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Our remit asked us to assess the impact of the minimum wage on different groups of workers, including ethnic minorities, women and people with disabilities. These groups of workers are disproportionately represented in low-paying sectors and therefore stand to benefit more than most from upratings of the minimum wage. In the 2005 Report, we found clear evidence that the minimum wage had had a major impact in narrowing the gap between the pay of women and that of men at the lower end of the earnings distribution. Since then, the median pay gap for full-time female employees has reduced further and the pay gap at the lower end of the distribution has continued to narrow. In common with the rest of the population, the employment prospects of workers with a work-limiting disability have improved in recent years, but they have recently experienced a slight increase in unemployment. Minority ethnic groups (as defined by the 2001 census) have also fared better in the labour market in recent years. Although the employment rates of ethnic minorities are still lower than those of white workers, they have increased at a faster rate since the introduction of the minimum wage. There has also been a sharp decline in the unemployment rates of ethnic minority groups between 1999 and 2004. Since 2004, however, the unemployment rates of ethnic minorities have been rising at a slightly faster rate than the rest of the working age population. The minimum wage has clearly helped to improve the earnings position of workers with disabilities and those from ethnic minorities at the lower end of the earnings distribution. The arrival of some half a million migrant workers from central and eastern Europe since the enlargement of the European Union in 2004 has been a significant recent development in the UK labour market. Many have found employment in low-paid occupations particularly in the agriculture, food processing and packing, and hospitality sectors. Much of the evidence suggests that these workers have had a positive effect on the overall economy and have filled existing vacancies and plugged skills gaps rather than displacing UK workers. Some migrant workers are vulnerable to exploitation by unscrupulous employers prepared to take advantage of their imperfect knowledge of employment rights. A number of consultation responses suggested that excessive deductions from pay were a particular problem. We discuss the need for effective awareness campaigns and enforcement in relation to migrant workers in Chapter 6. Following the detailed review of the accommodation offset and resulting recommendations to the Government in our 2006 Report, the Department of Trade and Industry consulted on draft guidance that aimed to clarify the rules and address evasion. The final version is due to be published soon after this report. However, the evidence relating to migrant workers has demonstrated that some enforcement problems remain. We did not focus on the operation of the accommodation offset this year but we did review its level: we recommend that the accommodation offset should increase in line with the adult rate of the minimum wage to £4.30 per day in October 2007. Homeworkers performing unskilled manual work, often on a piece rate basis, continue to face problems ensuring their employment rights are respected. We received evidence that some employers argue that these workers are self-employed in order to deny their entitlement to the minimum wage. We had hoped that new rules on fair piece rates introduced in October 2004 would simplify the calculation of minimum wage pay but the evidence we received, albeit limited, indicated that there were some practical difficulties associated with applying these rules to output work. In view of the difficulties faced by homeworkers, we continue to believe that this group warrants particular attention in terms of the enforcement of their minimum wage rights. Despite the publication of guidance on therapeutic activity in 2003, there continue to be reports of suspected non-compliance with the minimum wage. There is no doubt that the minimum wage should apply to all workers regardless of any learning disability or mental health problem, but there are also concerns that inappropriate enforcement action, or the fear of such action, could result in the closure of therapeutic services with no alternative provision available. We welcome the fact that the Department of Trade and Industry has revised and reissued its guidance in January 2007 and we encourage the Government to continue to take steps to improve awareness of the minimum wage among those providing services to people with disabilities or other impairments. Volunteers are another group whose status can be unclear with respect to the minimum wage. In our 2005 Report we made a recommendation, accepted by the Government, that existing guidance for the voluntary sector be consolidated and made more widely available. Since then, the Department of Trade and Industry and HM Revenue and Customs have worked with a number of sector bodies to clarify the minimum wage position for their respective constituents. In January 2007, the Government announced plans to review the minimum wage in relation to voluntary workers, work which would encompass our earlier recommendation for revised guidance. We stand ready to contribute to such a review and hope the improved guidance that we called for two years ago will be made available in the near future. We do not want minimum wage rules to cause problems for individuals who are happy to give their time freely to benefit their community. But we received evidence this year indicating that it has become the norm in some parts of the media to expect prospective newcomers to offer their time for little or no financial reward as the price of entry to that industry. The Department of Trade and Industry and HM Revenue and Customs have worked with sector bodies in the television industry on best practice guidance and we hope this will make employers more aware of their minimum wage obligations and reduce non-compliance, whether intentional or not. We will consider how the guidance has affected employer practice in a future report. Introduction 4.1 Our terms of reference asked us to examine the impact of the minimum wage on different groups of workers including different age groups, ethnic minorities, women and people with disabilities. It might be expected that, if the minimum wage were to affect employment adversely, those groups that were already faring less well in the labour market would be among the first to show signs of adverse consequences. However, analysis in our previous reports has shown that the employment prospects of many disadvantaged groups have been improving in recent years, with the exception of young people, who are considered separately in Chapter 5. We begin this chapter by examining the labour market outcomes of women, people with a work-limiting disability and ethnic minorities. 4.2 We have continued to pay close attention to developments at the low-paid end of the labour market. There has been much debate about the impact of recent arrivals from eight central and eastern European countries that joined the European Union (EU) in 2004 (known as the A8). Many have found employment in low-paying sectors such as agriculture, food processing and hospitality and here we examine the impact on the labour market. Several consultation responses noted that migrant workers were often employed through agencies, some of which were prepared to exploit their lack of knowledge of their employment rights, or their reluctance to assert them. We also received evidence relating to agency practices in the entertainment industry. This chapter therefore takes a closer look at agency workers. Our 2006 Report examined the particular difficulties that migrant workers may face in relation to accommodation. This topic was raised again this year, focused on those working through an agency or labour provider, some of whom faced excessive deductions from pay for accommodation and other services. We note developments since our last report and review the level of the accommodation offset. 4.3 In the latter half of the chapter, we look at some further groups of people who are affected by the minimum wage in very different ways. A common factor is that their entitlement to the minimum wage can be unclear, or they may face particular difficulties in enforcing their right to the minimum wage. In this context, we cover homeworkers, people undertaking therapeutic activity and volunteers. Women, Ethnic Minority Workers and those with Work-limiting Disabilities Introduction 4.4 Women, workers with disabilities and minority ethnic groups are more likely than other workers to benefit from minimum wage upratings. In the earnings analysis that follows, we observe effects that arise as a consequence of the concentration of these groups of workers in low-paying sectors and occupations. It should, however, be noted that we are tasked with recommending minimum wage rates for all workers over school leaving age. It is not part of our remit to seek to bring about social change for groups disadvantaged in the labour market. Instruments other than the minimum wage are required to address deep-rooted inequalities with complex causes. 4.5 The quality of data available to study the gender pay gap is superior to that available for studying the impact of the minimum wage on the pay of those with work-limiting disabilities and ethnic minority groups. Nevertheless, we are able to make some general comments about the earnings position of these two groups. 4.6 We look first at the broad trends in the employment, unemployment and inactivity of these three groups of workers compared with the working age population as a whole. When the minimum wage was first introduced, there were concerns that it would lead to a decline in employment, especially among those groups more likely to be low-paid. Figure 4.1 shows that this has not been the case. The general working age employment rate has increased since the introduction of the minimum wage in Spring 1999, as has the employment rate for women, those with work-limiting disabilities and ethnic minority groups. Figure 4.1 Working Age Employment Rates of Various Groups, UK, 19982006
Source: LPC estimates based on Labour Force Survey (LFS) Microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 19982006. Notes: 1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should be made with care. 2. The break between Summer 2004 and Q4 2004 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. 4.7 Figure 4.2 suggests that, just as there was no diminution of employment, there was also no negative impact on unemployment for those groups most affected by the minimum wage following its introduction. The unemployment rate of women, ethnic minorities and people with work-limiting disabilities steadily decreased in the late 1990s and the early part of the 2000s. However, more recently, both the rate and level of unemployment have been rising for these groups and the rest of the working age population. As we noted in Chapter 2, the simultaneous increase in employment and unemployment levels may reflect the recent strong growth in the UK labour supply. This has been driven by reductions in inactivity levels, particularly among older workers, and by the recent increase in net migration. Figure 4.2 Working Age Unemployment Rates of Various Groups, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 19982006. Notes: 1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should be made with care. 2. The break between Summer 2004 and Q4 2004 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. 4.8 Figure 4.3 shows the trends in inactivity rates and confirms the increasing labour market participation of women, the disabled, and ethnic minority groups since the introduction of the minimum wage. Ethnic minorities in particular have seen a sharp reduction in their inactivity rate in the year to the third quarter of 2006. Figure 4.3 Working Age Inactivity Rates of Various Groups, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 19982006. Notes: 1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should be made with care. 2. The break between Summer 2004 and Q4 2004 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. Labour Market Outcomes by Gender Employment 4.9 Although women's participation in the labour market has been increasing, as shown in Figure 4.1, their employment rate remains lower than that of men. In the year to the third quarter of 2006, the employment rate of women remained around 70 per cent compared with around 79 per cent for men. 4.10 Women have invariably had lower unemployment rates than men, as was indicated in Figure 4.2. Both men and women have experienced a decline in their unemployment rates in recent years, although the unemployment rate for both has been rising slowly since 2004. The unemployment rate of women stood at 5.5 per cent in the third quarter of 2006, compared with 6.1 per cent for men. 4.11 Another distinctive feature of women's employment is their much higher propensity to work part-time. According to the Labour Force Survey (LFS), in the third quarter of 2006, over 40 per cent of female employees were working part-time, compared with 9 per cent of male employees; thus nearly 4 in 5 part-time employees were women. The consequences of these different working patterns for the earnings of women are explored below. 4.12 As we have noted, women are disproportionately represented in low-paying sectors and occupations and are therefore more likely to be affected by the minimum wage. As shown in Chapter 2, according to estimates using the Annual Survey of Hours and Earnings (ASHE) 2006, about two-thirds of those covered by the 2006 October upratings were women. In the third quarter of 2006, 55 per cent of employees in the low-paying sectors were women, compared with 41 per cent in other sectors. Some low-paying sectors are particularly dominated by women, such as social care and hairdressing, where they make up over four-fifths of the workforce. The prevalence of women in low-paid jobs is even more pronounced when looking at low-paying occupations. As shown in Figure 4.4, in the third quarter of 2006 around 68 per cent of employees in low-paying occupations were women, compared with 39 per cent in other occupations. Workers in childcare, social care, office work and hairdressing occupations are overwhelmingly female. The fact that the concentration of women in low-paying occupations is even higher than in the low-paying industrial sectors reflects the vertical occupational segregation of women, as they are less likely to occupy managerial and supervisory posts. Figure 4.4 Proportion of Male and Female Employees in Low-paying Occupations, UK, 2006
Source: LPC estimates based on LFS Microdata, not seasonally adjusted, UK, Quarter (Q)3 2006. Gender Pay Gap 4.13 Although women's involvement in the labour market has been increasing and the gender pay gap1 has been gradually narrowing for some time, women continue to earn less than men on almost all relevant measures. 4.14 The size of the gender pay gap and the conclusions drawn about it depend greatly on how it is measured. The pay gap can be presented using various measures of the earnings distribution. The most commonly used measures are the mean and the median. The median is often preferred because it is not unduly affected by extreme values and is therefore viewed as a more representative and less volatile measure. Because men are much more prevalent among very high earners than women, using the mean tends to suggest a larger gender pay gap. Nevertheless, the mean measure can provide an interesting insight into gender pay differences precisely because it takes into account the top end of the earnings distribution, heavily skewed towards men. In the analysis that follows, we highlight both measures where possible and also look at the pay gap at different points of the earnings distribution. 1 The gender pay gap refers to the difference between the earnings of men and women. It is determined by calculating the gender pay ratio, that is, women's overall average pay as a percentage of men's. The pay gap is the difference between this and 100 per cent. 4.15 The pay gap derived from a measure of annual earnings is larger than that for weekly earnings, which in turn is larger than that for hourly pay. For instance, the gender pay gap in median annual earnings in 2006 (for all employees aged 18 and over) was twice as high as the pay gap in median gross hourly earnings excluding overtime. This is because men tend to work more hours per year. Another reason for the differences in these pay gaps is that the measures of annual and weekly earnings also include additional payments, such as overtime, which are predominantly paid to men. According to ASHE 2006, basic pay made up around 94 per cent of women's mean gross weekly pay compared with about 89 per cent for men. 4.16 In our analysis, we focus on gross hourly earnings excluding overtime, which is the closest definition of pay in ASHE to that of the minimum wage. The different working patterns of male and female employees, and the fact that relatively few men work part-time, also complicate the picture and we therefore consider full-timers and part-timers separately. We focus on employees aged 18 and over as the majority of 1821 year olds are paid at least the adult minimum wage rate. We will also consider the relationship between the gender pay gap and age. 4.17 Table 4.1 illustrates the differences in the median and mean hourly pay of male and female full-time employees aged 18 and over. Both mean and median gender pay gaps increased between 1997 and 1998, the year before the minimum wage was introduced. However, since the introduction of the minimum wage, they have gradually been narrowing, and, according to ASHE 2006, the ratio of women's pay to men's pay stood at 89.2 per cent (a 10.8 per cent pay gap) as measured by the median and 83.2 per cent (a 16.8 per cent pay gap) as measured by the mean. Table 4.1 Median and Mean Gross Hourly Earnings by Gender, Full-time Employees Aged 18 and Over, UK, 19972006
Source: LPC estimates based on ASHE without supplementary information, low-pay weights, UK, April 19972004 and ASHE with supplementary information, low-pay weights, UK, April 20042006. Notes: 1. Results for 2004 and earlier are without supplementary information; thus comparisons between the two ASHE series should be made with care. 2. Gross hourly earnings excluding overtime. 4.18 Figure 4.5 highlights that the mean pay gap is greater, and has been narrowing more slowly, than the median pay gap. Indeed, it increased slightly between 2005 and 2006 (from 16.5 per cent to 16.8 per cent). The difference in percentage terms between the mean and median gender pay gap has been increasing since 1997. This reflects the growing disparity between the earnings of men and women at the very top of the distribution. Figure 4.5 Median and Mean Gender Pay Gap, Full-time Employees Aged 18 and Over, UK, 19972006
Source: LPC estimates based on ASHE without supplementary information, low-pay weights, UK, April 19972004 and ASHE with supplementary information, low-pay weights, UK, April 20042006 (*). Notes: 1. Direct comparisons between the two ASHE series should be made with care. 2. Gross hourly earnings excluding overtime. 4.19 The changes in the ratio of women's earnings to those of men across the entire earnings distribution before the introduction of the minimum wage and after successive upratings are shown in Figure 4.6. It suggests that the minimum wage has had a major impact, substantially reducing the pay gap at the very bottom of the earnings distribution and helping to close the gap further up the distribution through the impact on differentials. The gap has also continued to close in the middle of the distribution, but little progress has been made at the top end, where the gender pay gap is also at its highest, and where the minimum wage has no influence. In 2006, the gender pay gap in the bottom decile was 6.4 per cent compared with 6.7 per cent in 2005 and 7.5 per cent in 2004. By contrast, the gender pay gap in the top decile has been rising in the three years to 2006. Figure 4.6 Women's Hourly Earnings as a Percentage of Men's Hourly Earnings by Percentile, Full-time Employees Aged 18 and Over, UK, 19982006
Source: LPC estimates based on ASHE without supplementary information, low-pay weights, UK, April 19982004 and ASHE with supplementary information (*), low-pay weights, UK, April 20042006. Notes: 1. Comparisons between the two ASHE series should be made with care. 2. Gross hourly earnings excluding overtime. 4.20 In contrast to the full-time gender pay gap, Table 4.2 shows that the median pay gap between female and male part-timers is negative. On average female part-timers earn slightly more than their male counterparts except at the top of the earnings distribution. However, the hourly earnings of all part-time workers, whether male or female, are less on average than those of full-time workers. The position of female part-timers compared with that of female full-timers had been worsening slightly after 1997, before improving again since 2002. Female part-time workers also made little progress in closing the gap with male full-time workers between 1998 and 2002. Since then, the pay gap between full-time male workers and part-time female workers has closed slightly but remains substantial at 38.7 per cent in April 2006. Table 4.2 Median Gross Hourly Earnings by Gender and Hours Worked, Employees Aged 18 and Over, UK, 19972006
Source: LPC estimates based on ASHE without supplementary information, low-pay weights, UK, April 19972004 and ASHE with supplementary information, low-pay weights, UK, April 20042006. Note: Comparisons between the two ASHE series should be made with care. 4.21 There is a clear relationship between age and the size of the gender pay gap as indicated in Figure 4.7. The median hourly earnings of 1617 year old female full-time employees are much higher than those of male employees and the gap seems to have widened since 1998. The high negative pay gap for 1617 year olds is due to the fact that men in this age group are disproportionately paid below the adult minimum wage rate. If we focus exclusively on those 1617 year olds paid at or above the adult minimum wage, the gender pay gap is non-existent. For employees aged 1829, the pay gap is very small and in the three years to April 2006, had become practically negligible. The gender pay gap then increases for employees aged 3039 and peaks for those aged 4049 before decreasing again. For all age groups the earnings position of women relative to men has improved since 1998. Figure 4.7 Median Gender Pay Gap by Age Group, Full-time Employees, UK, 19982006
Source: LPC estimates based on ASHE without supplementary information, low-pay weights, UK, April 19972004 and ASHE with supplementary information (*), low-pay weights, UK, April 20042006. Notes: 1. Comparisons between the two ASHE series should be made with care. 2. Gross hourly earnings excluding overtime. 4.22 We now explore gender pay differences in the low-paying sectors. Although hourly earnings of both men and women tend to be lower in these sectors, the gender pay gap is proportionately greater than in other sectors, apart from in the first decile of the earnings distribution (Figure 4.8). This is indicative of greater vertical occupational segregation in low-paying sectors whereby men tend to be concentrated in higher-grade occupations within a particular sector. Figure 4.8 Gender Pay Gap by Decile, Low-paying and Other Sectors, Full-time Employees Aged 18 and Over, UK, 2006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK , April 2006. Note: Gross hourly earnings excluding overtime. 4.23 By contrast, low-paying occupations, which hardly include any managerial or professional occupations and have a very high concentration of women, have a proportionally smaller gender pay gap than other occupations, especially as we move up the distribution (Figure 4.9). Figure 4.9 Gender Pay Gap by Decile, Low-paying and Other Occupations, Full-time Employees Aged 18 and Over, UK, 2006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2006. Note: Gross hourly earnings excluding overtime. 4.24 To summarise, the position of women in the labour market has been steadily improving in the last ten years and there is no evidence of an adverse impact on employment caused by the minimum wage. Although there has been an upward trend in unemployment for women since the end of 2004, this has also been the case for men. The median gender pay gap has been narrowing for some time and it is likely that the minimum wage continues to help close the pay gap at the bottom of the distribution, given women's prevalence in low-paying sectors and occupations. Disabled Workers Employment 4.25 According to the LFS, there were 5.4 million working age people with a work-limiting disability2 in the third quarter of 2006. This represents about 15 per cent of the working age population. The rate of participation in the labour market is much lower for this group but it has been increasing over the last ten years. In the third quarter of 2006, the inactivity rate of people with a work-limiting disability was 53.4 per cent compared with 14.8 per cent for those without such a disability. 2 Those with a work-limiting disability (as self-reported in the LFS) have a long-term health problem or disability that affects the amount or type of work they can do. 4.26 The proportion of workers with work-limiting disabilities in low-paying sectors is similar to that of those without such a disability at around 89 per cent. However, some low-paying sectors, such as cleaning, social care and security, have a higher concentration of workers with work-limiting disabilities. 4.27 The employment rate of those with a work-limiting disability is much lower than that of those without (41.1 per cent compared with 80.7 per cent in the third quarter of 2006), although the labour market position of these workers has been improving. Figure 4.10 shows that, since the introduction of the minimum wage, the employment rate of those with work-limiting disabilities has risen from around 38 per cent in Summer 1998 to 41 per cent in the third quarter of 2006, following the general upward trend in employment of the working age population. Although there has been a slight decline in the working age employment rate for all groups over the year to the third quarter of 2006, the employment rate of disabled workers has remained fairly stable. There is no evidence that the employment prospects of this group have been further disadvantaged by the introduction of the minimum wage or as a result of subsequent upratings. Figure 4.10 Working Age Employment Rate of those with Work-limiting Disabilities by Gender, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 19982006. Note: The break between Summer 2004 and Q4 2004 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. 4.28 Figure 4.11 shows trends in unemployment rates for those with work-limiting disabilities. Despite the fact that, from the late 1990s to the middle of 2004, unemployment rates declined sharply among those with work-limiting disabilities, their unemployment rate (11.8 per cent in the third quarter of 2006) remains twice as high as that of workers without disabilities. Since 2004, disabled workers, in common with the overall working age population, have experienced a sharp rise in their unemployment rate. However, as noted above, this increase has occurred at the same time as a rise in employment rates. Figure 4.11 Working Age Unemployment Rate of those with Work-limiting Disabilities by Gender, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 19982006. Note: The break between Summer 2004 and Q4 2004 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. 4.29 As discussed in Chapter 2, the rise in the unemployment rate of the disabled may be explained partly by the number of people coming off incapacity benefits and becoming available for work. According to data from the Department for Work and Pensions (DWP) Longitudinal Study, the number of people claiming incapacity benefits in Great Britain has fallen from 2.77 million in May 2004 to 2.69 million in May 2006. This probably reflects the impact of the Government's welfare reforms designed to increase the number of incapacity benefit claimants moving back into work through schemes such as Pathways to Work. Pay 4.30 ASHE is the best data source to analyse pay but unfortunately it does not provide information on disability or ethnic background. Thus we use the LFS as our source of information to analyse the pay of workers with work-limiting disabilities and from ethnic minority groups. However, the data on earnings and hours in the LFS are considered by the Office for National Statistics (ONS) to be less reliable than ASHE. Responses to income questions may have been given by proxy and individuals tend to record more hours worked than in corresponding employers' surveys, possibly leading the derived hourly earnings variable to underestimate hourly pay. It is nevertheless plausible to assume that the LFS data do at least reflect the relative earnings position of those with work-limiting disabilities and those without. 4.31 As shown in Figure 4.12, we estimate that 7.3 per cent of employees with a work-limiting disability were covered by the October 2006 upratings of the National Minimum Wage. The coverage increases to 10.6 per cent for those workers who have a disability as defined under the Disability Discrimination Act (DDA) and who also have work-limiting disabilities. These estimates of coverage are based on a new, improved ONS methodology to derive hourly pay estimates from the LFS (Ormerod, 2006c). Figure 4.12 Estimated Coverage of the 2006 Upratings of the National Minimum Wage by Disability for Employees Aged 16 and Over, UK, 2006
Source: ONS estimates based on LFS Microdata, not seasonally adjusted, UK, Spring 2006. Note: Covered employees defined as adults (aged 22 and over) earning less than £5.25, youths (aged 1821) earning less than £4.40 and 1617 year olds earning less than £3.25 in April 2006. 4.32 Figure 4.13 shows the hourly earnings of employees with work-limiting disabilities as a ratio of the hourly earnings of employees without disabilities. The gap between the hourly pay of disabled workers and that of non-disabled workers tends to increase further up the earnings distribution. There is a large gap between the median hourly earnings of employees with a work-limiting disability and those of other workers. However, since 1998 there seems to have been a narrowing of the pay gap in the first decile of the earnings distribution, and to a lesser extent in the second decile, suggesting a positive effect of the minimum wage on the earnings of disabled workers at the bottom end of the distribution. Figure 4.13 Disability Pay Ratio, Employees Aged 18 and Over, UK, 19982006
Source: LPC estimates based on LFS Microdata, not seasonally adjusted, UK, Spring 1998Spring 2006. 4.33 In summary, there is no evidence that the minimum wage has had an adverse impact on the employment prospects of those with work-limiting disabilities. The sharp increase in the unemployment rate experienced by this group of workers since 2004 is of concern, although the Government's welfare reforms may account for much of this increase and employment has continued to increase at the same time. Workers with work-limiting disabilities have continued to benefit from upratings of the minimum wage to a greater extent than workers without such disabilities, and the difference between the earnings of workers with and without work-limiting disabilities at the lower end of the distribution, although still evident, seems to have narrowed since the introduction of the minimum wage. Ethnic Minorities Employment 4.34 In the analysis that follows, we have used the LFS self-reported classification of ethnicity as adopted by the 2001 Census, nevertheless recognising the difficulties inherent in any attempt to categorise people in terms of ethnicity, and the fact that no such system of classification can be entirely free of arbitrary delineations. Nor does this analysis take into consideration the additional dimension resulting from the arrival of migrant workers from central and eastern Europe since 2004. The issue of recent migration and its impact on the labour market is discussed later in this chapter. 4.35 Figure 4.14 shows that people from ethnic minorities, whether men or women, generally have lower employment rates and higher unemployment and inactivity rates than whites. However, there are significant differences in the labour market position of different ethnic minority groups. Indian men have a similar employment rate to their white counterparts. The differences between ethnic groups are more marked among women, with women of Pakistani/Bangladeshi origin experiencing by far the lowest employment rate and the highest inactivity rate. Figure 4.14 Working Age Employment, Unemployment and Inactivity Rates by Gender and Ethnic Group, UK, 2006
Source: LPC estimates based on LFS Microdata, four quarter moving average, UK, 2006. 4.36 As with women and people with work-limiting disabilities, workers from ethnic minorities are also more likely to be working in the low-paying sectors or occupations. Around 36 per cent of ethnic minority employees work in low-paying sectors compared with 29 per cent of white employees. There are also marked differences between ethnic minority groups, with 44 per cent of Pakistani and Bangladeshi employees working in the low-paying sectors, of whom half work in the retail sector. The sectors with the highest concentration of ethnic minority employees are food processing, hospitality, textiles and security. 4.37 We have seen that, in general, employees from ethnic minorities have lower overall employment rates than white employees. However, the labour market prospects of ethnic minority groups have been improving during the last decade. Even in the context of the overall strength of the labour market, there has been a marked increase in the employment rate of ethnic minority groups, from around 57 per cent in the year to Summer 1998 to 60 per cent in the year to the third quarter of 2006. Despite a slight slow down in the overall labour market, the employment rate of ethnic minority groups increased in the year to the third quarter of 2006. 4.38 Figure 4.15 shows that the employment rate of men has been increasing for all ethnic minority groups and the largest increase has been among those with the lowest employment rate, namely Pakistanis and Bangladeshis. In line with white workers, black and Indian workers seem to have experienced a slight dip in their employment rates in the year to the third quarter of 2006. Figure 4.15 Working Age Male Employment Rate By Ethnic Group, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 19982006. Notes: 1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should be made with care. 2. The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. 4.39 As seen in Figure 4.16, the overall employment rate of women from ethnic minorities has also been steadily increasing since 1998, although it levelled off in 2006, as did the employment rate of white employees. Figure 4.16 Working Age Female Employment Rate by Ethnic Group, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 19982006. Notes: 1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should be made with care. 2. The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. 4.40 Figure 4.17 shows that the unemployment rate of men in all ethnic minority groups declined throughout the 1990s and the first part of the 2000s but started to increase in 2005 and 2006, at a faster rate than that of the overall working age population. Figure 4.17 Working Age Male Unemployment Rate by Ethnic Group, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 19982006. Notes: 1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should be made with care. 2. The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. 4.41 Similarly, as indicated by Figure 4.18, the unemployment rates of women from ethnic minority groups declined for most of the period following the introduction of the minimum wage, but they have started to increase since 2004. Of note is the much sharper increase in the unemployment rate of Pakistani and Bangladeshi women which began earlier than for other groups. However, this might be an indication of a growing attachment on the part of this group to the labour market as their employment rates have also risen and their inactivity rates have declined sharply. Figure 4.18 Working Age Female Unemployment Rate by Ethnic Group, UK, 19982006
Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 19982006. Notes: 1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should be made with care. 2. The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care. Pay 4.42 According to ONS estimates based on the LFS, around 8.6 per cent of employees from ethnic minority groups will have been covered by the October 2006 upratings of the National Minimum Wage, compared with 6.5 per cent of white employees. As Figure 4.19 shows, the coverage among different ethnic minority groups varies, with those of Chinese and Asian origin more likely to be covered by minimum wage upratings, but Black employees less likely to be affected. Figure 4.19 Estimated Coverage of the 2006 Upratings of the National Minimum Wage by Ethnic Group for Employees Aged 16 and Over, UK, 2006
Source: ONS estimates based on LFS Microdata, not seasonally adjusted, UK, Spring 2006. Note: Covered employees defined as adults (aged 22 and over) earning less than £5.25, youths (aged 1821) earning less than £4.40 and 1617 year olds earning less than £3.25 in April 2006. 4.43 Figure 4.20 shows the pay ratio between minority ethnic groups and white employees at each decile of the hourly earnings distribution. We have had to treat all non-whites as a single group due to small sample sizes, but this will have concealed some significant differences between groups. Overall, the median ethnic minority pay gap appears smaller than pay gaps for other disadvantaged groups such as women or people with work-limiting disabilities, but it does not seem to have narrowed significantly since the introduction of the minimum wage. There has been an improvement in the pay of ethnic minorities relative to their white counterparts at the bottom of the distribution, most notably in the first two deciles, suggesting the introduction of the minimum wage and successive upratings have had a positive effect on low-paid ethnic minority workers. Figure 4.20 Ethnicity Pay Ratio, Employees Aged 18 and Over, UK, 19982006 Source: LPC estimates based on LFS Microdata, seasonal quarters, not seasonally adjusted, UK, Spring 1998Spring 2006. 4.44 The labour market prospects of minority ethnic groups have been improving since the introduction of the minimum wage, as have those of other disadvantaged groups in the labour market. However, since 2004 the unemployment rate of ethnic minorities has been increasing at a slightly faster rate than that of white employees. The minimum wage has improved the earnings position of ethnic minorities at the lower end of the pay distribution and the difference in their earnings relative to those of white workers is smaller than the pay gaps experienced by the other groups considered in this chapter. 4.45 In the next section, we focus on another group of workers that is disproportionately likely to be low-paid. Migrant Workers from the Central and Eastern European Accession Countries 4.46 There has been a substantial increase in the number of migrant workers in the UK over a number of years, in particular following the enlargement of the EU on 1 May 2004. Nationals from eight of the ten countries joining the EU (the A8)3 were granted access to the UK labour market, but were required to register under the Home Office Workers Registration Scheme (WRS) if employed for a month or more4. Most other established EU member states have exercised their right to regulate access to their labour markets by nationals from the A8 countries. Nationals of the two remaining accession states Malta and Cyprus have free movement and the right to work throughout the EU. In this section we look at the inflow of workers from the A8 countries as their arrival in the UK is arguably the most significant change to the labour market since the introduction of the minimum wage. 3 The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. 4 Those registered on the WRS working legally in the UK for 12 months without a break are eligible to apply for a residence permit. 4.47 On 1 January 2007 Bulgaria and Romania also joined the EU. However, nationals from these countries do not have the same rights to work in the UK as those from the A8. Under transitional arrangements, the Government put in place new regulations which restrict the access of Romanians and Bulgarians to the UK labour market. The impact of this further expansion is therefore not expected to be as significant but it is too early to comment on how these arrangements are working in practice. Workers Registration Scheme 4.48 Around 487,000 applicants from the A8 countries were approved under the WRS between 1 May 2004 and 30 September 2006 (Home Office et al, 2006). In the first three months of the scheme, the number of applicants peaked at over 22,000 per month, which is thought to be due partly to a number of A8 workers already living in the UK registering when the WRS came into force. Applicant numbers have fluctuated since then. In the third quarter of 2006, around 60,000 A8 migrants registered to work in the UK, a similar number to the corresponding period in 2005. By far the highest proportion of those registered were from Poland (63 per cent), followed by Lithuania (11 per cent) and Slovakia (10 per cent) and these proportions have remained broadly constant since May 2004. Four-fifths (nearly 400,000) of registered workers were aged 1834 and 58 per cent of applicants were male. 4.49 It is important to note, however, that the number of WRS registrations does not represent a measure of net migration from the A8 countries to the UK; it is a gross (cumulative) figure for the number of workers applying to the WRS. It does not take into account those who have registered but who have subsequently left the UK. Given this, the WRS data may overstate the number of A8 workers in the UK at any given period. Conversely, it is believed that some workers will not have registered and therefore the WRS data are likely to underestimate the total inflow of migrant workers from the A8 countries. We cannot be sure which effect dominates, but most commonly there are thought to be a greater number than suggested by the WRS data. 4.50 Figure 4.21 below shows the top ten occupations in which A8 workers were registered, which account for 62 per cent of all workers registered under the scheme. There has been a high concentration of A8 workers in low-paying occupations since 2004. The occupation employing by far the largest number was process operative (other factory worker), with over 110,000 stating this as their occupation, followed by warehouse operative (over 30,000). The next most common occupations, each with around 27,000 A8 workers, were packers, and kitchen and catering assistants. Just over 23,000 were employed as cleaners or domestic staff.
Figure 4.21 Top Ten Occupations for Workers Registration Scheme Applicants, UK, 20042006
Source: Home Office, Department for Work and Pensions, HM Revenue & Customs and Department for Communities and Local Government, 2006. Accession Monitoring Report May 2004September 2006. ' Despite reports in the media to the contrary, BSA member company experience shows that migrants do not affect the job prospects of UK nationals in a negative manner. The reality is in fact to the contrary, with migrant workers helping to 'plug' gaps in the business service sector's workforces and helping to address the high 'attrition' rate in the recruitment and retention of staff. '
4.51 If we look at the geographical distribution of A8 migrant workers up to the end of September 2006, Anglia was the most popular destination, accounting for 15 per cent of A8 workers; followed by London and the Midlands, with 14 per cent and 12 per cent respectively. Northern Ireland and Wales continued to attract the fewest A8 workers (4 per cent and 3 per cent respectively). While the data may not be entirely robust as they rely on information provided on application forms, the WRS indicates that nearly all A8 applicants were working full-time (i.e. more than 16 hours a week). Just under half were in temporary employment. Impact on the Labour Market 4.52 There has been much conjecture about the effect of inward migration in terms of employment and unemployment levels for UK nationals and on wage rates, but the widely held view is that A8 workers are contributing to the success of the UK economy by filling gaps in the labour market. This view is consistent with the evidence we gathered when talking to employers throughout 2005 and 2006. We believe it is reasonable to assume that a substantial number of those who registered at the beginning of the WRS would have already been working in the UK prior to 1 May 2004, albeit illegally in many cases, and that this would have moderated the impact on the labour market and wages. 4.53 The impact of the increase in the number of migrant workers in the UK labour market was a key feature in the evidence received for this report. Most of those who commented on the issue believed that there had been a positive effect and that A8 workers had not affected adversely the employment of UK nationals. However, the CBI sounded a note of caution in its evidence. While it recognised the positive benefits for UK industry, it stated that there was a need to develop a better understanding of the impact of the rapid increase in migrant workers at the lower end of the labour market. During regional visits, a number of employers in the low-paying sectors noted that they had recruited migrant workers due to a shortage of local labour or because UK workers were unwilling to take the jobs on offer. The employer view of A8 migrant workers was generally very positive; in particular they were thought to be reliable, hard-working and willing to be flexible. Of the firms that employed migrant workers responding to our Employers' Survey, 64 per cent (748 firms) said they did so because of shortages in the local labour market. 4.54 The effect of the recent inflow of A8 workers on the UK labour market has also been considered in a number of recent research reports. Research we commissioned by French and Möhrke (2006) examined the utilisation of migrant labour in North Staffordshire. The researchers found that migrant workers had largely been employed to address specific skills shortages across many economic sectors and to address labour shortages, primarily in the low-wage sectors. A study by Blanchflower et al (2007) found that the inflow of workers from the A8 appeared to have had little or no discernible effect on the UK unemployment rate. The researchers found that the regions that had experienced the biggest increases in immigration tended to see the smallest rises in unemployment rates. They noted, however, that this was consistent with the possibility that foreign workers were attracted to those regions where the unemployment rate was lowest and opportunities were greatest. Research carried out by the DWP (Gilpin et al,2006) found that the impact of free movement of workers from the A8 countries on the UK labour market had been modest and broadly positive, and that there was no discernible statistical evidence which supported the view that A8 migrants were contributing to a rise in claimant unemployment in the UK. We will continue to monitor carefully the impact of migrant workers on the labour market. 4.55 There is a lack of reliable official data on pay rates for A8 workers. The WRS data depend on unverified responses to questions on the WRS application form. However, they show that the majority (78 per cent) of those registered were earning between £4.50 and £5.99 per hour between 2004 and 2006. This is consistent with anecdotal evidence we have gathered on A8 migrant workers' pay during our work this year. It is too early to assess the impact of A8 migration on wage inflation. However, if we look at the wage effect of migrant workers generally, research by Dustmann et al (2007), which examined the impact on wages of migrant workers using data that largely pre-dated the arrival of A8 workers in 2004, found some evidence that they have a small negative effect on wages at the bottom end of the earnings distribution, while native workers in the middle of the earnings distribution had gained from the increasing number of migrant workers. The Association of Licensed Multiple Retailers noted in its evidence that a survey of its members found that nearly half of the 21 respondents (who collectively operated just under 1,000 outlets with 15,500 staff) employed migrant workers because they were prepared to work for lower levels of pay in non-basic jobs. Six per cent of respondents to our Employers' Survey said that they employed migrant workers to control wage costs. Enforcement 4.56 A significant concern is that some migrant workers are particularly vulnerable to exploitation by unscrupulous employers. This was raised in evidence from worker and employer representative organisations, employers and not-for-profit groups alike and also during our visits throughout the UK. French and Möhrke (2006) found examples of exploitation of migrant workers, as well as potential discrimination within the workplace. The research, albeit based on a small number of case studies, found that those employed through international employment agencies were more likely to be paid less than the minimum wage or to have significant deductions made for accommodation and other services. A number of respondents to our consultation also linked examples of exploitation of migrant workers to the practices of some employment agencies and to abuse of the accommodation offset. We touch on these areas below within the sections on agency workers and the accommodation offset. We look in detail at compliance and enforcement in Chapter 6. Agency Workers 4.57 Flexible working has increasingly become a feature of working life in the UK. Agency workers are an important source of temporary, flexible labour to cover short-term absences or fill skills gaps at short notice. They can help employers to improve efficiency, manage fluctuations in demand and remain competitive. Non-standard working arrangements can also offer employment opportunities by enabling workers to gain new skills and experience, or allow them to fit work around other responsibilities or interests. Several consultation respondents commented on agency workers this year. In particular trade unions and other bodies representing workers suggested that some agency workers were less well-protected in terms of their employment rights due to the temporary and uncertain nature of much agency work. A number of trade unions also suggested that the use of agency workers was increasing. We examine the evidence in more detail below. Numbers and Pay of Agency Workers 4.58 The number of agency workers is difficult to establish due to conflicting data. As shown in Figure 4.22, the ONS employee jobs series records that there were 713,000 jobs in labour recruitment in September 2006, an increase of 127,000 (largely part-time jobs) since March 1999. Figure 4.22 Employee Jobs in Labour Recruitment and Annual Change, Thousands, GB, 19992006
Source: ONS employee jobs series, not seasonally adjusted, GB, 19992006. 4.59 The LFS records that in the third quarter of 2006 there were around 257,000 jobs classified as 'agency temping', compared with 246,000 in Spring 1999. Examining all types of temporary and casual jobs, many of which will not involve the use of an agency, we find that there were nearly 1.4 million such jobs in the third quarter of 2006, down from just over 1.5 million in Spring 1999. Around a third of these jobs were in the low-paying sectors, concentrated in retail (132,000), hospitality (130,000) and social care (96,000). According to the Recruitment & Employment Confederation (REC, 2006), there were 1.3 million temporary and contract placements in the year to March 2006, a 3.8 per cent increase on the previous year but fewer than the 1.5 million recorded in 2003/04. The actual number of workers involved is likely to be lower due to multiple placements. 4.60 Some trade unions noted an increase in contracting out of jobs from the public sector and suggested that increased use of agency workers might be a factor behind the recent falls in employment in retail and hospitality noted in Chapter 3. It is difficult to draw firm conclusions, but the various data sources considered here suggest that, following several years of significant growth, the number of agency workers has been more stable since around 2002 or 2003. Figure 4.22 does, however, show an increase of 18,000 employee jobs (2.6 per cent) in the sector in the year to September 2006. 4.61 The impact of the minimum wage on hourly earnings for agency jobs is shown in Figure 4.23. Three per cent of jobs paid at the minimum wage in April 2004 and April 2005, doubling to six per cent in April 2006. While this suggests the impact is increasing, it may partly be a consequence of the minimum wage uprating to £5.05, which crossed the £5.00 hourly threshold, given the clear spikes at other round figures such as £5.50 and £6.00. Figure 4.23 Hourly Earnings Distribution for Agency Workers Aged 18 and Over, UK, 20042006
Source: LPC estimates based on ASHE with supplementary information, low-pay weights, UK, 20042006. Notes: 1. NMW label shows the adult minimum wage rate in April of the given year. 2. Gross hourly earnings excluding overtime. 4.62 As we noted in the discussion on migrant workers, a number of trade unions and bodies and individuals representing workers highlighted the greater vulnerability of some agency workers to exploitative practices, particularly involving deductions from pay for services including accommodation. We consider the provision of accommodation by employers and agencies below. We also received evidence concerning agencies in the entertainment sector. We were informed that some extras (background or walk-on parts on TV, films and commercials) offered a day's work via an agency have found that, after deductions for commission fees and charges for including their details in a promotional publication, their earnings fell well below the minimum wage. A separate submission from Equity noted that the application of an agent's fee could result in the payment received by the performer falling below the minimum wage and suggested we examine such practices in relation to minimum wage entitlement. 4.63 While the majority of employment agencies treat their workers fairly, the DTI (2007g) has published a consultation document on a package of measures to tackle particular abuses associated with a minority of agencies. In particular, it proposes strengthening existing measures that prevent offers of work being conditional on acceptance of other services and tightening the rules on fees charged in the entertainment and modelling sectors. This initiative should help to address some of the issues raised in evidence to us. We discuss other steps needed to tackle the problems faced by vulnerable agency workers and other workers at particular risk of minimum wage underpayment in Chapter 6. ' The feedback from a number of REC members indicates that acting as a landlord is often the best and only way that the agency can ensure that there is affordable accommodation available for workers. '
The Accommodation Offset 2006 Review of the Accommodation Offset 4.64 We undertook a review of the accommodation offset in our 2006 Report, focusing on its application outside the traditional tied accommodation arrangements that have been a long-standing practice in sectors such as hospitality and agriculture. We had become aware that employers in particular labour providers or agencies operating in the food processing and agriculture sectors were increasingly arranging accommodation for migrant workers because of the difficulties these workers faced in securing accommodation on the private rental market. Many of these workers were new arrivals from the A8 countries. We considered whether there was a case for relaxing the offset rules to reflect these recent changes in the labour market. The argument put to us by employer bodies in these sectors was that, where an employer provided accommodation as an option rather than as a requirement of the job, there should be no restriction on the amount that could be charged to low-paid workers. The accommodation offset rules currently limit the maximum deduction from National Minimum Wage pay where accommodation is provided to £4.15 per day, or £29.05 per week. ' One of the key problems for migrant workers in particular is the practice of employers taking illegal deductions from their wages, particularly by abusing or avoiding the accommodation offset. '
4.65 However, while accepting a distinction in principle, we concluded that it would not be straightforward in practice to ensure that some of the most vulnerable workers did have a genuine choice to take up an offer of accommodation. We were concerned that some workers could be left with very little cash wages after deductions for accommodation. Therefore we recommended that the offset provisions should continue to apply to all workers housed by their employer regardless of any element of free choice. But we stated that we would continue to monitor developments relating to migrant labour and to the provision of accommodation. We also made a number of recommendations that sought to clear up confusion about the offset rules, raise awareness and tighten up on potential loopholes. Recent Developments 4.66 In July 2006, the DTI began a consultation on new draft guidance on the accommodation offset in response to our recommendations (DTI, 2006h). Our reply to the consultation document welcomed the initiative but said that the guidance needed to be clearer and more comprehensive. We emphasised the importance of publicity and awareness. The guidance also set out the DTI's belief that it was not necessary to introduce new measures to clamp down on employers using the device of a separate accommodation company to evade the offset rules a recommendation that we had made in our 2006 Report. In its view, the intention of the existing rules was clear and thus the offset could be enforced where separate but related companies were involved. We understand that the finalised guidance will be issued soon after publication of our 2007 Report, in order to take account of a case concerning the accommodation offset heard at the Court of Appeal in January 2007. ' The October 2006 increase in the accommodation offset to £4.15 per day (6.4 per cent) is welcome, but a weekly offset of under £30 is still an inadequate reflection of the cost of supplying accommodation. In the open market, rents of double that level might be considered normal .... '
4.67 In its response to our consultation this year, the Association of Labour Providers (ALP) recorded its disappointment with our conclusions on the issue of free choice and pointed out that there were already a number of areas of law where workers could agree in writing to opt in or out of arrangements, such as the 48 hour working week or deductions from pay that were not required by law. The ALP reported that, as a consequence of the Commission's position, labour providers were ceasing to provide accommodation because they could not deduct enough from minimum wage pay to cover their costs, while others were choosing to become accommodation providers only. According to the ALP, workers now faced paying higher rents charged by private landlords on the open market. 4.68 In its evidence, the REC acknowledged that the automatic deduction of accommodation costs from workers' wages could lend itself to abuse, but argued that in many cases 'agencies are simply offering an essential service rather than seeking to derive any financial gain or exploit the worker in question'. It noted the difficulties faced by migrant workers who found it hard to supply the credit references and deposits required by most landlords. Anecdotal evidence from our visits and research case studies (French and Möhrke, 2006) suggested that, while employers continue to provide accommodation for migrant workers, this might lessen as A8 workers become more established and as community networks develop. 4.69 As noted earlier, the TUC and the Transport and General Workers' Union expressed concerns that some employers continued to exploit migrant workers by overcharging for accommodation, often associated with deductions for other items such as transport, meals and utilities. While welcoming the tougher stance in the Government's draft guidance on the accommodation offset, the TUC called for us to examine its impact during 2007. 4.70 From the evidence we received on the topic of accommodation for this report, it is evident that some enforcement problems remain. But having examined the principles of the accommodation offset in detail in the 2006 Report, including the effects on particular sectors and groups of workers, we did not consider that it would be fruitful to undertake a similar detailed review this year. We made a number of recommendations in the 2006 Report, including calling for specific guidance on the offset, and further time is needed to consider the impact. In addition, the licensing system for gangmasters operating in the food processing, shellfish gathering and agriculture sectors which came into effect in October 2006 requires labour providers to show that accommodation charges are in accordance with the minimum wage and the accommodation is not of a poor standard or overcrowded. We will wish to consider the effects of the licensing requirements on use of and compliance with the accommodation offset provisions in these sectors in a future report. ' Homeworkers who complain they are not being paid the NMW will frequently find their employment status is challenged by their employer. Not knowing what an Employment Tribunal will conclude about their status is a real discouragement to making a complaint. '
The Offset Level 4.71 Consultation responses from other employer representatives focused on the level of the accommodation offset. The National Farmers' Union argued that the current rate offered no incentive to improve standards of accommodation; rather than building good quality but more costly permanent structures, some farmers and growers would be more inclined to house workers in second-hand caravans and mobile homes. The British Hospitality Association (BHA), Association of Licensed Multiple Retailers and British Beer and Pub Association (BBPA) called for a significant increase to a level that more closely reflected employers' costs and rents on the open market, while the CBI called for the offset to be raised in line with any increase in the minimum wage. The BBPA suggested two offset rates one for self-contained accommodation (for example a pub manager living above the pub) and one for accommodation with shared facilities. 4.72 In recent reports, we have recommended that the offset increase by the same proportion as the proposed increase in the adult rate of the minimum wage. Our 2005 Report set out the reasons for this approach and we believe that the balance it represents between the interests of employers and workers remains appropriate. Therefore we recommend that the accommodation offset should increase to £4.30 per day in October 2007. However, in view of the developments described above, we see a need to continue to keep the accommodation offset under review. 4.73 In the next section, we consider a largely hidden section of the workforce, but one which is at greater risk of minimum wage underpayment. Homeworkers 4.74 A wide spectrum of individuals work from home, including the self-employed and professional and managerial employees. However, our focus has been on those who perform unskilled manual work often on a piece rate basis typically packing, sewing, electronics assembly or telephone work as these homeworkers are most likely to be low-paid and face particular difficulties in enforcing their employment rights. They often work in isolation and many of them fear that they would no longer receive work if they were to make a complaint. 4.75 Homeworkers are spread across different sectors and occupations and official data gives only a partial and incomplete picture. The LFS indicates that in the year to the third quarter of 2006 (four quarter moving average), 785,000 workers, or 2.8 per cent of the workforce, worked from within their own home in their main job. If we focus on workers holding second jobs, we find that the proportion working in their own home rises to over 13 per cent (138,000). However, it is important to note that these figures include the self-employed and higher-paid employees. Around 225,000 people working from their own home in their main job work in the low-paying sectors, with some of these sectors, particularly textiles (8 per cent), leisure (6 per cent), social care (5 per cent), hairdressing (4 per cent) and agriculture (4 per cent), having a higher proportion of homeworkers than average. If we consider those working from home by their main occupation, we see that childcare (16 per cent), textiles (9 per cent), hairdressing (3 per cent) and office work (2 per cent) low-paying occupations have a higher than average proportion of homeworkers. Interestingly, 79 per cent of homeworkers in the low-paying sectors are self-employed, compared with an average of 55 per cent of homeworkers in all other sectors. Consultation Evidence 4.76 Although homeworkers are specifically included within the definition of a worker under the National Minimum Wage Act 1998, in its evidence the National Group on Homeworking (NGH) raised concerns about two issues which it believed were adversely affecting their attempts to access the minimum wage. First, that ambiguity remained with respect to their employment status. In its view, many employers wrongly classified homeworkers as self-employed and thus outside the scope of the minimum wage, and Employment Tribunal decisions on employment status could be unpredictable. The NGH argued that these factors created uncertainty and discouraged homeworkers from seeking to assert their right to the minimum wage. The NGH proposed that homeworkers should only be judged as self-employed if it could be demonstrated that they were genuinely running their own business. 4.77 Second, the NGH wrote that HM Revenue and Customs (HMRC) had used evidence of minimum wage compliance in earlier investigations as a basis for not pursuing later complaints made against the same organisation. It concluded that HMRC was failing to investigate such complaints adequately and this, together with the lack of clarity about the employment status of homeworkers, was forming obstacles to enforcement. It asked us to examine what happened when HMRC received a repeat complaint about a company it had already investigated, and for more training of Compliance Officers on the specific legislation relating to homeworkers and on the piece rate rules.' If I demand that their employers pay them the NMW then tomorrow there will be 20 plus sets of parents, carers and supported living managers looking for day centre places. The capacity to meet and support this sudden increased level of demand is not there. '
Fair Piece Rates 4.78 Homeworkers are often remunerated on a piece rate basis, but there was widespread dissatisfaction with the original approach under the minimum wage using fair estimate agreements. This led us to make recommendations for change and in October 2004, the Government introduced a new system called 'fair piece rates' based on the time a person working at average speed would take to produce a piece. From April 2005, employers have been required to multiply the rate by a factor of 1.2, so that most workers (not just those working at average or faster speeds) receive at least the minimum wage. We have received little evidence about how the new arrangements are working in practice. We attempted to gather information via supplementary questions to the textiles and clothing sector in our Employers' Survey (see Appendix 3). Unfortunately, very few of the returns were from employers who operated a piece rate system as defined under the National Minimum Wage (i.e. the employer did not control the number of hours a worker worked), and with such small numbers no real conclusions could be drawn. However, we did receive evidence from the delivery and distribution sector on experience in applying the fair piece rates system; this was also a sector in which the NGH understood that bogus claims of self-employment occurred. 4.79 We were informed that specialist distribution companies engaged thousands of temporary workers to make door-to-door deliveries of telephone directories. However, due to the range of factors that influenced delivery speed (such as weather and profile of the route), difficulties could arise in calculating a piece rate per directory in line with the minimum wage requirements. We understand this led one company to agree with HMRC to re-define the work as 'unmeasured work', with estimated daily hours and a post-delivery assessment including regular audits. It was also suggested that other piece workers in the sector were unlikely to complain about their pay, were it to fall below the minimum wage, due to the short-term nature of the work. The National Centre for Social Research also reported difficulties applying piece rates to its panel of 1,300 freelance interviewers. It was operating with estimates made in advance of expected hours to be worked on an assignment, which were then adjusted to ensure interviewers were paid at least the National Minimum Wage. While solutions were found in both of these examples, they do highlight practical difficulties in applying fair piece rates. ' ... the Working Group is concerned about the worrying number of learning disability employment providers (specifically LA and voluntary sector social enterprises) that appear to be in breach of the NMW. '
Enforcement 4.80 While we look more closely at enforcement in Chapter 6, the Government's evidence pointed to work undertaken by HMRC's specialist homeworking team. Forty-nine homeworking investigations were opened between October 2004 and July 2006, with arrears of £21,000 identified in 17 closed cases during the period. The team had worked with employers on issues such as completion of fair piece rate timesheets and where employers claimed self-employed status for homeworkers. The Government's evidence also stated that, since 2004, it had become apparent that some businesses had ceased to use homeworkers, with the reasons cited by Compliance Officers including difficulties with paying the minimum wage or a desire to move work abroad. 4.81 In the 2005 Report, we called for homeworkers to be included early on in HMRC's rolling programme of targeted enforcement. Two years on, the fair piece rate system is still a relatively recent development, with limited evidence as to how it is operating. The information we have received during this year's consultation reminds us of the difficulties which can arise in applying these arrangements, and for both employers and workers in ensuring the correct wage is paid. Mindful of this, and the greater vulnerability of some homeworkers, we continue to see low-paid homeworkers as a group warranting particular attention in terms of the enforcement of their minimum wage rights. Therapeutic Activity 4.82 In previous reports, we have commented on the application of the minimum wage in the context of services provided for people with a disability or mental health problem. We noted that it was not always straightforward to determine whether an activity was focused on providing therapeutic benefits for the individual, or whether it should be regarded as work and attract the minimum wage. These activities, sometimes described as 'therapeutic work', 'work placements' or 'volunteering', take place in a variety of settings such as local authority (LA) day centres, sheltered workshops in the voluntary sector or within profit making companies, and can range from making greetings cards to gardening to stacking shelves in a shop. In some cases the tasks undertaken would fall into the category of work for minimum wage purposes. 4.83 Our 2005 Report focused on two issues. First, a concern that some service providers were unclear whether the minimum wage applied, which in some cases had led them to withdraw services, or to remove small levels of remuneration that had traditionally been offered as an incentive for attendance. We said that guidance on therapeutic activity (DTI, 2003) appeared to have helped to clarify the position but that, in our view, it had not been disseminated widely enough. Second, we noted some stakeholders' concerns that a number of vulnerable people who were probably doing work that should be properly remunerated were being exploited and not receiving the minimum wage. However, we have had no hard evidence about the extent of such practices. 4.84 This topic was raised again by a small number of respondents to our consultation for this report. Concern was expressed about exploitation and also a lack of willingness on the part of some local authorities to reform services to ensure compliance with the minimum wage. However, there was also a fear that disproportionate enforcement action might have a negative impact on users of local authority and other services if these services closed because they could not afford to pay minimum wage arrears following a compliance investigation, or because they feared there might be grounds for a case to be brought against them in the future. ' ... it would appear that sports, and clubs, are now more aware of the NMW rules than this time last year and are successfully operating within the legislation. '
4.85 We received evidence from a supported employment co-ordinator who arranged work placements for adults with learning disabilities. He reported that, before the introduction of the minimum wage, 'therapeutic wages' of up to £20 per week could be paid that reflected the mutual balance of benefit to both parties. In his view, such arrangements were not intrinsically exploitative. He was concerned that, if the employers involved were asked to pay the minimum wage, the placements would end immediately. In his experience, most employers were unwilling to take on people with learning difficulties, even after several years on a work placement, because of the gap they could see existed between 'a wage that has to be paid and the productivity that the employee can return'. As well as the negative consequences for the individuals who had derived some benefit from the placement, he feared that there would be a knock-on effect on already stretched day services provision. A charitable trust wrote that it had had to change its service for the disabled from 'employment opportunities' to 'day services' and had withdrawn a small cash remuneration due to concerns about potential liability to pay the minimum wage. This echoed comments made by other organisations in previous years. 4.86 In its evidence, the TUC wrote that 'the provisions on therapeutic work are still being widely abused'. Similarly Leicester City Council (LCC) wrote that arrangements made by local authorities and the voluntary sector could be 'lax' and even if the activities undertaken were beneficial, they might still be exploitative. LCC was also concerned that if no payments were made, HMRC was less likely to conclude that a worker/employer relationship existed, thus in LCC's view, a more exploitative employer was less likely to be found in breach of the minimum wage, compared with one that at least offered some level of payment. 4.87 Similar issues were raised in a recent report, Improving Work Opportunities for People with a Learning Disability (Working Group on Learning Disabilities and Employment, 2006). The report suggested there was a lack of awareness of the DTI guidance and an urgent need for various Government bodies to work together to improve awareness and understanding to ensure that organisations employing people with learning disabilities recognised their obligations under the minimum wage. 4.88 Our meetings with stakeholders and the evidence submitted to our consultation illustrate that this is a complex area. We are aware that there are differing views about the most appropriate means to support people with learning disabilities or mental health problems, including helping them to participate in the labour market. We continue to believe that the minimum wage should apply to all workers regardless of any disability or other condition that might affect their productivity and we are concerned that there continue to be reports of suspected non-compliance with the minimum wage. 4.89 As we have noted, the DTI has produced specific guidance on therapeutic work advising on the circumstances in which the minimum wage should be paid. In addition, the publication Paying a Real Wage to People in Work Projects (MCCH Society Ltd, 2005) provides practical advice based on one organisation's real experience of reforming services in response to the minimum wage. Therefore in our view the emphasis must be on effective dissemination of the guidance and on raising awareness. We are pleased that the DTI published an updated version of its guidance note on therapeutic activity on its website in January 2007. The guidance was also sent to over one hundred organisations, a significantly larger distribution than had been achieved for the 2003 version, and comments were invited on the contents. We will take a close interest in the response to this exercise. We strongly encourage the DTI to continue to work with other parts of Government to ensure that organisations operating in this area understand and act upon their obligations with respect to the minimum wage. It is also important that any misplaced fears or misunderstandings concerning the minimum wage based on a lack of knowledge do not inhibit the provision of services that are of real benefit to people with a disability or mental health problem. 4.90 As we discuss in the next section, there are some other groups whose status with respect to minimum wage entitlement can sometimes also be unclear. Volunteers 4.91 Volunteers provide an important resource for numerous organisations. The 2005 Citizenship Survey (Home Office, 2005) estimated that over two-fifths of the population in England had volunteered formally at least once in the last twelve months (defined as 'giving unpaid help through groups, clubs and organisations to benefit other people or the environment'). It has also been estimated that 1.1 million full-time UK workers would be needed to replace formal volunteers, well over twice the number of full-time equivalent paid employees in the voluntary sector (National Council for Voluntary Organisations, 2006). 4.92 Genuine volunteers who give their time and effort freely are outside the scope of the National Minimum Wage Act 1998 since they are not workers. Others who may regard themselves as volunteers could in fact be workers because they receive a payment or some form of benefit for the work they undertake. However, Section 44 of the 1998 Act provides that voluntary workers engaged by charities, voluntary organisations or similar bodies are not entitled to the minimum wage as long as they receive only reasonable subsistence, accommodation or expenses. In addition, a genuine honorarium, or one-off gift with no expectation or obligation, and of a reasonable amount, would not normally signify an entitlement to the minimum wage. 4.93 At the time of our 2005 Report, we received representations from only one organisation concerning volunteers and the minimum wage, suggesting that difficulties raised in our earlier reports may have been largely resolved, but some problems remained. The Central Council of Physical Recreation (CCPR) raised several concerns, including that an entitlement to the minimum wage could be inferred where a small non-cash benefit was offered or where an honorarium had become customary for holders of a particular office. We noted that there were ongoing discussions between the CCPR, HMRC and the DTI, and expressed a hope that these would resolve the concerns. 4.94 In response to our latest consultation the CCPR reported that it had agreed a policy statement with the DTI and HMRC that would apply to its members. The agreement sets out what are reasonable expenses and benefits-in-kind that will not trigger eligibility for the minimum wage. Under the agreement, HMRC will not undertake proactive investigations of CCPR members and affiliated volunteer or sports clubs for minimum wage compliance, but will investigate any complaints made to it. The CCPR told us that the policy statement had provided valuable clarity and attracted positive feedback from its members. 4.95 We welcome this positive outcome. However, it has been several years since advice for the voluntary sector as a whole was first produced. In our 2005 Report, we recommended a comprehensive updating of the guidance, taking into account developments such as the CCPR policy statement and other sector-specific materials. While the Government accepted our recommendation, the necessary action has not yet taken place. We understand that the Government is seeking to resolve minimum wage issues with some other organisations, in particular with Project Scotland and 'V' (formerly the Russell Commission). The Russell Commission, set up by the Government in 2004 to examine youth action and engagement, recommended that young people undertaking voluntary work receive regular payments and Project Scotland offers a subsistence allowance. We have been informed that the DTI is working with both bodies to produce a policy statement which will address minimum wage enforcement in relation to a range of voluntary bodies. In its evidence, the Government stated that any policy statement which results from this would be published on its website when complete, and that the DTI would continue to keep this and other policy statements agreed with voluntary sector organisations under review. 4.96 Although we received few representations on the topic of volunteers in response to our most recent consultation, the DTI's ongoing work illustrates that there are still issues concerning the relationship between volunteers and the minimum wage for a number of organisations. While we appreciate efforts by Government policy and enforcement authorities to agree ways of operating with stakeholders, it reinforces our view that guidance for the sector should be consolidated and made widely available, as recommended in our 2005 Report. We were therefore pleased that, on 17 January 2007, the Government announced that it was to undertake a review of the National Minimum Wage in relation to voluntary workers and that this would include addressing our 2005 recommendation. We stand ready to contribute to the review process and await the outcome with interest. We trust that this will lead in the near future to the improvement in available guidance to the sector that we recommended two years ago. Unpaid Work Experience 4.97 Given the importance of volunteers to the health of many organisations, and the particular recognition given to voluntary workers in the minimum wage legislation, we would not want the minimum wage to act as a barrier to people giving their time freely to support activities that are of benefit to their community. However, we received submissions claiming that it is becoming commonplace in certain sectors for businesses to demand a period of unpaid work as the price of entry to a competitive industry. This may be described as 'volunteering', acting as an 'intern', or perhaps most commonly as 'work experience'. Whatever label is used it raises the same issue: whether the person is a genuine volunteer and thus outside the scope of the minimum wage, or whether the activities performed are in fact work for which the National Minimum Wage must be paid. 4.98 The TUC, the National Union of Journalists and the Broadcasting, Entertainment, Cinematograph and Theatre Union have pointed to evidence of a growth in unpaid work in the media sector. While the TUC stressed it did not want to curtail genuine work experience opportunities, it felt that the position in this sector had become one of exploitation. It called on us to re-examine the rules on unpaid work in order to check they were sufficiently rigorous. In terms of the activities being undertaken in this unpaid work, a submission from Mark Watson highlighted numerous advertisements offering work experience in the television industry as a runner, researcher or administrator, which typically involved set hours and specific duties, and called for candidates to possess particular skills or experience. In addition, Equity told us that a survey of members found that in any given week, 7 per cent in the performance industry were doing unpaid work, rising to 22 per cent in film and 21 per cent in small scale theatre. 4.99 Good practice standards and guidance have been developed for employers offering work experience placements in the television industry through consultation between the DTI, HMRC, employer and trade union representatives, the National Council for Work Experience, Skillset (the Sector Skills Council) and others. The guidelines (DTI, 2007h) make clear that there are only a few limited circumstances in which an employer may offer unpaid work experience. These include students required to do a work placement as part of a higher education course; activities that consist entirely of work shadowing with no performance of tasks; or volunteering, where those who take part are free to come and go as they choose. 4.100 As we have noted in relation to other groups, the line between work for minimum wage purposes and non-work can be a difficult one to draw. Nevertheless, we are concerned that some unpaid work experience opportunities share many of the characteristics of work for which the minimum wage should be paid. The forthcoming guidance for the television industry should help to raise awareness on the part of applicants and employers alike and improve employers' understanding of their obligations with respect to the minimum wage. The guidance is also likely to have wider application for other sectors where similar practices are common and we would encourage the DTI to publicise it widely. We will monitor how the development and dissemination of this guidance affects employer practice. The Government's recently announced review of the minimum wage and volunteers may also have a bearing on this issue. Conclusion 4.101 The information presented in this chapter has illustrated that there is a positive story to tell in relation to a number of groups who are disadvantaged in the labour market. As we have shown, women, ethnic minorities and people with a work-limiting disability are disproportionately represented in the low-paying sectors and therefore are more likely to benefit from minimum wage upratings. While the minimum wage has raised the earnings of low-paid workers from these groups, there is no evidence that it has had a detrimental effect on their employment prospects. We will examine another group of workers who have been faring rather less well in the labour market, namely young people, in the next chapter. 4.102 There continue to be groups of workers who are more likely to face a struggle to receive their entitlements, including the minimum wage. In this chapter we have illustrated that initiatives to improve awareness and understanding of employment rights play an important role in mitigating the problems faced by some groups. For example, national and local Government, trade unions, employer bodies and others have made significant efforts to inform migrant workers of their rights, both in the UK and before arrival. We have been encouraged by the emphasis the DTI has placed on vulnerable workers and by proposals for additional measures to protect agency workers. But the evidence from stakeholders of exploitative practices, including excessive deductions from pay and bogus claims of self-employment, has shown that awareness alone is insufficient unless it is backed up by effective enforcement, which we consider in Chapter 6. 4.103 This chapter has also highlighted the importance of tailoring guidance for specific groups or sectors where a lack of knowledge or understanding of the minimum wage persists. We have welcomed the work that the DTI and HMRC are taking forward with the voluntary sector and with the television industry to develop a sensible and balanced approach to enforcement of the minimum wage while continuing to ensure that workers are protected. Where such guidance is available in relation to a particular sector or group and has been publicised effectively, there should be no further excuse for non-compliance. |
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