competition from countries such as the Netherlands. A second plant supplier from the same area said that increases in agricultural minimum rates in England and Wales, driven from the bottom by minimum wage upratings, had caused labour costs to increase from 25 per cent of turnover five or six years previously to 32 per cent in 2006. It was also noted that, while the AWB had awarded smaller percentage increases for some agricultural grades, skilled and experienced staff expected their pay differentials to be maintained. 3.88 Although the minimum wage has a direct impact on the horticulture sector in particular, wages in agriculture are determined to a significant extent by AWB minimum rates as well as by market factors. Falls in employment are primarily a consequence of long-term restructuring, and while it would be very difficult to estimate the degree of any specific additional impact arising from the minimum wage, the earnings data and the recent upturn in employment suggest that this is likely to be limited. Food Processing 3.89 Following the review of our definitions of the low-paying sectors outlined in the introduction to this chapter, we include an analysis of the food processing sector for the first time. We hope to build on our knowledge of the sector in subsequent reports. 3.90 Figure 3.25 below shows a declining trend in employment in the food processing sector since 1999. Between September 2004 and September 2006, the number of jobs fell by 11,000 to 365,000. There has also been a fall in employment in low-paying food processing occupations in the last few years, although there was a small increase to 204,000 in the year to the third quarter of 2006. There may be a variety of factors behind this decline, including international competition. We also have anecdotal evidence that agency workers are an important source of flexible labour in the sector; these jobs would not be recorded within the food processing industrial sector. Figure 3.25 Employee Jobs in the Food Processing Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. 3.91 The earnings distribution illustrates that the minimum wage has had a smaller impact on food processing than on other low-paying sectors, although there are signs that the impact may be increasing. Figure 3.26 shows that 2 per cent of jobs in the sector paid the adult minimum wage in April 2004, rising to nearly 4 per cent in April 2006 as the minimum wage passed the £5.00 hourly threshold. Similarly when looking at low-paying food processing occupations (not shown), the proportion of jobs paying the minimum wage increased from 4 per cent to 5 per cent between April 2005 and April 2006. Almost three-quarters of jobs in the sector paid at least £1.00 per hour above the minimum wage in April 2006, while median hourly earnings were significantly above this level (£7.55). However, the margin between lowest decile hourly earnings and the minimum wage reduced from 50 pence to 30 pence over the two years to April 2006 suggesting that the minimum wage is catching up with wages in parts of the sector. Lowest quartile earnings rose by 6 per cent over the two years to 2006, while the minimum wage rose by almost 12 per cent. Figure 3.26 Hourly Earnings Distribution for Employees Aged 18 and Over in the Food Processing Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year.' The industry is already on a knife-edge. The additional pressure placed on employers by the NMW worsens an already precarious position. Inappropriate increases could mean the last straw which will break the back of the textile industry. '
3.92 Consultation responses from employer organisations indicated that the minimum wage was beginning to affect parts of the sector. The Food and Drink Federation wrote that initially the minimum wage was of little relevance, but it was now starting to have both a direct impact on the lowest pay rates in the sector and an indirect impact on differentials. It noted that profitability had been significantly squeezed in recent years and expressed concern about the future competitiveness of the sector. The CBI reported that food manufacturing faced significant cost pressures arising from intense competition in the retail food sector. It added that many businesses were operating at very low, and even negative, profit margins and those businesses that were able to survive would seek to recover costs by increasing automation and reducing the size of the workforce. 3.93 Similar comments were made to us during a visit to Scotland in 2006. A dessert manufacturer attributed a fall in profitability and a cut in the workforce to the minimum wage and reported that differentials between skilled bakery staff and unskilled operatives had fallen from 17 per cent in 1999 to 3 per cent in 2006. This manufacturer, and a separate bakery business, also located in Scotland, told us that they had mechanised processes as much as possible, but there was a tension between the savings that this could achieve and the need to produce higher value, hand-finished goods to retain a place in niche markets. During a visit to Wales in 2006, a food manufacturer reported that 45 per cent of its workforce were now on the minimum wage and squeezed differentials had adversely affected staff morale, with some experienced staff leaving the company. 3.94 Overall, the evidence indicates a fairly small but increasing impact arising from the minimum wage. Textiles and Clothing 3.95 In previous reports we have looked at the textiles, clothing and footwear sectors. However, our analysis of earnings in the footwear sector has shown that low pay is less common than previously and, given the relatively few low-paid workers now employed in this shrinking sector, we concluded that it should no longer be included in our sectoral analysis. 3.96 The long-term decline in employment in textiles and clothing has continued. A further small fall in jobs between September 2005 and September 2006 meant there were 119,000 jobs remaining in the sector, just under 39 per cent of the number of jobs in September 1998. Low-paying occupations in textiles and clothing also showed a small drop in employment between the third quarter of 2005 and the same period in 2006. 3.97 However, the decline has been less steep in recent years, as illustrated in Figure 3.27, and this may indicate that it is beginning to bottom out as firms competing with low-wage economies have moved production offshore or closed, leaving the UK sector to those firms that have found niche markets or who are using new technologies in order to improve competitiveness. It is too early, however, to draw any firm conclusions from the data. Figure 3.27 Employee Jobs in the Textiles and Clothing Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee jobs series, not seasonally adjusted, GB, 19992006. 3.98 We have said in previous reports that it is difficult to know to what extent, if any, the decline in jobs in the sector can be attributed to the National Minimum Wage. While employer organisations accepted that the decline of the sector was largely due to competition from low wage economies, they pointed to the impact of the minimum wage as being a contributory cause. The TUC and trade unions such as Community have viewed globalisation as the key factor at work in explaining the long-term decline in employment. 3.99 Figure 3.28 below shows that nearly 6 per cent of jobs paid the adult minimum wage in April 2006, compared with just over 4 per cent in April 2004. However, there was some evidence of a widening of the differentials in the earnings distribution, with, for example, the gap between the minimum wage and lowest quartile earnings widening slightly between 2004 and 2006, from 87 to 95 pence. Figure 3.28 Hourly Earnings Distribution for Employees Aged 18 and Over in the Textiles and Clothing Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. 3.100 In its evidence, the CBI reported that the sector had been hugely affected by the minimum wage, with companies looking at ways to reduce wage bills including ending apprenticeship schemes. The British Apparel & Textiles Confederation (BATC) again highlighted to us its concern about the impact of increases in the minimum wage on incentive pay schemes and on differentials. Similar concerns were raised by the Scottish Textiles Manufacturers Association. The BATC reported that the proportion of production workers on incentive based payment schemes whose pay had to be 'made-up' to the level of the minimum wage had increased since our 2005 Report from an average of 22 per cent to 27.5 per cent. In its view this was an unsustainable position for such schemes. It set this in the context of an extremely competitive sourcing situation in the high street as a result of low cost imports, and higher costs being faced by UK manufacturers due to energy price rises and new legislative measures. 3.101 In our Employers' Survey 59 per cent of the textiles and clothing firms which said they had an incentive pay system reported they had been affected by the October 2005 increases in the minimum wage, compared with 35 per cent of textiles firms without such a scheme this is higher than the respective findings of 52 per cent and 26 per cent in the 2004 survey. These firms also reported a greater impact from the minimum wage than was reported in the 2004 survey in respect of a range of measures, including increased costs and reduced differentials. For textiles and clothing firms overall, 37 per cent of respondents affected by the October 2005 upratings said they had decreased overall staffing levels (49 per cent in the 2004 survey) and 30 per cent had cut overtime hours (33 per cent in the 2004 survey). 3.102 Although the minimum wage continues to have an impact on wage rates in the sector, our overall assessment remains that it is international competition from low-wage economies rather than the minimum wage that has been the main factor in the decline in employment in the textiles and clothing sector. Hairdressing 3.103 There has been a steady increase in employment in hairdressing since the introduction of the minimum wage, except for a short period around 2001 (Figure 3.29). There were 115,000 employee jobs in September 2006, a small increase over the year. The number of people employed in low-paying hairdressing occupations has also seen an increase in recent years (up 12,000 to 126,000 in the year to the third quarter of 2006). Self-employment is significant in the sector and, while the trend has been upwards over the last few years, the number of self-employed hairdressers remained static at around 111,000 between the third quarter of 2005 and the same period in 2006. Figure 3.29 Employee Jobs in the Hairdressing Sector and Annual Change, Thousands, GB, 19992006
Source: ONS employee job series, not seasonally adjusted, GB, 19992006. 3.104 Figure 3.30 shows that the minimum wage continues to have a considerable impact on earnings in the sector. Six per cent of jobs paid at the adult minimum wage in 2005 and 8 per cent in 2006. As with other low-paying sectors, it is clear from the spike at £5.00 in the April 2005 distribution that a significant earnings threshold was crossed when the minimum wage rose above this level, which may partly account for the increased height of the spike at the minimum wage level in the April 2006 distribution. The earnings distribution also supports our understanding that the Youth Development Rate and the apprenticeship exemptions are used more widely in hairdressing than in other sectors. In April 2006 15 per cent of jobs paid below the adult minimum wage rate and just over one-third paid £5.50 or less per hour. Not surprisingly, lowest decile earnings were below the adult minimum wage rate in the period 20042006. Lowest quartile earnings remained slightly above the minimum wage although the gap narrowed from 30 pence in 2004 to 9 pence in 2006, suggesting some squeezing of differentials may have occurred at the bottom of the distribution. Figure 3.30 Hourly Earnings Distribution for Employees Aged 18 and Over in the Hairdressing Sector, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult minimum wage rate in April of the given year. 3.105 In its evidence, the National Hairdressers' Federation (NHF) reported that the sector continued to experience skills shortages, but small salons were reluctant to take on trainees over the age of 17 or 18 because of the cost. It repeated its call for an exemption from the minimum wage for the full duration of an apprenticeship to encourage salons to continue to offer training opportunities. At present, apprentices aged 19 and over are exempt for the first twelve months of their apprenticeship. As well as the impact on training, the NHF was concerned that the minimum wage had undermined incentives. It reported that most hairdressers were now on the minimum wage; in the past they would have received a low basic wage with commission payments to reflect their personal contribution to the salon's income. These two issues were highlighted in the CBI's evidence, which also suggested that increasing employment costs arising from the minimum wage and other employment regulation were leading to an increase in self-employment, some of it in the informal economy. 3.106 The minimum wage continues to have a significant impact on wages in the hairdressing sector although the employment picture remains positive. The main issue raised by employer representatives related to the exemptions for apprentices, which we examine in Chapter 5. Office Work 3.107 Following a review of the sectors and occupations in which low-paid workers are concentrated, we examine office work occupations for the first time. This group includes telephonists, receptionists and elementary office occupations. According to the LFS, in the third quarter of 2006 there were 324,000 employees in low-paid office occupations, slightly fewer than in the same period in 2005, and in line with the general downward trend in recent years. Figure 3.31 below shows that, unlike many of the low-paying sectors, there is no pronounced spike in the earnings distribution at the adult minimum wage. Just over two per cent of office work jobs were paid at this level in April 2006. For this occupational group, the rate of pay is likely to vary considerably depending upon the industrial sector in which the job is based. Figure 3.31 Hourly Earnings Distribution for Employees Aged 18 and Over in Office Work Occupations, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: NMW label shows the adult NMW rate in April of the given year. 3.108 Office work occupations are dispersed widely across the economy, which perhaps explains why respondents to our consultation did not raise any issues relating to this occupational group in their evidence. As these occupations are not closely associated with a particular industrial sector, we do not have the same breadth of information to draw on to assess the impact of the minimum wage. However, the dispersed nature of these occupations implies that the impact of the minimum wage on individual firms is likely to be limited, unless they have significant numbers of other low-paid workers or are operating in a low-paying industrial sector. Conclusion 3.109 While the total number of jobs in the low-paying industrial sectors remains substantially higher than when the minimum wage was introduced, there was a slight fall in the number of jobs in the year to September 2006. This was the fourth successive quarter in which a year-on-year fall occurred in the overall employment level in these sectors. This is at a time when employment levels have grown in the economy as a whole. Although some of the low-paying sectors, such as textiles and clothing, and agriculture, have been in long-term decline, employment fell in hospitality and retail, which have seen some of the most rapid growth in recent years. It has been suggested by some employers and their representative bodies that increases in the minimum wage were a key contributory factor to the fall in jobs, but it is not possible to determine whether this was a primary or even a contributory factor. It is, for example, possible that the fall in jobs in retail and hospitality reflects the slowdown in consumer spending in 2005 and early 2006. Some other low-paying sectors, however, continued to experience a growth in employment, in particular the social care, and leisure, travel and sport sectors. The childcare occupational sector also saw a small rise in employment. 3.110 We have seen that the minimum wage is having an increasing impact on pay in the low-paying sectors, particularly hospitality, retail, cleaning and childcare, with a growing proportion of jobs paid at the minimum wage and a growing number of firms having to make adjustments for those immediately above this wage level. For many sectors and businesses such action has not stopped differentials narrowing, as absorbing minimum wage increases has become more difficult. This was a particularly strong message from employers this year, and a point often made to us during our regional visits. Other sources of information, such as earnings data, our written consultation and oral hearings, plus commissioned research, also provided evidence of the increasing influence of the minimum wage on pay structures. There was also some evidence of a greater impact of the minimum wage on pay in leisure, travel and sport, while in hairdressing we found an increased proportion of jobs paid below the adult rate reflecting the common usage of the Youth Development Rate and apprentice exemptions in that sector. Textiles and clothing employers with an incentive based pay system also reported that the minimum wage was increasingly affecting these arrangements. 3.111 We found that for some sectors the impact of the minimum wage on pay remains more limited. This was the case for office work occupations and in the security and food processing sectors, although, in the case of the latter sector, the impact seems to be increasing. The impact on small firms appears to have been fairly stable over the last two years. While in the social care sector overall we found a more modest impact relative to other low-paying sectors, with a comparatively small proportion of jobs paid at the minimum wage, this proportion was far larger in the independent care sector. There was evidence, particularly from our consultation and regional visits, to suggest that recent minimum wage upratings were having an effect on pay and differentials for a number of social care providers. 3.112 However, much of the evidence from the social care sector has suggested that some local authorities continue to fail to reflect fully increases in the minimum wage in their setting of fees for independent sector care providers. While we have recognised the progress that has been made on funding of social care, the problem persists in some areas of the UK. We have therefore recommended again that the Government should continue to make clear that the commissioning policies of local authorities should reflect the real costs of provision, and have particularly emphasised the need for the Government to monitor how far the practice of each council matches this policy. Where variation occurs it should examine the reason for this. 3.113 Having looked in detail at the sectors of the economy and occupations that are most affected by the minimum wage, we focus in the next chapter on those groups of workers that are particularly affected. |
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