Introduction

1.1 This year sees the tenth anniversary of the introduction of the National Minimum Wage. During the decade that has passed since 1 April 1999, the UK has experienced record levels of employment and unprecedented consecutive quarters of economic growth. But this anniversary fell during the most turbulent economic times the UK has seen for decades. Growth stalled in the second quarter of 2008 and reversed in the third and fourth quarters, falling by a cumulative 2.2 per cent. This fall in output growth has been reflected in sharp increases in unemployment and a fall in total employment. The decline in economic activity has been much more pronounced than the mild slowdown that had been anticipated by independent forecasters when we held our deliberations in January 2008.

1.2 In this chapter, we set out a brief history of the minimum wage in its first ten years, specify the remit given to us by the Government for this year, and give an overview of the work we have undertaken to fulfil it.

Ten Years of the National Minimum Wage

1.3 The Government established the independent Low Pay Commission in 1997, asking the Commission to work in social partnership and recommend a definition, structure and rate for a National Minimum Wage. In its First Report, and in each subsequent one, the Commission has made a unanimous recommendation to government on the level  of the National Minimum Wage. The First Report set out the Commission’s intentions for the minimum wage: that it should support a competitive economy, be set at a prudent level, be simple and straightforward, and make a difference to the low paid. These guiding principles, and the strong evidence-based, analytical approach the Commission adopted, have changed little in the succeeding years.

1.4 As shown in Table 1.1, the minimum wage was introduced at a conservative level, reflecting the Commission’s guiding principles. The Government accepted our recommendation for the introductory rates but rejected our recommendation that the adult rate should be paid from age 21 onwards, setting the adult rate for those aged 22 and over.

Table 1.1 Evolution of the National Minimum Wage, 1999–2008

Source: Low Pay Commission.

1.5 After a period of caution in the early years, the Commission was able to take stock. Economic growth and the analysis of extensive research findings and data, which showed that the minimum wage had had no discernable adverse impact, enabled the Commission to increase the minimum wage faster than average earnings growth between 2003 and 2007. In the period since 2007, the Commission has again adopted a more cautious approach in the face of relative economic uncertainty. The recommended increases to the minimum wage have consequently been more modest. In every case, the recommendations to government have been based on thorough analysis of economic data and research, and the Commission is transparent in its process, setting out its thinking in each report.

1.6 From the outset, the Commission has argued that more caution is needed when considering the position of young people in the labour market than for adults. Young people, particularly those with poor skills, are more susceptible to unemployment than older workers, and any early experience of unemployment can have scarring effects throughout the rest of their working lives. The Commission has not wished to encourage young people out of education or restrict training opportunities through the minimum wage youth rates. Faced with evidence of exploitation of young workers however, the Commission recommended the introduction of a minimum wage rate for 16 and 17 year olds in 2004.

1.7 Each year, the Government sets out the Commission’s remit. In addition to monitoring and evaluating the minimum wage, in the last ten years the Commission has been asked to report on the impact of an extension to annual leave entitlement, the position of young workers in the workplace, benefit-in-kind and salary sacrifice schemes and, this year, to review whether the apprentice exemptions from the minimum wage remain appropriate. We look forward to continuing the Commission’s work in the coming years.

Terms of Reference 2009

1.8 In the terms of reference for the 2009 Report, the Government asked us to undertake the following work and report to the Prime Minister and the Secretary of State for Business, Enterprise and Regulatory Reform by the end of February 2009.

• Monitor, evaluate and review the National Minimum Wage and its impact, with particular reference to the effect on pay, employment and competitiveness in the low-paying sectors and small firms; the effect on different groups of workers, including different age groups, ethnic minorities, women and people with disabilities and migrant workers and the effect on pay structures.
• Review the levels of each of the different minimum wage rates and make recommendations for October 2009. The Commission is also asked to make provisional rate recommendations as appropriate for October 2010.
• Review the current apprentice exemptions and advise whether they are still appropriate. The Commission is asked to bear in mind the Government’s ambition to increase the number of apprentices to 500,000 and the need to ensure that sufficient employed places are available when the education participation age is raised in 2013.

1.9 On receipt of its remit, the Commission began gathering and analysing data to inform its recommendations, but the February deadline for our report and the timing of the economic downturn meant that little of the data covered the period of this recession. For this reason, the Commission believed it prudent to delay the submission of our 2009 Report until 1 May 2009 and asked the Secretary of State for Business for his agreement to an extension. This extension allowed the Commission to take account of two further months of economic data, taking us through the second quarter of negative GDP growth, without prejudicing the possibility of the Government implementing any changes on 1 October as usual. The remainder of this chapter sets out the work programme we undertook through the year.

Consultation

1.10 In preparing this report, we have again consulted widely. The consultation has involved individuals, businesses and groups representing each of the low-paying sectors and the process remains a valuable source of information for the report, improving our understanding of the issues involved.

1.11 We carried out two formal written consultations over the summer and early autumn of 2008, inviting views directly from a large number of organisations as well as publishing the consultation on our website. The first consultation sought views on the current apprentice exemptions and whether they are still appropriate, to which we received 36 responses. The second consultation asked for views on the impact of the minimum wage and related issues, to which we received 80 responses. Responses included the views of employer organisations, trade associations, trade unions, voluntary organisations, individuals and the Government. As a result of extending the time limit by which we were to submit our report to the Government, we received additional written evidence from 14 organisations. This additional evidence was considered alongside the other evidence we had gathered throughout the year.

1.12 We also held oral evidence sessions over two days in early December and heard from a number of organisations, including the TUC, CBI, and those representing the hospitality, retail, care, and hairdressing sectors. This gave organisations the opportunity to expand on the written evidence they had submitted to the Commission.

1.13 As ever, we are grateful to those organisations and individuals who took the time to respond to our consultation and to those who gave oral evidence. A list of those who responded to our consultation and who gave oral evidence can be found in Appendix 1.

Research

1.14 For this report, we commissioned through an open tender process five new research projects that would inform our work. Much of our previous research had concerned the impact of the introduction of the minimum wage and the initial upratings, particularly the increase in October 2001. The focus of the research programme for this report has been the impact of the large minimum wage upratings implemented between 2003 and 2006. We commissioned research from the National Institute of Economic and Social Research (NIESR) and the University of Glasgow to investigate the impact of the recent minimum wage upratings on competitiveness, business performance and sector dynamics. Two of the projects looked at the impact of the recent increases in the minimum wage on employment. The first, commissioned from NIESR and the University of Sussex, investigated the impact on employment and hours. The second, commissioned from Royal Holloway, University of London, looked at the geography of the minimum wage, using local area data to analyse the impact on employment and the distribution of earnings.

1.15 Our research programme has generally concentrated on looking for adverse impacts of the minimum wage rather than any benefits. We attempted to address this gap by funding research in a new area. Experian has analysed the impact of the introduction, and subsequent upratings, of the minimum wage on staff turnover, retention and recruitment. We also commissioned Incomes Data Services to investigate the impact of the 2007 upratings and the then forthcoming 2008 upratings on businesses in the low-paying sectors, focusing on changes to pay structures but also covering employment, hours, profits, training and annual leave. Details of the research projects and a summary of the findings are set out in Appendix 2. Our research programme provides crucial evidence in support of our recommendations. In addition to this research, we also conducted a survey of employers in low-paying sectors.

Survey of Employers

1.16 GfK NOP carried out our biannual postal survey of employers in low-paying sectors to assess the impact of the previous year’s upratings of the minimum wage. Questionnaires were sent to over 35,700 businesses in 11 low-paying sectors in the UK. The response rate was 7 per cent. The survey provided some useful insights into the effect of the upratings in 2007 on those businesses on which the minimum wage has the greatest impact. It also enabled us to compare the views expressed this year with those from earlier surveys. However, the response rate was low and, because respondents are likely to be those most affected by the minimum wage, the survey cannot be assumed to be representative of the low-paying sectors as a whole. Further information about the survey and details of the results are set out in Appendix 3.

1.17 The Institute for Employment Studies undertook a follow-up survey on apprentices, conducting telephone interviews with 40 employers in the childcare, hairdressing, leisure, retail, and social care sectors. We would like to thank those businesses that took the time to complete the questionnaire and respond to the interviews. Further information about the follow-up survey and details of the results are set out in Appendix 2.

Statistics

1.18 We have continued to work closely with the Office for National Statistics (ONS). The Commission bases its recommendations on a comprehensive evidence base and reliable data continue to form the foundations of our work. The ONS earnings series, Annual Survey of Hours and Earnings (ASHE) provides us with an important and consistent source of data. We made a recommendation in last year’s report reflecting our concern that the reduction in the ASHE sample would jeopardise our ability to analyse the impact of the minimum wage on some individual low-paying sectors. We are pleased that ONS has reached an agreement with the Government to reverse the cut, guaranteeing a return to the original sample for at least the next three years, 2009 to 2011. We also welcome our involvement in consultations with ONS about the introduction of a new industrial classification system; and the release of a full back-series of Labour Force Survey calendar quarter data.

Visits

1.19 As in previous years, we carried out a programme of visits across the country at which Commissioners met those directly affected by the minimum wage. The visits focused on groups in the low-paying sectors and, in particular this year, on those with an interest in the apprentice exemptions. We met business managers and workers, voluntary organisations, apprentices and organisations representing business sectors or groups of workers. For example, we heard from homeworkers, a number of staff and owners of hairdressing salons, and workers from different retail outlets. In order to better understand the issues affecting young people, particularly those not in employment, education or training (NEET), we met a number of apprentices and participants in the Prince’s Trust programmes. Visits took place in Belfast, Cardiff and Llanelli, Dundee, Gravesend and Paddock Wood, Leeds, London, Manchester, Newcastle, and Nottingham. As in previous years, we found that talking to people directly added to our understanding of the issues.

1.20 The Commission Secretariat also held a large number of meetings throughout the summer and autumn with officials from government departments, employers’ representatives and trade unions from all sectors of the economy. We list the organisations we met in Appendix 1.

Timing

1.21 In addition to visits and meetings with stakeholders, oral evidence sessions and research workshops, the Commission met eight times during the year. These culminated in a meeting held over two days in mid-March to review the economic data, research findings and stakeholder evidence, and to agree the recommendations contained in this report.

Conclusion

1.22 This year, as the National Minimum Wage celebrates its tenth anniversary, the Government asked the Low Pay Commission to undertake once more a full programme of work. We were asked to monitor and evaluate the impact of the minimum wage, review the apprentice exemptions, and to make recommendations on the minimum wage rates for October 2009 and, as appropriate, 2010. To fulfil this remit, the Commission has commissioned research, analysed data, consulted widely, and travelled around the UK to build an evidence base to inform its recommendations. The chapters that follow provide a breakdown of our findings and set out our recommendations for 2009.