Young People and Trainees

In our 2006 Report we noted that the labour market for young people had been weakening over a number of years, most noticeably for those not in full-time education. The evidence shows that the sharp increase in the number of inactive 16­17 year olds since 1999 can be largely explained by the increased participation of this age group in full-time education, reinforced by the introduction of the Education Maintenance Allowance in 2004. However, 16­17 year olds not in full-time education have continued to experience a worsening of their labour market prospects since 2005 and at a somewhat faster rate than in the past. We remain particularly concerned about the number of 16­17 year olds (over 120,000 in England alone) who are not in education, employment or training.

Young people aged 18­21 have also continued to fare badly in the labour market when compared with older workers. We are concerned that, since 2001, 18­21 year olds not in full-time education have been experiencing a decline in employment and a rise in inactivity. Since 2004, their unemployment rate has also been increasing. Around 540,000 18­21 year olds not in full-time education were either unemployed or inactive in 2006. Eighteen year olds not in full-time education seem to have been the worst affected. By contrast, 21 year olds have seen their employment rate increase and unemployment rate decrease since 2005.

Conclusive evidence to explain the causes of this decline remains elusive. Evidence from research on the impact of the minimum wage on employers' demand for young people provides a mixed picture, with some firms strongly inclined to employ young employees while others state a preference for older, more experienced staff. While many employers choose to pay young people above the minimum wage applicable for their age, there is evidence of a small increase, since 2004, in the use of age-related pay below the adult rate of the minimum wage.

In the light of the evidence on the labour market prospects of young people, we remain convinced that there continues to be a need for lower National Minimum Wage rates for younger workers as a protective measure. However, we also continue to believe that the 21^st birthday remains the most appropriate cut-off point between the Youth Development Rate and the adult rate. The evidence shows that 21 year olds have fared better in the labour market than 18 and 19 year olds and that the overwhelming majority of them (nine in every ten) are paid at least the adult rate of the minimum wage. We recommend that the Government amend the regulations so that 21 year olds are entitled to the adult rate of the minimum wage.

As recommended in our 2006 Report, the Government abolished the little-used Older Workers' Development Rate with effect from 1 October 2006. At the same time, it removed the upper age limit on the twelve month exemption from the minimum wage for apprentices. A number of consultation respondents commented positively on the recommendation in our 2006 Report that we be invited to review the minimum wage treatment of apprentices and report in 2008. The Government has promised to consider this recommendation, but we still await a definitive response. We remain of the view that it would be appropriate for us to conduct such a review and have reiterated our earlier recommendation.

Introduction

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5.1 When recommending minimum wage rates for young people, we have tried to reconcile a number of different factors. We have aimed to ensure that they are not priced out of the labour market or encouraged out of education. We have also tried to protect their training opportunities. At the same time, we have always believed that young people should receive a fair rate of pay, otherwise they may feel undervalued as members of the workforce and become disillusioned with the world of work.

5.2 The evidence presented in our 2005 Report indicated that the minimum wage had not harmed the employment prospects of young people and that employment rates for 18­21 year olds had remained largely unchanged following the October 2003 upratings. However, in our 2006 Report we found that the position of 18­21 year olds in the labour market had deteriorated slightly. We also carried out a full assessment of the impact of the 16­17 year old rate, which was introduced in October 2004 to prevent the exploitation of young people in very low-paying jobs providing minimal training and few developments prospects. We concluded there was no evidence that it had encouraged these young people out of full-time education (FTE) or training, or damaged their prospects in the labour market and therefore we decided it was appropriate to increase the rate from its introductory level. However, we expressed concern about the weakening of the labour market position for 16­17 year olds not in FTE in recent years and the rise in the number of young people who are not in education, employment or training (NEET).

5.3 In this chapter we consider first the impact of the October 2005 upratings of the minimum wage on young people's labour market performance and participation in training and education. We then estimate the coverage of the October 2006 upratings and consider the impact on earnings. We go on to assess recent trends in the use of age-related pay and consider the role of the Youth Development Rate, including its age coverage. Finally, we consider training and the minimum wage exemption for apprentices.

Employment, Unemployment and Participation of Young People

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5.4 The UK labour market has remained remarkably robust since the introduction of the minimum wage although, as we noted in Chapter 2, recent performance has been more mixed. In some of our previous reports, we expressed concern about the relatively greater difficulties experienced by young people in the labour market compared with older workers. In this section, we consider whether these trends have continued, looking separately at the labour market position and participation in education and training of 16­17 year olds and 18­21 year olds.

Labour Market Position of 16­17 Year Olds

5.5 The number of 16­17 year olds has gradually increased since the 1990s, as has their share of the working age population. According to the Office for National Statistics (ONS) Labour Force Survey (LFS), in the third quarter of 2006, there were 1.58 million 16­17 year olds (0.81 million men and 0.77 million women) in the UK, making up 4.2 per cent of the working age population.

5.6 Most 16­17 year olds are in FTE and their number has been gradually increasing since the early 1990s, over and above population growth for the age group as a whole. As shown in Figure 5.1, the participation rate in FTE has therefore increased in real terms. In the year to the third quarter of 2005, 73.8 per cent of 16­17 year olds were in FTE compared with 71.9 per cent in Winter 1998. The increase in participation in FTE has been particularly marked in the last two years, increasing to 76.1 per cent in the year to the third quarter of 2006.

Figure 5.1

Proportion of 16­17 Year Olds in Full-time Education by Gender, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.7 The data suggest no adverse impact on participation in full-time education as a result of the introduction of the 16­17 year old minimum wage rate in October 2004. However, as we noted in our 2006 Report, the introduction of the minimum wage for this age group coincided with the national roll-out of the Education Maintenance Allowance (EMA) in September 2004 and it is therefore difficult to disentangle any specific effects of the minimum wage. Evidence from evaluation of the EMA pilots (Battistin et al, 2005) has shown that, among eligible young people, the EMA increased the proportion who were in full-time education at both age 16 and 17 by 6.1 percentage points. The effect was particularly strong for young men, and those who had been low or moderate achievers at the end of Year 11. Research by the London School of Economics (Dearden, Emmerson, Frayne and Meghir, 2006) also found that the EMA had improved retention in education.

5.8 We now examine in detail the labour market position of 16­17 year olds. It is important to note that small sample sizes and a high degree of proxy responses for this age group mean that the data presented below need to be treated with caution. Figure 5.2 illustrates the distribution of 16­17 year olds by education status and economic activity. In the third quarter of 2006, over three-quarters of 16­17 year olds (1.17 million) were in FTE, of whom over 369,000 were employed and 706,000 were economically inactive (i.e. neither in employment nor unemployed). Young women were more likely to be in FTE and employed than young men. Around 12 per cent of 16­17 year olds were not in FTE but employed, while 5.7 per cent were not in FTE and unemployed and 6.3 per cent were not in FTE and inactive. This shows that it is important to consider the labour market position of young people in the light of their participation in FTE as it will have a significant impact on their patterns of economic activity.

Figure 5.2

Labour Market Status of 16­17 Year Olds by Education Status, UK, 2006

Source: LPC estimates based on LFS Microdata, four quarter moving average, UK, Q4 2005 ­ Q3 2006.

5.9 Figure 5.3 shows the trend in employment, unemployment and inactivity among 16­17 year olds in FTE since the introduction of the minimum wage. After remaining fairly stable between the end of the 1990s and the first few years of the 2000s, the employment rate of this age group started declining in mid-2003, predating the introduction of the 16­17 year old minimum wage rate in October 2004. This decline in employment has been associated with a rise in inactivity among those in FTE which accounts largely for the rise in inactivity among all 16­17 year olds. The fall in employment and rise in inactivity seem to have accelerated since the end of 2004, coinciding with the national roll-out of the EMA.

Figure 5.3

Proportion of 16­17 Year Olds in Full-time Education in Employment, Unemployment and Inactivity, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.10 Focusing on 16­17 year olds not in FTE, Figure 5.4 shows that their employment rate has been declining since mid-1999. This decline in employment has been associated mainly with a rise in the proportion of those who are inactive and more recently, but to a lesser extent, with an increase in unemployment. Between the third quarter of 2005 and the third quarter of 2006, the employment rate fell from 55.7 per cent to 49.9 per cent while inactivity rose from 21.8 per cent to 26.3 per cent, overtaking the proportion of unemployed 16­17 year olds not in FTE, which increased from 22.5 per cent to 23.7 per cent. This represents an unemployment rate of 32.2 per cent, compared with a working age national average of 5.4 per cent over the same period.

Figure 5.4

Proportion of 16­17 Year Olds Not in Full-time Education in Employment, Unemployment and Inactivity, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.11 Figure 5.5 provides a breakdown of 16­17 year olds not in FTE and economically inactive by the reason they have given for inactivity. These figures should be treated with care due to the high level of proxy responses. In the year to the third quarter of 2006, over half of inactive 16­17 year olds said they were students doing part-time studies, with the proportion increasing significantly since 1998. The remainder of inactive 16­17 year olds were made up of those who had caring responsibilities (in sharp decline compared to 1998), those who were looking for or wanted to work but were not classified as unemployed (slightly down), and those who said they would not like to work.

Figure 5.5

Reasons for Inactivity Among 16­17 Year Olds Not in Full-time Education, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: There is discontinuity in the series as the LFS moved from seasonal to calendar quarters in 2006; thus comparisons should be made with care.

5.12 The increase in the proportion of economically inactive 16­17 year olds not in FTE who said they were engaged in some form of education or training may partly explain the rise in inactivity among this age group. However, of particular concern to us are those who are NEET. According to the Department for Education and Skills (DfES, 2006d), the size of the 16­17 year old NEET group in England remained fairly stable from 1999 at around 7 to 8 per cent, but it increased to about 9 per cent in 2004 (114,000) and 2005 (124,000). In 2005, 10 per cent of 16 year old men were NEET compared with 6 per cent of women, and 13 per cent of 17 year old men were NEET compared with 9 per cent of women. For both 16 and 17 year olds, male NEET rates have increased faster than female NEET rates. The Scottish Executive (2006b) estimates that 14 per cent (36,000) of 16­19 year olds in Scotland were NEET in 2005.

5.13 There is currently a lack of evidence offering a convincing explanation for the growth of the NEET group. The Youth Cohort Study (YCS) (DfES, 2005a) shows that in 2004, 16 year olds whose parents were in higher professional occupations were much less likely to be NEET than those whose parents were in routine occupations. The YCS also found that the likelihood of not being NEET fell significantly as attainment at year 11 increased. Almost two out of five young people who said they were persistent truants in year 11 were NEET, a rise of 10 percentage points since 2000.

5.14 To sum up, since 1999 there has been a sharp decline in the employment rate of 16­17 year olds accompanied by a corresponding rise in inactivity. These trends can be explained to a great extent by the increased participation of 16­17 year olds in FTE as most of these young people are classified here as economically inactive. The labour market prospects of the decreasing number of 16­17 year olds not in FTE have been worsening since 1998 and at a somewhat faster rate since 2005, with a decline in employment and a rise in inactivity. However, there has been a substantial increase in the number of 16­17 year olds not in FTE who are defined as economically inactive but are engaged in part-time education. The proportion of 16­17 year olds who are NEET has remained fairly constant since 1992, although there is evidence of a small increase since 2004.

Labour Market Position of 18­21 Year Olds

5.15 The population of 18­21 year olds has increased steadily since 1999. According to the ONS 2005 mid-year population estimates, there were 3.2 million 18­21 year olds, accounting for about 8.5 per cent of the working age population.

5.16 The employment rate of 18­21 year olds rose steadily between 1997 and the end of 2000, apparently unaffected by the introduction of the minimum wage. However, since then it has been slowly but steadily declining. This fall in employment has been accompanied by an increase in the rate of inactivity and, more worryingly, since 2004 by a sharp increase in the unemployment rate, which rose from 12.4 per cent in Autumn 2004 to 14.9 per cent in the third quarter of 2006. To understand fully the dynamics of the labour market for 18­21 year olds, it is important to consider separately those who are in FTE and those who are not. Figure 5.6 shows participation rates in FTE for this age group. Not surprisingly, 18 year olds have the highest participation rate in FTE, at around 50 per cent, compared with just over a quarter of 21 year olds. The proportion of 18­21 year olds in FTE has been slowly increasing since the end of the 1990s. This in itself would tend to depress the trend in the employment rate for this age group, since full-time students are less likely to be employed. However, the effect is likely to be small.

Figure 5.6

Participation of 18­21 Year Olds in Full-time Education, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.17 In the third quarter of 2006, 1.17 million 18­21 year olds (38 per cent) were in FTE. Figure 5.7 shows that the employment rate of those in FTE remained fairly stable after the introduction of the minimum wage in 1999 until the beginning of 2004 when it started to decline. The 18 months to the third quarter of 2006 have seen a slight increase in the employment rate again.

Figure 5.7

Employment, Unemployment and Inactivity Rates of 18­21 Year Olds in Full-time Education, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.18 As shown in Figure 5.8, the decline in the employment rate of 18­21 year olds not in FTE has been more marked since 2004. The decline in employment was sharpest among 18 year olds, widening the gap between that age group and 19­21 year olds. Between the third quarter of 2005 and the third quarter of 2006 alone, the employment rate of 18 year olds fell from 69.9 per cent to 64.8 per cent. By contrast, during the same period, the employment rate of 21 year olds increased from 73.5 per cent to 74.5 per cent.

Figure 5.8

Employment Rates of 18­21 Year Olds Not in Full-time Education, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.19 The trends in the unemployment rates of 18­21 year olds not in FTE, shown in Figure 5.9, have mirrored the trends in employment. After a decline in unemployment throughout the late 1990s, the unemployment rate levelled off before rising again in Spring 2004. In the third quarter of 2006, it stood at 15.7 per cent. Again, 18 year olds, who have consistently experienced a higher unemployment rate than 19­21 year olds, seem to have been hit the hardest, with their unemployment rate rising from 18.4 per cent in the third quarter of 2005 to 22.5 per cent in the third quarter of 2006. Twenty-one year olds, on the other hand, have seen their unemployment rate decline by 0.7 percentage points to 12.7 per cent during the same period.

Figure 5.9

Unemployment Rates of 18­21 Year Olds Not in Full-time Education, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.20 Figure 5.10 shows that the inactivity rates of 18­21 year olds not in FTE have remained fairly stable since 2003. In the third quarter of 2006, 15.5 per cent of 18­21 year olds not in FTE were economically inactive. The increase in inactivity was sharpest among 18 and 19 year olds who now have similar inactivity rates to 20 and 21 year olds. In the third quarter of 2006, nearly one in five 18­21 year olds not in FTE said they were inactive because they had caring responsibilities, compared with over half in 1998. Nearly a quarter said they were students, while just over 10 per cent said they would not like to work.

Figure 5.10

Inactivity Rates of 18­21 Year Olds Not in Full-time Education, UK, 1998­2006

Source: LPC estimates based on LFS Microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998­2006.

Note: 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.

5.21 To summarise, 18­21 year olds have experienced a worsening of their labour market position. Of concern is the decline in employment and rise in inactivity they have been experiencing since 2001. Since 2004, their unemployment rate has been increasing. Amongst this age group, eighteen year olds have been the most adversely affected. By contrast, the labour market prospects of 21 year olds have improved since 2005, with employment rising and unemployment declining.

Demand for Young People

5.22 There is no hard evidence to explain this worsening in the labour market position of young people. As we noted in Chapter 2, the total UK labour supply has increased in recent years, driven by the rise in labour market participation among older workers and the recent arrival of young migrant workers from the European Union Accession countries. One explanation might be that some young people are being substituted by older workers or migrants but little evidence is available at present to substantiate this hypothesis. For instance, Blanchflower, Saleheen and Shadforth (2007) found no statistically significant relationships between the rise in youth unemployment rates across regions and changes in regional shares of new migrants, older worker activity rates or shares of workers affected by the minimum wage.

5.23 Young people are disproportionately represented in the low-paying sectors and are therefore more likely to be paid the minimum wage. According to the LFS, three-quarters of 16­17 year olds and over half of 18­21 year olds were working in low-paying sectors in the year to the third quarter of 2006. Those in FTE were particularly likely to work in low-paying sectors. A high proportion of 16­21 year olds are employed in retail and hospitality, but other sectors such as social care; leisure, travel and sport and hairdressing also have a higher than average proportion of young employees.

5.24 The LFS also shows that between 1998 and 2006, the proportion of 18­21 year olds working in low-paying sectors increased (from 52 to 63 per cent), as did the employment share of workers of retirement age. By contrast, the proportion of 16­17 year olds in low-paying sectors declined over this time period (from 69 to 60 per cent).

5.25 Evidence from other sources indicates that the minimum wage has had little impact on employers' demand for young people. Results from our latest survey of low-paying sectors (detailed results can be found at Appendix 3) showed that the October 2005 upratings had little impact on the decisions of employers with age-related pay structures to employ young workers. Research we commissioned from the Institute for Employment Studies (Denvir and Loukas, 2006) on the impact of the minimum wage on three low-paying sectors suggested that successive upratings in the minimum wage have led to some firms being more likely to employ younger, less experienced workers because they could be paid at a lower rate. Conversely, other firms stated a preference for older, experienced staff in order to justify the rates that had to be paid, or because they tended to stay longer. One interviewee noted that the workforce was being 'split between these very young trainees and staff who are a lot older with a great deal of experience in the business', with the result that 'the middle market is missing out'.

Earnings

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16­17 Year Olds

5.26 Figure 5.11 illustrates the hourly earnings distribution of 16­17 year olds since the introduction of the £3.00 minimum wage rate for this age group in October 2004. The upward shift in the distribution indicates that some 16­17 year olds have benefited from the introduction of the 16­17 year old rate, but more notably from upratings of the Youth Development Rate and the adult rate. The main peaks in the hourly earnings distribution at April 2006 are at the Youth Development Rate (£4.25) and adult rate (£5.05), but there were also two noticeable mezzanine levels at £4.00 and £4.20 ­ one in ten jobs held by 16­17 year olds paid between these two rates in April 2006. The peak at £3.00 is much smaller, highlighting the relatively small proportion of 16­17 year olds paid at the 16­17 year old rate.

Figure 5.11

Hourly Earnings Distribution for Employees Aged 16­17, UK, 2004­2006

Source: LPC estimates based on Annual Survey of Hours and Earnings (ASHE) with supplementary information, low-pay weights, UK, April 2004­2006.

Note: Labels show the adult minimum wage (NMW), Youth Development Rate (YDR) and 16­17 year old rate in April of the given year.

5.27 Table 5.1 shows the proportion of jobs held by 16­17 year olds which paid below the 16­17 year old rate, the Youth Development Rate and the adult rate applicable in April of the relevant year. In April 2006, 4.3 per cent of jobs held by 16­17 year olds were paying below the 16­17 year old rate. The proportion of jobs held by employees in that age group paid below the Youth Development Rate increased from over a quarter in 2004 to nearly a third in 2006. By contrast, the proportion of jobs held by 16­17 year olds paid at the adult rate and above remained more stable at around 40 per cent over this period.

Table 5.1

Jobs Held by 16­17 Year Olds Paying Below the 16­17 Year Old Rate, Youth Development Rate and Adult Rate, UK, 2004­2006

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

18­21 Year Olds

5.28 Figure 5.12 shows that 18­21 year olds have also continued to benefit from upratings of the minimum wage. The main peaks in the hourly earnings distribution coincide with the adult rates and, to a lesser extent, the Youth Development Rate. Threshold levels are also noticeable at £5.00 per hour in 2003 and 2004, before the October 2005 uprating displaced the spike to £5.05, and at £5.50 and £6.00 per hour in all three years.

Figure 5.12

Hourly Earnings Distribution for Employees Aged 18­21, UK, 2004­2006

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

Note: Labels show the adult minimum wage (NMW) and Youth Development Rate (YDR) in April of the given year.

5.29 In previous reports, we have commented on the fact that a higher proportion of employers tend to make use of the flexibility offered by the Youth Development Rate immediately following a large uprating of the adult rate. Table 5.2 shows that the relationship between use of the Youth Development Rate and the size of upratings has not been as evident in recent years. In April 2002 and 2004, two years in which there were relatively large upratings of the adult rate of the minimum wage (the October 2001 and 2003 upratings respectively), the proportion of jobs held by 18­21 year olds paying below the adult rate was higher than in 2000, 2001 and 2003. However, use of the flexibility afforded by the Youth Development Rate has been increasing every year since 2004, despite the fact that the October 2005 uprating of the adult rate was relatively smaller. Nevertheless, in April 2006, over four-fifths of jobs held by 18­21 year olds paid at or above the adult rate. Just under 2.5 per cent of jobs were paid below the Youth Development Rate, which is likely to reflect use of the apprenticeship exemptions.

Table 5.2

Jobs Held by 18­21 Year Olds Paying Below the Youth Development Rate and Adult Rate, UK, 1999­2006

Source: ONS central estimate methodology LFS and ASHE without supplementary information, Spring 1999­2004. LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2004­2006.

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

5.30 In Table 5.3, we look at those young workers paid in April of each year below the minimum wage rates due to be implemented later that year, and thus who stand to benefit from the upratings. The proportion of jobs held by 18­21 year olds that paid below the forthcoming adult rate was at its highest in 2001 and 2004, which saw relatively large upratings in the adult rate, but also in 2006, a year with a relatively modest increase in the rate. This is consistent with the observation above that use of the flexibility offered by the Youth Development Rate has increased in the last two years.

Table 5.3

Jobs Held by 18­21 Year Olds Paying Below the Forthcoming Youth Development Rate and Adult Rate, UK, 1999­2006

Source: ONS central estimate methodology LFS and ASHE without supplementary information, Spring 1999­2004. LPC estimates based on ASHE with supplementary information, low-pay weights, UK, April 2004­2006.

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

5.31 Figure 5.13 illustrates how the hourly earnings distribution of 18­21 year olds relates to that of employees aged 22 and over for the bottom half of the distribution, as well as the relationship between the Youth Development Rate and the adult rate applicable in the years shown. Our approach so far has been to keep the ratio of the Youth Development Rate to the adult rate fairly constant. When it was introduced in April 1999, the Youth Development Rate was worth about 83 per cent of the adult rate before increasing to 87 per cent of the adult rate in April 2000. Since then, in response to the weakening of the youth labour market, the ratio of the Youth Development Rate to the adult rate has steadily decreased to reach 83 per cent again in October 2006. The introduction of the minimum wage has helped to raise the lowest decile of the earnings distribution for 18­21 year olds relative to that of adults: young people's lowest decile earnings were 77 per cent of adults' lowest decile earnings in 1998 before the minimum wage was introduced and have remained at around 81­82 per cent since its introduction. The relative value of young people's earnings to those of adults aged 22 and above at the lowest quartile and median has remained fairly constant since the introduction of the minimum wage and through subsequent upratings.

Figure 5.13

Gross Hourly Earnings of 18­21 Year Olds Relative to Employees Aged 22 and Over, UK, 1998­2006

Source: LPC estimates based on ASHE without supplementary information, low-pay weights, UK, April 1998­2003 and ASHE with supplementary information, low-pay weights, UK, April 2004­2006.

Note: There is a break in the ASHE series between 2003 and 2004. Thus direct comparisons should be made with care.

5.32 Figure 5.14 shows how the 'bite' of the various minimum wage rates, defined as the ratio of the minimum wage applicable to a particular age group to the median earnings of that age group, has changed over time. The bite of the minimum wage applicable for the age group in relation to median earnings is higher for 16­17 and 18­21 year olds than for adults aged 22 and over as young people are generally lower paid, but the bite in relation to the bottom decile is much closer between young and adult workers. For 18­21 year olds, the ratio of the Youth Development Rate to median earnings has been increasing at a faster rate than the ratio of the adult rate to the median earnings of adults, especially in the last two years. It was 73.5 per cent in April 2006, compared with 70.5 per cent in 2004. The ratio of the 16­17 year old rate to median earnings decreased between 2005 and 2006 because it was not uprated in 2005.

Figure 5.14

Ratio of the Minimum Wage to Median Earnings by Age Group, UK, 2000­2006

Source: LPC estimates based on ASHE without supplementary information, low-pay weights, UK, April 2000­2003 and ASHE with supplementary information, low-pay weights, UK, April 2004­2006.

Note: There is a break in the ASHE series between 2003 and 2004. Thus direct comparisons should be made with care.

Coverage

5.33 Our 2006 Report estimated that around 110,000 jobs held by 18­21 year olds were covered by the October 2005 uprating of the Youth Development Rate. Between 110,000 and 140,000 jobs were forecast to be covered by the 2006 uprating. Using April 2006 ASHE data, we now estimate that 106,000 to 109,000 jobs held by those aged 18­21 (around 5.8­6.0 per cent of all jobs for this age group) were covered by the October 2005 uprating of the Youth Development Rate, and that 121,000­123,000 jobs (around 6.2­7.9 per cent of all jobs for this age group) would have been covered by the October 2006 uprating.

5.34 Our 2006 Report estimated that up to 32,000 jobs would benefit from the October 2006 uprating. We now calculate that around 25,000 jobs (7.2 per cent) were covered by the 2006 uprating. This is likely to be an upper estimate as the exemptions for apprentices and those on pre-apprenticeship programmes will reduce the number of young workers who were actually covered by the upratings.

5.35 In summary, we have seen that young workers have continued to benefit from increases in the youth rates. In addition, a substantial number of young people are paid well above the youth rates and have therefore benefited from the upratings of the adult rate. However, the proportion of 18­21 year olds who are paid below the adult rate has been increasing following the October 2004 and 2005 upratings. The use of age-related pay is considered in more detail in the next section.

Use of Age-related Pay

5.36 There is a clear relationship between age and earnings, as illustrated by Table 5.4 below. Lowest decile hourly earnings rise with age, reflecting increasing skills and experience and the fact that a high proportion of young people are employed in low-paying sectors. In all three years, the lowest decile hourly pay of 18 year olds has been equal or very close to the Youth Development Rate applicable in April and the lowest decile hourly pay of 19 year olds is much lower than that of 20 year olds. By contrast, over the last three years the lowest decile earnings of 21 year olds have equalled the adult rate applicable in April (£4.50 in 2004, £4.85 in 2005, and £5.05 in 2006).

Table 5.4

Gross Hourly Earnings for Young People by Age, UK, 2004­2006

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

5.37 Figure 5.15, which shows the proportion of employee jobs paid at or below a certain hourly rate in April 2006, illustrates how earnings increase with every single year of age at every point of the distribution. Jumps in the distribution are noticeable at the various minimum wage rates but also at threshold hourly rates such as £4.00. There is a very clear demarcation between the cumulative earnings distributions of 16­17 year olds and 18­21 year olds, with the majority of jobs held by 16­17 year olds paying below the adult rate. The use of the adult rate increases with age: in April 2006, 69 per cent of jobs held by 18 year olds paid at or above the adult rate, rising to 80 per cent for 19 year olds, 87 per cent for 20 year olds and 91 per cent for 21 year olds. This also reflects the fact that the proportion of young employees in low-paying sectors decreases with age.

Figure 5.15

Cumulative Hourly Earnings Distribution by Age, UK, 2006

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

Note: Labels indicate the 16­17 year old rate, Youth Development Rate (YDR) and adult rate (NMW) applicable in April 2006.

5.38 As we saw earlier in this chapter, the earnings data show that in the last three years, the proportion of jobs held by 18­21 year olds paying at the adult rate and above, although very high, has been decreasing, irrespective of the size of the upratings. Figure 5.16 shows use of the adult rate over time by single year of age. Among workers aged 18­21, there has been a slight decline in the proportion of jobs paying at or above the adult rate, but the decline seems more pronounced for 18 and 19 year olds than for 20 and 21 year olds. In 2006, 91 per cent of jobs held by 21 year olds paid at or above the adult rate. This means that fewer than 50,000 jobs held by 21 year olds paid below the adult rate in April 2006.

Figure 5.16

Proportion of Employee Jobs Paying At or Above the Adult Rate of the National Minimum Wage by Age, UK, 2000­2006

Source: LPC estimates based on ASHE without supplementary information, low-pay weights, April 2000­2003 and ASHE with supplementary information, low-pay weights, April 2004­2006.

Note: There is a break in the ASHE series from 2004; thus comparisons between the two series should be made with care.

5.39 Evidence from research we commissioned, our Employers' Survey and our consultation provided a mixed picture of the use of age-related pay, with different trends across the low-paying sectors. Incomes Data Services (IDS, 2006b) found some evidence that a trend it had observed in recent years in the retail sector towards raising the age threshold for payment of adult rates, attributable to the impact of the minimum wage, had reversed. It reported that a number of large retail firms had lowered the threshold to 18 years old, although many large retailers continued to pay a single lower rate for workers under the age of 18. This finding was supported by written evidence from the British Retail Consortium based on a survey of multiple retailers. This survey found that around nine in ten employees aged 21 and below received at least the adult rate of the minimum wage, which was higher than the equivalent figure (69 per cent) in its 2005 survey. Similarly, the vast majority of multiple retailers paid 16­17 year olds above the minimum wage for this age group, with around four-fifths paying £4.25 or more in April 2006. However, use of the youth rates was much more common among small and medium-sized retailers with fewer than 250 employees.

5.40 However, ASHE data show that in 2006, the low-paying sectors had a smaller proportion of jobs held by employees aged 18­21 paid at or above the adult rate than other sectors and that the proportion had declined faster in the last three years. This was particularly the case in the hospitality sector, where 63 per cent of jobs held by employees aged 18­21 were paid the adult rate in 2006 compared with 81 per cent in 2004. This decline was most pronounced among 18 and 19 year olds. In the retail sector, the data seem to corroborate IDS findings of a reversal of the decline in the use of the adult rate, with 84 per cent of jobs held by 18­21 year olds paying above the adult rate in 2006 compared with 83 per cent in 2004 and 88 per cent in 2000.

5.41 Within the childcare sector, an IDS survey (IDS, 2006b) found that nurseries employed a substantial number of staff under the age of 22. Just over a third of the 94 respondents reported use of age-related pay, with 22 years of age the most common threshold for payment of the full adult rates. However, in the hotel sector, IDS found that the payment of adult rates from the age of 18 was fairly common. Only three of the 20 hotels and hotel groups in its survey paid their full adult rate from the age of 22.

5.42 This was also a theme during our visits across the UK to meet employers and workers affected by the minimum wage. Many employers paid above the 16­17 year old rate and the Youth Development Rate in order to attract staff or because they felt it was unfair to pay a lower rate for the same work. During a Commission visit to Birmingham, a group of pub companies and licensees from the British Beer and Pub Association told us it was common practice to pay adult rates from the age of 18 because employers did not feel they could justify paying a lower rate of pay to a younger member of staff doing identical work alongside an older worker. However, the Birmingham Chamber of Commerce did sound a note of caution with regards to young people from deprived areas of the city who had experienced long spells of unemployment. It feared some had been priced out of employment as a result of the youth rates.

5.43 Our survey of low-paying sectors showed that, compared with the 2004 survey, fewer employers reported making use of age-related pay structures, but a greater proportion of these employers said they paid younger workers below the adult rate. Around 14 per cent of respondents reported using age-related pay structures in the 2006 survey, compared with 20 per cent in the 2004 survey. The survey also showed that a high proportion of respondent firms paid their young employees more than the minimum wage applicable for their age. Around a fifth of businesses with age-related pay structures reported paying their 18 year old employees above the Youth Development Rate and this proportion went up to 57 per cent for 21 year olds. It should be noted that the survey is biased towards those businesses most likely to be affected by the minimum wage.

5.44 We also asked those same respondents at which age they started paying the adult rate. Around 44 per cent of firms reported starting to pay the adult rate at 22 compared with 22 per cent in the 2004 survey, suggesting a growing use of youth rates among those with age-related pay.

5.45 Our analysis has shown that, while many employers choose to pay young people above the minimum wage applicable for their age, earnings at the lower end of the distribution continue to be significantly lower than those of older workers. There is also evidence of an increased use of age-related pay. In the next section, we consider how the use of age-related pay fits with new legislation outlawing discrimination at work on the grounds of age.

The Minimum Wage and Age Discrimination

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5.46 An exemption within the Employment Equality (Age) Regulations 2006 permits employers to continue to base their pay structures on the three minimum wage rates in place for 16­17 year olds, 18­21 year olds and workers aged 22 and above. Employers may pay 16­17 year old workers less than those aged over 17, and may pay 18­21 year olds less than those aged over 21. However, the specific minimum wage exemption only applies if young workers under the age of 22 are paid less than the adult rate. The Government believes that the exemption can be objectively justified, as is countenanced by the European Employment Directive that the Regulations are designed to implement, on the grounds that it supports a legitimate employment policy aim of avoiding damage to youth employment.

' The rate for young workers aged 16 and 17 has been introduced at a modest level and should be substantially increased in future years. The TUC is keen to see the rate for this age group set at a level that will be high enough not only to prevent exploitation but also to send the message to young workers in their formative years that employment brings worthwhile rewards. '
TUC evidence

5.47 A number of consultation responses commented on the continued use of youth rates within the minimum wage structure in the context of the new legislation, as we discuss below.

Stakeholders' Views

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5.48 Trade union respondents to our consultation consistently argued that the age threshold for entitlement to the adult minimum wage rate should be lowered from 22 years of age. The TUC suggested this could be achieved by phasing down the age threshold over a number of years, beginning with 21 year olds. While several unions believed that the adult rate should, as a matter of principle, apply from the age of 16, there was a general consensus that, as a first step, it should apply from the age of 18 and that the 16­17 year old rate ought to be increased substantially. The YWCA England and Wales expressed concern that the low level of the 16­17 year old rate was causing poverty and hardship for some young women.

5.49 In the unions' view, a lowering of the age for entitlement to the adult minimum wage would not have an adverse impact on the employment prospects of young people. The Union of Shop, Distributive and Allied Workers (Usdaw) reported that many retailers already paid adult rates from the age of 18 for a variety of reasons including competitive pressures, to maintain morale among staff and in recognition of the fact that 18 is the usual age of maturity. The Transport and General Workers' Union (T&G) noted that where it had negotiated the removal of lower youth rates 'there is no evidence that this has led to a decrease in young people employed'. ' The CBI has consistently argued that young workers are one of the most vulnerable groups in the labour market and inflexible minimum wages could threaten high unemployment among young people. '
CBI evidence

5.50 Responses from employer organisations were more cautious and stressed that the lower youth rates were necessary to ensure that young people's employment prospects were not damaged. The CBI noted that the incidence of low pay was considerably higher among younger workers and argued that the lower rates helped to maintain their employment levels and 'make up for lower productivity among younger and inexperienced workers'. The British Chambers of Commerce indicated that the Youth Development Rate was already too high and should be scaled back to £4.35. There were few comments on the 16­17 year old rate, although the British Hospitality Association stated that its members had welcomed its introduction and it had not been a source of difficulty. The Business Services Association suggested that there was room to increase both the 16­17 year old rate and the Youth Development Rate at least in proportion to the next increase in the adult rate to ensure that the minimum wage provided sufficient work incentives for the young. It added that most of its members paid the full minimum wage regardless of age. However, the Newspaper Society was concerned that a higher rate for 16­17 year olds might reduce the number of entry level first jobs that provided a way into the newspaper industry.

' Young people are one of the lowest paid and [most] vulnerable groups of workers, which is why they are the most in need of a decent level of wage protection. The current minimum wage of just £3 per hour [in September 2006] for 16 and 17 year olds does not provide adequate protection and leaves them open to exploitation by unscrupulous employers. '
BYC evidence

 5.51 Some respondents questioned the continued legitimacy of the youth rates following the introduction of new laws banning age discrimination at work. The British Youth Council (BYC) argued that lower statutory minimum wages for younger people contravened the spirit, if not the letter, of the legislation. It suggested that we had paid insufficient attention to the fact that a sizeable minority of young people had no choice but to leave school at 16 to seek employment. It added, 'Low pay can lead to problems around health, educational failure and social exclusion. The impact of this can be even more damaging for younger workers whose future may be at least partially determined by their first experiences of work.' Usdaw suggested that the treatment of the youth rates under the age discrimination legislation might lead to a levelling down of pay rates for young people such that the adult rate became 'not a minimum but a maximum wage for young people', which would, in its view, undermine both the aim of the new provisions to reduce age discrimination and the aim of the minimum wage to increase pay. ' ... caution is required to ensure that any increases in the NMW that might have negative employment consequences for younger workers are avoided. Younger workers are also typically less skilled and productive than older workers. For these reasons a lower National Minimum Wage development rate is in place that seeks to protect young workers while not jeopardizing their employment prospects. '
Government evidence

The Role of the Youth Rates

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5.52 In implementing the age discrimination legislation, the Government shared our concern that, without the flexibility afforded by the lower minimum wage youth rates, the employment prospects of young people could suffer. Our 2005 Report recorded our concerns that, if employers were required to pay the adult minimum wage rate to young workers, the already poor position of young people in the labour market might be exacerbated. The evidence we have examined in this chapter has shown that young people have continued to fare badly in the labour market, with higher unemployment and inactivity rates and lower employment rates than older workers and there is some evidence that the position has worsened recently. We believe, therefore, that the principle of lower National Minimum Wage rates for younger workers continues to be justified as a protective measure. We note that the minimum wage exemption from the age discrimination provisions and pay practices in individual firms may be tested via legal challenges. We will continue to pay close attention to the position of young workers in the labour market and to the appropriateness of the lower rates for workers under the age of 22.

Twenty-one Year Olds

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5.53 Since our First Report (1998) on the minimum wage, we have consistently recommended that 21 year olds should be entitled to the adult rate of the minimum wage. In our 2005 Report, we stated that it was important that the Youth Development Rate should remain in place but it should only apply to those age groups who were at risk of adverse employment effects arising from the minimum wage. We judged that the most appropriate cut-off point between the Youth Development Rate and the adult rate was the 21^st birthday. However, we were disappointed to record in our 2006 Report that the Government had decided once again to reject this recommendation, citing concerns in its response to our 2005 Report that the economic evidence was mixed and that the employment prospects of 21 year olds remained behind those of 22 year olds and not much better than those of 20 year olds.

5.54 The latest data on 21 year olds indicate that, unlike 18­20 year olds, the labour market position of 21 year olds has improved since 2005. The earnings data also show that the overwhelming majority of 21 year olds are paid at least the adult rate of the minimum wage. Thus a move to lower the age threshold for entitlement to the adult rate from the 22^nd to the 21^st birthday is likely to have minimal impact on employers. Therefore, we recommend again that 21 year olds should be entitled to the adult rate of the National Minimum Wage.

Trainees

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Introduction

5.55 We have always taken the view that the minimum wage should be sufficiently flexible to encourage employers to offer good quality training opportunities. Previous reports have examined the extent to which the National Minimum Wage is a factor in determining employers' training strategies and this section begins by considering recent findings from our research programme. We have been particularly concerned that the minimum wage should not disadvantage young people entering the labour market who may need to develop skills and experience in order to become fully productive members of the workforce. In our 2005 and 2006 Reports we looked in detail at two provisions designed to offer some recognition of the training costs incurred by employers and ensure that the minimum wage does not act as a barrier to training in the workplace: below we outline recent developments in relation to the Older Workers' Development Rate and the treatment of apprentices. A number of stakeholders commented this year on the recommendation in our 2006 Report that we review the exemptions for apprentices and report in 2008. We summarise the views expressed and review our earlier recommendation.

The Minimum Wage and Employers' Training Strategies

5.56 In previous reports we have examined the impact of the minimum wage on the provision of training by employers. For some, the minimum wage could act as a spur to increase training in order to improve productivity ­ for example by ensuring staff are multi-skilled to cover various roles. In contrast, other businesses may seek savings by cutting back on training of existing staff, or be more reluctant to take on new staff who require training. We have commissioned a number of research projects on this topic over the past few years, which found little evidence that the minimum wage has had any significant impact on the provision of training, although employers in the hairdressing sector have indicated a reluctance to hire older trainees on cost grounds. In general, the research has found that changes to training provision are a response to changing business circumstances rather than being due to the minimum wage.

5.57 Following the more substantial upratings of the adult rate in recent years, we commissioned further research to examine whether there were any signs that the National Minimum Wage was now influencing firms' decisions about workforce training. Using the LFS, Dickerson (2007) found that the minimum wage appears to have had no statistically significant impact on the provision of job-related education or training. The result held true for different groups including men, women, adults and young workers. Similarly, in examining the impact of the minimum wage on 510 firms in three low-paying sectors, Denvir and Loukas (2006) found that only 6 per cent of firms made changes to training and skill levels that were attributed to the introduction or subsequent upratings of the minimum wage. Most commonly this was to justify changes in pay or increase staff flexibility. These findings may also help to explain why few employers have made use of the Older Workers' Development Rate.

The Older Workers' Development Rate

5.58 The Older Workers' Development Rate applied to workers aged 22 and over starting a new job with a new employer and doing accredited training on at least 26 days during the first six months of the employment. The rate had generally been set at the same level as the Youth Development Rate since the minimum wage was introduced in April 1999. As we discussed in our 2005 Report, it was intended as an incentive for employers to train new staff, but uptake had been consistently very low. The evidence suggested that this was due to a lack of awareness and to the complexity and costs associated with accredited training schemes. Our 2005 Report provisionally concluded that the Older Workers' Development Rate was unnecessary and this conclusion was confirmed in our 2006 Report. The Government accepted our recommendation and abolished the rate with effect from 1 October 2006. There was no comment on this step in our latest consultation evidence suggesting that, as we would have expected, there has been little impact.

The Apprenticeship Exemptions

5.59 We reviewed the twelve months' exemption from the minimum wage for apprentices under the age of 26 and the exemption for all apprentices under the age of 19 in our 2005 Report and concluded that they were working well. For the purposes of the minimum wage, apprentices are workers who either have contracts of apprenticeship or are taking part in specified Government training programmes. We were concerned, however, that the upper age limit of 26 for the twelve months' exemption might not be compatible with the Equal Treatment Directive (2000/78/EC). In our 2006 Report, we confirmed our provisional recommendation that this upper age limit should be removed. The Government accepted our recommendation and with effect from 1 October 2006, the one year exemption applies to all apprentices aged 19 and over with no upper age limit. This change, and the abolition of the Older Workers' Development Rate, were covered in the Employment Equality (Age) Regulations 2006 (DTI, 2006a). There has been no change to the treatment of apprentices under the age of 19.

5.60 In our 2004 Report we stated that we would wish to look at the position of apprentices and pre-apprentices in a few years' time and to consider whether the exemption for apprentices under the age of 19 should be retained following the introduction of the 16­17 year old rate in October 2004. We noted that pay rates for 16 and 17 year old apprentices were often low, to some extent reflecting the fact that the majority were working towards a level 2 qualification rather than more advanced qualifications. We expressed concern that the application of the minimum wage to these apprentices after one year of employment could deter employers from providing training.

5.61 However, in our 2006 Report we recorded the concerns of trade unions that the apprentice exemptions were being abused by some employers who offered little or low quality training and that low pay was contributing to high non-completion rates. We stated that it would be too soon to report on any impact of the abolition of the Older Workers' Development Rate or the removal of the upper age limit on the apprenticeship exemption in our 2007 report. The report also noted other developments in England such as the requirement introduced by the Learning and Skills Council (LSC) in August 2005 that waged apprentices receive a minimum of £80 per week from their employer, and the extension of EMA entitlement to unwaged apprentices in April 2006. For these reasons we recommended in our 2006 Report that we review the apprenticeship exemptions and report in 2008.

Stakeholders' Views

5.62 Several trade unions referred to the recommendation in our 2006 Report and called for a review of the treatment of apprentices; in general they believed that such a review ought to lead to the removal of the minimum wage exemptions. The T&G and UNISON did, however, accept that there might be a need to apply a lower rate of pay to workers undergoing training. The TUC was concerned about the 'exploitative rates' paid to some apprentices and both UNISON and the BYC suggested this could lead to disillusionment on the part of young people, who might abandon their training in favour of, in the BYC's words, 'better paid, dead end jobs'. The Scottish TUC (STUC) focused on apprentices in its submission. It suggested that the exemptions were open to abuse and added that drop out rates in certain sectors such as hairdressing and hospitality were unacceptably high.

5.63 A number of respondents, including the TUC, STUC, BYC and the Equal Opportunities Commission (EOC), drew attention to the pay gap between male and female apprentices, largely a consequence of occupational segregation. A 2005 survey for the Department for Education and Skills (DfES, 2005b) had reported wide variations in apprentice pay in England. The research found that, since women made up the overwhelming majority of trainees in the lower-paying sectors such as childcare and hairdressing, the average pay of female apprentices was 74 per cent of that of male apprentices. A significant proportion of trainees in these two sectors received wages of less than £80 per week.

' The EOC considers it unacceptable that the skills to be acquired in the course of apprenticeships in sectors dominated by males should be paid more than those in sectors dominated by females, even before those skills have been fully acquired. '
EOC evidence

One in ten of the 4,174 respondents employed apprentices, with the highest proportions found in hairdressing, childcare and retail. The median hourly wage for first year apprentices was £3.60, while the median for second and third year apprentices was £4.25 and £5.00 respectively. Low Pay Commission Employers' Survey 2006

5.64 Since this survey was conducted, training providers have been required to ensure that employed apprentices in England receive a wage of at least £80 per week. In its evidence, the Government explained that it was felt necessary to provide a 'bottom line' for apprentice pay, so that it was at least on a par with the package of financial support available via other learning routes. This was also the rationale behind the Government's decision to remove the Minimum Training Allowance and extend entitlement to the EMA to unwaged apprentices in England (who make up around 15 per cent of all apprentices). The total financial support package for low-income families in England is now similar regardless of whether a young person remains in full-time education at school or college or enters work-based learning. Although the devolved administrations have been examining the merits of the English model, training allowances in the region of £40­£55 per week continue to apply to non-waged apprentices in Scotland, Wales and Northern Ireland.

5.65 In its evidence, the Scottish Executive wrote that it would like to see the exemptions for apprentices removed because of evidence of a link between low pay and low completion rates. It did not believe this would adversely affect take-up of apprenticeship programmes in Scotland. The Scottish Executive believed it would be simpler, as well as easier to enforce, if a minimum rate for apprentices was established within the minimum wage structure, rather than being set by the LSC in England.

' We would recommend that the exemption for apprentices be increased to cover the duration of and participation in an externally accredited training programme or apprenticeship scheme. '
NHF evidence

5.66 There were few consultation responses from employer bodies on the topic of apprentices and they related to just one sector. The CBI reported that the minimum wage had had a negative impact on the capacity of the hairdressing sector to take on apprentices, stating that 'salons struggle in years two and three to pay trainees at a level above their economic worth'. Similarly, the National Hairdressers' Federation (NHF) reported that salons were reluctant to recruit trainees over the age of 17 or 18 because of cost, but they were worried that new rules on age discrimination would mean they could no longer select only younger trainees. The NHF was also concerned that the £80 per week minimum pay requirement might exacerbate the problem and concluded that the minimum wage exemption for apprentices should apply for the whole period of training, which in hairdressing might be up to three years.

Reviewing the Apprenticeship Exemptions

5.67 In its response to our 2006 Report, the Government said that it would consider carefully our recommendation that we should be invited to review the apprenticeship exemptions. We are disappointed that we are unable to record a definitive outcome in this report, but we look forward to receiving the Government's considered response to our recommendation in the near future. The recent developments we have highlighted and the evidence received for this report have reinforced our belief that we should examine the minimum wage treatment of apprentices.Therefore we reiterate our earlier recommendation that the Government invite us to carry out a full review of the apprentice and pre-apprentice exemptions and report in 2008.

Conclusion

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5.68 The labour market position of young people has been progressively worsening for some years but this seems to have further exacerbated since 2005. There has been a sharp decline in the employment rate of 16­17 year olds, accompanied by a corresponding rise in inactivity, which can partly be explained by their increased participation in FTE. However, we remain concerned about the number of 16­17 year olds who are NEET. Young people aged 18 to 21 have also experienced an increase in unemployment since 2004, especially among 18 year olds.

5.69 The causes of this decline remain difficult to explain but the evidence is strong enough to lead us to reiterate the importance of lower National Minimum Wage rates for younger workers in order to protect their employment prospects. Twenty-one year olds have seen their labour market position improve since 2005, unlike their younger peers. The earnings data also show that the overwhelming majority of 21 year olds are paid at or above the adult rate of the minimum wage. We have therefore repeated our recommendation that 21 year olds should be entitled to the adult rate of the National Minimum Wage.

5.70 We have not examined the minimum wage exemptions for apprentices in any detail in this report, but have reiterated our view that it would be appropriate for us to review their treatment under the minimum wage in our next report, which we anticipate will be in 2008.