WELCOME TO THE LOW PAY COMMISSION

3.1 In the previous chapter we highlighted that the minimum wage is likely to have the greatest impact on small firms and those sectors with either a large number or high proportion of jobs paying at or around the National Minimum Wage. In this chapter we assess the impact the minimum wage has had on these sectors, focusing in particular on the minimum wage upratings of October 2007.

3.2 We begin by reviewing across sectors the number of jobs at and below the minimum wage, employment trends, and other measures that might indicate any impact from the minimum wage. We then look at each of the low-paying sectors in detail, and consider the particular way the minimum wage has affected them. We draw on a variety of material, including multiple data sources, our commissioned research, other independent research, surveys of the market and employers, and our consultation. The position of small firms, which are disproportionately affected by the minimum wage, follows this analysis, and the chapter concludes by drawing together certain themes that emerged from the evidence we received.

3.3 In this section we give an overview of the impact of the minimum wage across the low-paying sectors. In particular we look at changes to the proportion of jobs paid at the minimum wage and job levels. We found that overall the proportion of jobs paid at the minimum wage in April 2008 remained the same as in April 2007. But, there were differences between sectors, with some experiencing a rise and some a fall. We also found sector variation in the impact of the minimum wage on wage differentials. There was evidence from our Survey of Employers (2008) of a growing proportion of employers affected by the minimum wage, but that the impact for affected organisations from the 2007 uprating was less than from the 2005 uprating. Overall, the number of jobs in low-paying industries fell between December 2007 and December 2008, with the majority of job losses occurring in the two largest industries, retail and hospitality. Some low-paying industries, however, experienced an increase in jobs over the same period. As shown in Chapter 2, our most recent research found little evidence to suggest that increases in the minimum wage had led to reductions in employment or hours worked. The fall in jobs in hospitality and retail is more likely a consequence of the general economic climate than as a result of increases in the minimum wage, while falls in other industries, such as textiles and clothing, are linked to factors that often pre-date the minimum wage. The data available for this report on industry levels jobs only covered December 2008 and we anticipate that there will be more redundancies shown in later data, as the recession bites.

3.4 The low-paying sectors we have identified are those industrial or occupational sectors that employ a large number of minimum wage workers or those in which a high proportion of jobs are paid at the minimum wage. The low-paying industries are: retail; hospitality; leisure, travel and sport; social care; food processing; agriculture; hairdressing; cleaning; security; and textiles and clothing. We also use these headings for our occupational-based definition. In addition to these, the low-paying occupations include childcare and office work. The ten low-paying industries accounted for over 8.4 million jobs in December 2008, almost a third of all jobs in the UK. Retail continues to be the largest low-paying industry by far, accounting for around 40 per cent of all jobs in the ten low-paying industries, followed by hospitality, which accounts for around 21 per cent of these jobs. But, not all jobs in the low-paying industries are low-paid. Indeed, many employees in these industries receive significantly more than the minimum wage. Moreover, these low-paying industries account for only about 70 per cent of all employees paid at or below the minimum wage; hence around 30 per cent of low-paid employees work in industries that we do not identify as low-paying. We have supplemented our analysis of these low-paying industries, with additional information on trends in employment in low-paying occupations associated with them.

3.5 Table 3.1 shows that in April 2008, the proportions of jobs paid at the adult minimum wage remained unchanged from the proportions in April 2007 (2.8 and 8.2 per cent respectively in the whole economy and low-paying industries). This stability may reflect that the increase in the minimum wage in October 2007 was in line with pay settlements. It masks the fact, however, that certain low-paying sectors experienced a rise in the proportion of jobs on the minimum wage (cleaning, social care, agriculture, hairdressing, and food processing) and others a fall (retail, leisure, security, and textiles and clothing). The proportion on the minimum wage remained the same in hospitality. There was a rise in the proportion of jobs paid at the minimum wage among childcare occupations, whereas office work experienced a fall.

3.6 The sectors with the highest proportion of jobs paid below the adult minimum wage were hairdressing (17.8 per cent) and hospitality (14.6 per cent) followed by childcare (8.4 per cent). These proportions reflect the widespread use of the apprentice exemptions and the Youth Development Rate in these sectors. We look in detail at the impact on earnings in each sector later in the chapter.

Table 3.1 Percentage of Employee Jobs Held by Those Aged 18 and Over Paid At or Below the Adult Minimum Wage, by Sector, UK, 2006–2008a

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2008.

a. This table also includes those aged 18–21 paid at or below the adult rate in 2006, 2007 and 2008.

b. These sectors are defined using Standard Occupational Classifications. The other sectors are based on Standard Industrial Classifications.

3.7 Figure 3.1 shows the proportion of jobs in each sector that pay just above the adult rate of the minimum wage: up to and including £6.00 per hour. The retail and childcare sectors had the largest proportion of jobs that paid between the adult rate of the minimum wage (£5.52) and the forthcoming adult rate (£5.73), with both at 8 per cent. These were closely followed by the cleaning and hospitality sectors, each having 7 per cent of jobs within this range of earnings. Office work had the lowest proportion, at just 2 per cent of jobs. The same sectors also had the highest proportions of jobs paid between £5.73 and £6.00, with cleaning having 16 per cent, childcare 12 per cent, hospitality 11 per cent, and retail 10 per cent.

Figure 3.1 Percentage of Employee Jobs Held by Those Aged 18 and Over Paid Below, At, and Above the Adult Minimum Wage to £6.00 Per Hour, by Sector, UK, 2008

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2008.

Note: The childcare and office work sectors are defined using Standard Occupational Classifications. The other sectors are based on Standard Industrial Classifications.

3.8 Again this year, we received evidence from employers on the adverse impact on pay differentials of increases in the minimum wage. Trade unions offered a different perspective and referred to the benefits of a rising minimum wage. The Trades Union Congress (TUC) maintained that unions rarely heard that pay compression caused difficulties and maintained that there was no evidence that compressed differentials were stopping workers from accepting additional responsibility or training. The TUC also referred to the beneficial effect of the minimum wage in closing the pay gap at the bottom of the earnings distribution for women and other groups of workers. The CBI reported that surveys of members between 2000 and 2008 had found a growing proportion paying staff at the National Minimum Wage (from 16 to 25 per cent). It had concerns about the minimum wage reducing the ability of businesses to maintain suitable differentials to encourage staff to take on additional responsibilities. Data from the Annual Survey of Hours and Earnings (ASHE) showed that there had been a squeeze on differentials in some sectors, particularly in the cleaning sector, which was the only low-paying sector to see a reduction in median earnings between April 2007 and April 2008. Other sectors experienced a widening in differentials at the lower end of the earnings distribution, perhaps reflecting the lower rise in the minimum wage compared with the 2006 upratings. The largest low-paying sector, retail, saw a reduction in the proportion of workers paid at the adult minimum wage and an increase in the proportion of those paid just above it, indicating a shift by this sector away from being minimum wage employers.

3.9 Our Survey of Employers (2008) found that a higher proportion of employers (55 per cent) had been affected by the October 2007 upratings in the minimum wage than in the previous survey in 2006, covering the 2005 upratings (42 per cent). This was despite the increase in the minimum wage in 2005 (4.1 per cent) being greater than in 2007 (3.2 per cent). But, those affected by the 2007 upratings seem to have been affected to a lesser extent than those affected by the 2005 upratings. For example, a lower proportion of affected firms had to increase pay rates in order to comply with the minimum wage or maintain differentials. Allison, Bowring, Chubb, Hatchett, Mulkearn, Warberg, Wiggins and Withers (IDS, 2009) research also provided evidence that the October 2007 minimum wage increase had less impact on affected organisations than some previous upratings. The study found that the average pay differential between the established adult rate and the minimum wage for a panel of major companies had fallen from 14.6 per cent to 4.8 per cent between 1999 and 2007. But, the 2007 average pay differential was wider than the 4.0 per cent in 2006.

3.10 We met in mid-March 2009 to review the latest evidence and decide our recommendations for this report. Generally, there is a time lag between changes in output and changes in employment. The data available for this report, therefore, may not show the worst outcomes on jobs, which could eventually emerge from the fall in economic activity. However, the figures which were available to December 2008 (Table 3.2), showed a fall in jobs in both the low-paying industries (down 1.0 per cent), and the economy overall between December 2007 and December 2008. In the low-paying industries the decline was largely in retail, which saw a fall of 87,000 jobs (2.5 per cent) and hospitality, which experienced a reduction of 29,000 jobs (1.6 per cent). As the economic recession continues, businesses in areas of discretionary spend such as retail and hospitality are likely to face further job losses. A fall in jobs also occurred in the cleaning, food processing, and textile and clothing industries. Some low-paying industries, however, experienced an increase in jobs over the same period. Social care saw the largest rise in jobs, up 28,000 (2.4 per cent), with the security; agriculture; hairdressing; and leisure, travel and sport industries also experiencing increases. In the low-paying occupations, childcare experienced a rise in employment (up over 15,000, to stand at 360,000) and office work a slight fall in employment to 303,000 in the year to the fourth quarter of 2008.

‘It is certainly clear that the minimum wage has not hindered job creation. Rather, increases in the minimum wage have coincided with employment growth in the low-paying sectors that has been stronger than employment growth in the broader economy.’

Source: LPC estimates based on ONS employee jobs series, three-monthly, not seasonally adjusted, GB, 2006–2008.

3.11 A number of employers’ representatives reported that the minimum wage was having an adverse impact on employment, hours and jobs in their sector, all within the context of a worsening general economic situation. Trade unions pointed to information that countered these views, and suggested that the impact of the minimum wage was more muted. The research we commissioned for this report on the impact of the National Minimum Wage on the low-paying sectors (IDS, 2009) found some evidence that the minimum wage was having an adverse impact on hours worked in the fast food sector. In addition, IDS found that in childcare the October 2007 upratings had led to a reduction in jobs and hours at some nurseries. But, this impact was smaller in 2008 than that found in its 2007 survey, a fall from 10 per cent to 7 per cent of the nurseries that answered this question (IDS, 2009). Our Survey of Employers (2008) found that the proportion of affected firms reducing staffing or hours in response to the rise in the minimum wage was lower than in the previous survey in 2006. Although as noted in Chapter 1, given the low response rate and that respondents are likely to be those most affected, the survey cannot be assumed to be representative of the low-paying sectors as a whole.

‘During the last decade of economic growth, the NMW has risen sharply ahead of average earnings….The NMW has also risen well ahead of all measures of inflation since 1999….The result has been a substantial increase in the ‘bite’ of the wage….For affected firms, the impact of the growing wage is more significant and can be seen in the increasing coverage among employers and employees.’

3.12 The global economic downturn has had an impact on the retail sector. Gross Value Added (GVA), a measure of a sector’s output, in the wholesale and retail sector had seen continuous growth in output since 1998. GVA data showed that growth continued in the first two quarters of 2008 but at a slower rate; however, in the third and fourth quarter of 2008, output fell by 2.8 and 5.2 per cent respectively (see Figure 3.2). This fall, however, has mainly been confined to wholesale distribution and the motor trade. Retail, as a whole, has been reasonably robust. The value of retail sales grew by 3.7 per cent in 2007 and by 3.1 per cent in 2008, with growth strongest in the first quarters of each year. This growth in value of sales continued into 2009 but the rate of growth has slowed, to 2.6 per cent in January 2009. Official data also show a similar slowdown in growth of sales volumes. Industry data, from the CBI Distributive Trades Survey and BRC-KPMG Retail Sales Monitor, paint a more pessimistic picture of the retail sector throughout 2008 with sales static or falling, but these data generally ignore internet sales. Together, the data suggest that consumers are feeling the effects of the economic turmoil in the economy. Despite this, official retail data showed retail sales and volumes were relatively robust in January 2009 and the BRC-KPMG Retail Sales Monitor (BRC-KPMG, 2009) indicated that total sales increased in the three months to February 2009 by 0.6 per cent compared with the same period in 2008.

3.13 Disaggregated retail data show that this robustness is entirely due to the food and non-store non-food sectors. Food was the main sector to show sales up on a year ago. There continued to be heavy discounting on clothing and household goods, but despite this, sales in these areas fell below the levels of a year earlier. The Retail Sales Monitor indicated that non-food, non-store sales (i.e. internet, mail order or telesales) in February 2009 were 12.5 per cent higher than in February 2008. Although non-food, non-store sales increased in February 2008, the rate of growth has slowed. The British Retail Consortium (BRC) points out that non-food, non-store sales are largely another route to customers for retail businesses who also have shops. The Office for National Statistics (ONS) internet sales figures for February 2009 showed that the value of internet sales increased by over 13 per cent compared with a year earlier. Figures from the IMRG Capgemini e-Retail Sales Index (2009) showed that online sales in February 2009 were up 13 per cent on the same period in 2008 and, although growth has been consistent for the last 8 months, this was the second lowest yearly growth the Index has recorded since it was launched in April 2000.

3.14 Although online sales are expanding, and the increased use of online buying is widely reported, they still represent a small share of overall retail sales. Many retailers have online sites and these sales provide a contribution to offset other losses retailers may suffer. It is clear, however, that more shoppers are moving to online sales, and research conducted by Capgemini showed that 37 per cent of shoppers now generally did more than half their shopping online. It is not apparent, though, how this will affect the employment of low-paid workers.

3.15 Despite the robustness of the sector as a whole, in the run up to the production of this report, a number of retailers have ceased trading and an increasing number are reporting trading difficulties. It is predicted that as a result of the economic downturn, more businesses than usual will cease trading and staff will be made redundant. Although this is not directly as a result of increases in the minimum wage, the increases will have had an impact on businesses’ costs. As shown in Chapter 2, insolvencies across the economy increased by 52 per cent in the fourth quarter of 2008 compared with a year ago. Many of these were in retail.

‘Within the food retail market in the UK there has been consolidation by the major supermarkets. It is this consolidation that is adversely affecting small retailers rather than additional costs associated with the minimum wage.’

3.16 The number of people paid at or just above the adult minimum wage continued to rise and, according to ASHE, in April 2008 592,000 jobs in retail held by adults aged 22 and over were paid between £5.52 and £5.57 an hour. In April 2008, there was a decrease in the proportion of retail jobs paid at the National Minimum Wage compared with April 2007, down from 7 per cent to just above 6 per cent. This is in contrast to a significant rise between April 2006 and April 2007. In April 2008, although there was a reduction in the proportion paid at the adult minimum wage, there were significant increases in the proportions paid just above it and at £6.00 per hour. The lower increase in October 2007 has enabled more employers to pay above the minimum wage. Further evidence supporting this is shown in research conducted by IDS (2009), which found that only a third of retailers in 2008 set the adult minimum wage rate as their start rate, down from two-thirds in 2006. This research also found that there has been a trend in recent years to lower the age at which the adult rate is paid and that a number of retailers had ended completely the practice of age-related pay.

3.17 The IDS research also found that the gap between established rates of pay and the minimum wage narrowed between 2003 and 2005 but has now widened again. In 2003, 13 per cent of established rates for sales assistants were at the National Minimum Wage. This proportion rose to 34 per cent in 2005 but fell back to 16 per cent in 2007. This suggests retailers have opted to pay above the minimum wage as their established rate. In addition, some employers have also sought to maintain and in some cases increase their pay differentials. Separately, IDS (2008) found that the median pay settlement in 2008 across the retail sector was 3 per cent, unchanged from 2007.

3.18 When we look in more detail at the number of jobs paid at the adult minimum wage, over 13 per cent of employees in specialist food stores (greengrocers, fishmongers, bakers etc.) were paid at the National Minimum Wage in April 2008. This proportion is the same as April 2007 and a slight reduction from April 2006. This part of the retail sector has by far the largest proportion of jobs paid at the adult minimum wage.

3.19 There were nearly 3.4 million employee jobs in the retail sector in December 2008, accounting for around 40 per cent of all jobs in the low-paying sectors. Around 10 per cent of these jobs were paid at or below the minimum wage in April 2008. Figure 3.2 shows that the total number of retail employee jobs decreased by 2.5 per cent (87,000 jobs) in the year to December 2008. Anecdotal evidence gathered during our consultation suggests that jobs in this sector will fall further as a result of the economic slowdown. According to the Labour Force Survey (LFS), however, employment in retail occupations remained stable between the fourth quarter of 2007 and the same period in 2008.

Figure 3.2 Output Growth, UK, and Employee Jobs, GB, in the Retail Sector, 1999–2008

Source: LPC estimates based on ONS employee jobs series, three-monthly, not seasonally adjusted, GB, 1999–2008 and LPC estimates based on Output Index (GDQC), quarterly, seasonally adjusted, UK, 1999–2008.

Note: As a result of the break in the employee jobs series between December 2005 and September 2006, annual changes cannot be estimated for periods from March 2006 to June 2007.

3.20 The BRC reported in its evidence this year that turmoil in the financial markets, along with increasing inflation and increasing unemployment had contributed to consumer confidence reaching all-time lows. Previous upratings to the minimum wage had continued to squeeze differentials, and small businesses were reducing staff and hours. In a BRC survey (2008), 18 per cent of multiple retailer respondents and 33 per cent of respondents from small and medium-size enterprises (SMEs) attributed a decrease in average staffing levels to an increase in the minimum wage. Tesco advised that it had re-structured its reward budget in order to absorb increases in the minimum wage above its average pay increases.

3.21 In the year to April 2008, the proportion of jobs in the retail sector paid at the minimum wage decreased, reflecting a smaller percentage increase to the minimum wage in 2007. The number of jobs in the retail sector is decreasing, although this is more likely due to other current economic factors rather than the minimum wage. The data available as this report was prepared showed a reduction of 2.5 per cent in the number of retail jobs, and it seems clear from the number of high street names that have gone into administration that the decline will continue in the months ahead. We would expect some parts of the retail sector to feel the effect as consumer discretionary spending decreases, but other parts (e.g. food) should remain relatively buoyant.

3.22 The fortunes of hospitality and leisure, travel and sport are often closely allied. Each has experienced strong growth in jobs in the period since the introduction of the minimum wage, although the proportion of jobs affected by the minimum wage differs between the two sectors.

‘Minimum wage increases had an impact on differentials. One company used to have eight gradings but this had been reduced to three, purely to maintain some differentials. Another was struggling to maintain differentials.’

3.23 We saw from Table 3.1 that hospitality continues to be a sector where a high proportion of jobs are paid at the adult minimum wage, but that the proportion remained unchanged between April 2007 and April 2008. Our Survey of Employers (2008) found that hospitality had the highest proportion of employers (61 per cent) which needed to raise pay rates in order to comply with the 2007 upratings. As with retail, there may have been an impact from a lower rise in the minimum wage in October 2007 compared with that in 2006, allowing employers more room to accommodate the increase. This additional room to make adjustments is perhaps also illustrated by ASHE data, which show some widening of differentials at the lower end of the hourly earnings distribution for hospitality. There was, however, a narrowing between the first quartile and median earnings during the same period.

3.24 Evidence from IDS (2009) showed that the use of youth rates varied within the hospitality sector. It found that most hotels paid adult rates from age 16, with some paying from age 18, and only one waited until the age of 22 to apply the adult rate. In the fast food, pubs and restaurants sector, 9 of the 15 companies responding to the survey operated youth rates and 5 of these paid adult rates from age 22.

‘The NMW appears to have little impact in the hotel sector according to responses to an Incomes Data Services survey….While minimum rates for the lowest paid employees are at NMW levels, typical rates are usually above the statutory wage.’

3.25 A smaller proportion of jobs were paid at the adult minimum wage in leisure, travel and sport in April 2008 than in April 2007, a fall from 6.1 to 5.0 per cent. Our Survey of Employers (2008) found that leisure had the lowest proportion of employers who said the October 2007 upratings in the minimum wage had affected them. Earnings data show that, for leisure, differentials at the lowest end of the hourly earnings distribution have remained virtually the same between April 2007 and April 2008 but, in contrast with hospitality, differentials had widened between the first quartile and median earnings over this period.

3.26 Although not readily available for leisure, travel and sport, there are sector output data (GVA) for hospitality. Figure 3.3 shows how the annual growth rate in hospitality fell sharply during 2007 and has been negative since the second quarter of 2008 (-2.2 per cent in the fourth quarter of 2008). This started to feed through to employment in the second half of 2008, with a fall of 9,000 employee jobs in September 2008 compared with September 2007. The latest jobs data, for December 2008, show a larger fall, with a reduction of 29,000 jobs (1.6 per cent) compared with December 2007. The fall in jobs in the years to September and December 2008 respectively, was the first period of year-on-year falls since March 2001, and only the third since the introduction of the minimum wage (although data in this series are not available for year-on-year comparisons between December 2005 and September 2007). Because of the fall in output in late 2005, we think it highly likely that a fall in employee jobs will have resulted at some point during the period following December 2005. The fall in jobs in December 2008 was highest in the sub-sector of bars, down 18,000. The other sub-sectors also experienced a decline in jobs over the same period, except canteens and catering, where there was a rise of 6,000. This loss of jobs in bars was a trend noted in our 2007 Report. Reasons put forward to explain the fall include the public smoking ban, falling beer consumption, and competition from supermarket sales. According to LFS, there was also a fall in employment in low-paying hospitality occupations of over 56,000 between the fourth quarter of 2007 and the same period in 2008.

3.27 Leisure, travel and sport is a sector that experienced substantial growth in employee jobs in the period following the introduction of the minimum wage, but this slowed and the level remained virtually the same between December 2007 and December 2008, with a small increase of 3,000 jobs. According to LFS, employment in low-paying leisure occupations also experienced a small rise, by over 3,000 between the fourth quarter of 2007 and the same period in 2008, to stand at 102,000.

Figure 3.3 Output Growth, UK, and Employee Jobs, GB, in the Hospitality Sector, 1999–2008

Note: As a result of the break in the employee jobs series between December 2005 and September 2006, annual changes cannot be estimated for periods from March 2006 to June 2007.

3.28 Some stakeholders in hospitality pointed to the impact of the minimum wage on wage structures in the sector. The Association of Licensed Multiple Retailers (ALMR) repeated a point made in previous submissions that the minimum wage had become the average wage within the bars sub-sector. British Beer & Pub Association (BBPA) members told us during a visit to Wales that differentials had been squeezed in the sector and staff were not motivated to take on extra responsibility for what is now a small increase in wages. The Cinema Exhibitors’ Association told us that increases in the minimum wage ahead of inflation had the effect of eroding pay differentials and addressing this increased the potential inflationary effect on the wages of other job categories above minimum rates.

‘A small number of respondents have always stated that they have had to let staff go as a result of increases in the NMW, but this is the first time that this action has been taken by a significant majority of employers…and may account for the recent decline in employment within the sector and the brake on the creation of new job opportunities.’

3.29 The British Hospitality Association (BHA), BBPA and Business In Sport and Leisure (BISL) submitted a collective response to our consultation. They reported a deteriorating economic situation for the hospitality and leisure sectors that included: rising costs; a sharp fall in job vacancies; declining employment, turnover and profits; and a 1.4 per cent fall in output in hotels and restaurants in the quarter to June 2008, with the most significant decrease in pubs and bars. They said an estimated 35 pubs were closing every week, with a number of bingo clubs also ceasing to trade. By the time of our oral evidence, they reported a further worsening of the market for hospitality and leisure businesses. The ALMR said that employment growth in its sector peaked in 2005 but has since declined and predicted it to fall further this year. It said gross employment costs had risen, on average, from 18 per cent of turnover in 1997 to over 30 per cent in October 2008. Increases in the minimum wage contributed to this rise, with 61 per cent of employers in its survey saying they had to let staff go because of the latest increases, up from 45 per cent in 2006 and 32 per cent in 2004. The ALMR said that there was evidence that some small businesses in its sector will seek to reduce the number of outlets they manage as a result of increased employment costs attributed to the National Minimum Wage. Our Survey of Employers (2008) found that hospitality had the highest proportion of employers who had to adjust staffing or hours in response to the October 2007 increases in the minimum wage.

‘In short, a wobbly market in September has become a collapsing market in November….The rapid deterioration in business means only one thing: fewer jobs across the industry, and even fewer if costs are allowed to rise.’

3.30 In written submissions trade unions suggested that the situation in hospitality was of less concern. The TUC said the hotel sector was still enjoying historically high returns, with revenue per available room in London hotels rising by nearly 12 per cent in late July 2008 compared with the same week in 2007. Unite said that earnings data showed the relatively high earnings growth in the hotel sector over the last 18 months, and that the majority of hospitality companies in the top 50 sector employers were profitable.

3.31 The evidence suggests that in both hospitality and leisure, the lower rise in the minimum wage in October 2007, compared with October 2006, allowed employers to accommodate the increase with less impact than from previous upratings on differentials or the proportion of jobs paid at the minimum wage. In some parts of these sectors, particularly in bars, however, the minimum wage has continued to have a greater influence. Overall, the hospitality and leisure sectors are facing a slowdown in demand and output, and having difficulty in accommodating increased costs. The decline in jobs, or slowing of job growth in these sectors, is more closely related to the economic climate than the minimum wage.

3.32 Independent sector providers, in large part funded by public sector purchasers such as local authorities and the NHS, supply the majority of residential social care in the UK. Laing and Buisson (2008a) estimated the annual UK market value for residential care as £13 billion at April 2008, of which private (for profit) was £9.1 billion, voluntary (not-for-profit) £1.8 billion and public sector supply £2.1 billion. It further estimated that in 2008 the value of the UK homecare market delivered by independent sector providers was £3.2 billion, with the majority of services purchased by local authorities (Laing and Buisson, 2008b). There had been continued growth in expenditure on community care services since the introduction of community care reforms in 1993. Social care is a highly regulated sector in terms of minimum staffing and qualification requirements, particularly in care homes. These factors are reflected in the impact of the minimum wage on the sector, and in some of the issues raised with us by the stakeholders.

3.33 Overall, in April 2008, 5.0 per cent of jobs in social care were paid at the adult minimum wage, a small rise over April 2007. The impact is greater in the private sector, where 7.8 per cent of jobs are paid at the adult rate of the minimum wage. Together with the voluntary sector, the private sector delivers the majority of care services. In the public sector only 1.3 per cent of jobs are paid at the adult minimum wage.

3.34 In most cases, as noted by IDS (2009), adult rates of pay are applied in the sector from age 18. Its research also highlighted that 38 per cent of respondents had to raise pay rates in order to comply with the October 2007 rise in the minimum wage. The median proportion of the workforce affected was 8 per cent, but with a range between less than 1 per cent and 100 per cent. Differentials between NVQ Level 2 and NVQ Level 3 qualified care assistants had narrowed significantly (IDS, 2009). Our Survey of Employers (2008) found social care had one of the highest proportions of affected employers reporting they needed to increase pay rates in order to maintain pay differentials as a result of the October 2007 upratings. Stakeholders also highlighted further pressure on social care providers’ ability to recruit: changes to the regulations governing employment of non-EU/EEA workers meant that care providers would have more limited access to this source of care workers in future, which, stakeholders believed, would put further pressure on their ability to attract suitable staff at an affordable wage.

3.35 The number of employee jobs in the social care sector has continued its upward trend to stand at almost 1.2 million in December 2008. This was an increase of over 2 per cent on December 2007. Employment in low-paying social care occupations also increased, by nearly 76,000, between the fourth quarter of 2007 and the fourth quarter of 2008. IDS (2009) found a significant rise in the proportion of organisations experiencing recruitment problems.

‘The Commission has previously noted its interest in direct payments and an emerging personal assistant workforce… there are employment issues, including the ability of service users to meet the NMW and provide adequate contracts and job descriptions, along with training and career opportunities.’

3.36 Affordability was again a key theme in the evidence we received from those representing social care providers, such as the United Kingdom Home Care Association (UKHCA) and the English Community Care Association (ECCA). Often, increases in the fees paid by the state did not reflect increases in the cost of providing care, including the minimum wage. This is an issue we have considered and voiced our concerns about in a number of previous reports. Figure 3.4 shows that in 2008/09 the Laing and Buisson survey of local authorities baseline fees (Laing and Buisson, 2008a) found the majority paid fee increases less than that required to meet care home cost inflation (the standstill margin). Our Survey of Employers (2008) found that when social care providers attempted to re-negotiate their contracts in the light of the October 2007 increase in the minimum wage, two-thirds were unsuccessful. Organisations in the sector also highlighted that the minimum wage had an impact on differentials because the rise in the wage often exceeded the increase in care fees paid by local authorities commissioning care. ECCA told us in oral evidence that the sector aspired to pay significantly above the minimum wage, but that its aspirations were undermined by chronic under-funding.

‘The ECCA supports the NMW but the costs must be reflected in what council and NHS purchasers of residential care are prepared to pay…. This financial year has seen particularly low, or even nil increases, for care homes funded by the state through council or PCT commissioning.’

3.37 Stakeholders also brought to our attention the increased role envisaged by the Government in the use of ‘direct payments’. These occur where public authorities give individuals money with which to commission and pay for their care themselves, perhaps employing a personal assistant. Although only a small proportion of service users receive care via direct payments, the numbers have risen in recent years in line with government policy that supports further expansion (Laing and Buisson, 2008b). Direct payments came to our attention in evidence for our 2005 Report, and we noted a potential compliance problem for the minimum wage. In circumstances of individuals purchasing their own care, both the service user and those performing the personal assistant role may not be fully aware of their rights and responsibilities in respect of their employment relationship, including payment of at least the National Minimum Wage.

Figure 3.4 Proportion of Local Authorities Paying Baseline Fee Increases Below, At, or Above the Standstill Margin Increase, by Type of Care, UK, 2006/07–2008/09ab

Source: Laing and Buisson baseline fee survey conducted by Community Care Market News, UK, 2006–2008

a. The Laing and Buisson/Joseph Rowntree Fair Price Model estimates the proportional increase in baseline fees needed to stay in line with care home cost inflation (the standstill margin).

b. Excludes those who did not respond to the surveys or did not have comparable data with the previous year.

3.38 We continue to be concerned by the shortfall in funding experienced by many social care providers. In line with recommendations we made in previous reports we recommend that the commissioning policies of local authorities and the NHS should reflect the actual costs of care, including the National Minimum Wage. In addition, we urge the Government to consider the implications of the increased use of direct payments for compliance with the National Minimum Wage and how it can best ensure both protection of the minimum wage rights of personal assistants and a greater awareness of the responsibilities of those who employ them.

3.39 The expansion of childcare provision remains high on the Government’s agenda. The administrations in England, Scotland, Wales and Northern Ireland have their own programmes and policies for supporting childcare. In England, by 2010 all 3 and 4 year olds will be entitled to 15 hours a week of free high quality care for 38 weeks a year and there will be an out-of-school childcare place for children aged 3–14 (8.00 am to 6.00 pm) on weekdays. The Government has also introduced measures to reform the childcare workforce, improve its status and increase the proportion of workers holding qualifications, particularly at NVQ Level 3 (Nicholson, Jordan, Cooper and Mason, 2008).

3.40 Laing & Buisson (2008c) estimated that the value of the UK full-day care market was £3.8 billion for 2007. Private sector providers accounted for the majority of this (£3.0 billion), with the remainder split between the voluntary sector (£415 million) and the public sector (£385 million). Results from the Childcare and Early Years Providers Survey covering England in 2007 (Nicholson, Jordan, Cooper and Mason, 2008) showed a continued increase in the number of full-day care providers, but with another fall in sessional care (most likely explained by sessional providers switching to full-day care in response to parental demand). The number of after-school clubs continued to rise, but holiday clubs fell in number. Between 2003 and 2006, the financial situation seemed to have worsened for most types of providers, with a lower proportion saying they had made a profit or surplus and a higher proportion saying they had made a loss (Nicholson, Jordan, Cooper and Mason, 2008). Since then, the position has improved for some types of provider. Our Survey of Employers (2008) found that 69 per cent of employers in childcare who were affected by the minimum wage, faced a fall in profits as a consequence of the October 2007 upratings.

3.41 The proportion of jobs in childcare paid at the adult minimum wage rose between April 2007 and April 2008 to stand at 4.7 per cent. This followed a fall between April 2006 and April 2007. As with social care, the minimum wage has the greatest impact on the independent sector. Just over 10 per cent of jobs in the voluntary sector were paid at the adult rate of the minimum wage compared with 7.0 per cent in the private sector, and 2.5 per cent in the public sector (see Figure 3.5).

Figure 3.5 Hourly Earnings Distribution for Employees Aged 18 and Over in the Childcare Sector, by Voluntary, Public, and Private Providers, UK, 2008

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2008.

Note: * Five pence bands except where stated otherwise (bands labelled by minimum pay amount).

3.42 The Childcare and Early Years Providers Survey (Nicholson, Jordan, Cooper and Mason, 2008) covering England showed that while the paid workforce within childcare providers increased by 7 per cent in full-day care settings between 2006 and 2007, it fell in other types of provision. Overall, there was a marginal fall, from 306,000 workers to 300,000 between 2006 and 2007 – although this was still substantially higher than the 228,000 in 2003.[1] In contrast, LFS data for the childcare sector showed a rise in employment. There were over 167,000 nursery nurses employed in the fourth quarter of 2008 compared with nearly 145,000 in the fourth quarter of 2007 (a rise of just over 15 per cent). Employment in low-paying childcare occupations also rose (by over 15,000) in the same period, to stand at 360,000. IDS (2009) found a lower proportion of nurseries had reduced staffing or hours as a result of the latest increases in the minimum wage compared with its previous survey. Of those firms giving a reason for a lower knock-on effect, the majority cited restrictions in staff-to-children ratios.

3.43 The National Day Nurseries Association (NDNA) told us that 80 per cent of income went on wages and that an increase in the minimum wage resulted in higher fees to parents as providers sought to maintain differentials. We found evidence from our Survey of Employers (2008) that supported this, with around 70 per cent of employers who had been affected by the minimum wage saying they had to raise prices in response to the October 2007 increase. NDNA also referred to the sustainability problems in the sector, with half of all nurseries breaking even and a fifth making a loss. The NDNA said that 40 per cent of the nursery sector’s workforce was under 24 years old, so changes to youth rates or extending the adult rate to age 21 had a particular impact on its members.

‘The rise in the NMW often exceeds pay increases, which has substantially eroded differentials. Pressure on differentials meant there was little scope to reward older staff.’

3.44 The childcare sector continues to be one where the minimum wage has an important influence on wage structures and, again, we received evidence of an impact on differentials. Providers in the independent sector continue to be sensitive to changes to the minimum wage. However, latest employment data show a rise in employment in childcare occupations.

3.45 Market and Business Development (2008) estimated that a 2 per cent increase in 2008 has taken the value of the UK contract cleaning market to £5.7 billion. The moderate increase in 2008, compared with 5 per cent increases in 2006 and 2007, reflects the economic downturn. The value of the total cleaning market is estimated at around £12 billion and the sector is characterised by a high proportion of part-time workers, reflecting the variable work patterns and unsociable hours of many cleaning operations.

3.46 Over the last few years, the impact of the minimum wage on the security sector has lessened, mainly driven by the introduction of a statutory licensing system, which has led to an increase in professionalism, and consequently higher rates of pay.

3.47 In April 2008, 22 per cent of jobs in the cleaning sector were paid at the adult minimum wage. Table 3.1 shows that the proportion was just over 19 per cent in April 2007. The cleaning sector continues to have the highest percentage of jobs paid at the adult minimum wage and the earnings data also suggest an impact on pay differentials. The earnings distribution demonstrates that the second most common rate of pay in 2008 remained at £6.00 per hour, despite the uplift in the minimum wage (see Figure 3.6). In addition, the increase in median earnings for all low-paying sectors between 2007 and 2008 was 2.7 per cent. During this period, however, the cleaning sector was the only one to see a reduction in median earnings, of 0.7 per cent.

Figure 3.6 Hourly Earnings Distribution for Employees Aged 18 and Over in the Cleaning Sector, UK, 2007–2008

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2007–2008.

Note: * Five pence bands except where stated otherwise (bands labelled by minimum pay amount).

3.48 The Cleaning and Support Services Association (CSSA) reported that the proportion of cleaners paid between the minimum wage and £6.50 per hour had remained the same at just over 70 per cent. It also advised that a wage ceiling among supervisory staff at £6.50 per hour had been created. Our Survey of Employers (2008) found that 68 per cent of companies in the cleaning sector that responded had seen a decrease in profits because of the increase in the minimum wage in October 2007. Around 62 per cent also reported having to increase prices because of increases in the minimum wage.

3.49 In the security sector, in April 2008, just over 3 per cent of jobs were paid at the minimum wage. This was the same as in April 2007.

3.50 There are a number of sources of information on cleaning jobs but it continues to remain difficult to gain a clear picture of the number of people undertaking cleaning activities. The various data sources all show increases in the number of jobs but some workers will not be captured within the employment figures for the cleaning industrial sector because they perform a support role in firms categorised within another industry. Others may be self-employed or not recorded because they work in the informal economy. The ONS employee jobs series shows that jobs in the sector decreased by 8,000 to around 482,000 in the year to December 2008. LFS shows that employment in low-paying cleaning occupations rose by nearly 40,000 to over 745,000 in the year to the end of the fourth quarter of 2008. The CSSA estimates that there are 900,000 people employed in the cleaning sector in the UK, with 400,000 of these working for outsourced firms. According to the ONS employee jobs series, jobs in the security sector continued to increase to just over 176,000 in the year to December 2008.

3.51 In their evidence the CSSA reported that the current economic circumstances were affecting cleaning firms. Margins had declined to around 4 per cent, which meant cleaning contractors were now struggling to meet the cost of capital and to invest in new technologies. It advised that it was not possible to pass on these price increases through their contracts. The annual increases in the services producer price index for industrial cleaning are less than RPI increases. This gives support to the CSSA claim that cleaning contractors have not been able to pass on the full increases.

3.52 The CSSA also advised that between October 2007 and October 2008, due to a number of factors (including the minimum wage, maternity pay and statutory sick pay) the cost of employing a worker on the minimum wage has increased by just over 5 per cent. It advised that changes to the minimum wage were a key driver of pay movements in the sector and that there continued to be a compression of differentials.

3.53 Increases in the minimum wage appear to be affecting the cleaning sector. The increase in the number of jobs paid at the minimum wage, evidence of a squeeze on differentials and a reduction in median earnings all point to this conclusion but data on employment suggest a mixed picture, so there is no clear evidence that the minimum wage has been a significant factor.

3.54 Provisional data from the Annual Business Inquiry for 2007 showed there were just under 26,000 hairdressing enterprises, with a total turnover of just over £4 billion. Our Survey of Employers (2008) found hairdressing had experienced the largest increase in the proportion of firms that said they had been affected by the minimum wage (from 39 per cent in 2006 to 66 per cent in 2008) of any low-paying sector.

3.55 Almost 9 per cent of jobs in the hairdressing sector were paid at the adult minimum wage in April 2008, and nearly 18 per cent were paid below, reflecting common use of apprentice exemptions and age-related pay in this sector (see Table 3.1 and Figure 3.7). ASHE data showed that although the hourly pay differential at the lowest end of the earnings distribution had reduced slightly between April 2007 and April 2008, it had widened marginally between the first quartile and median earnings.

Figure 3.7 Hourly Earnings Distribution for Employees in the Hairdressing Sector, by Age Band, UK, 2008

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2008.

Note: * Five pence bands except where stated otherwise (bands labelled by minimum pay amount).

3.56 Employment in the hairdressing sector has been declining in recent quarters but the number of ONS employee jobs in the sector grew slightly, by 5,000, between December 2007 and December 2008, to stand at 126,000. According to the LFS, employment in low-paying hairdressing occupations also increased by nearly 3,000 (2.0 per cent) between the fourth quarter of 2007 and the fourth quarter of 2008. Self-employment in the sector rose too by 3,000 between the fourth quarter of 2007 and the same period in 2008, to stand at nearly 103,000.

3.57 The National Hairdressers’ Federation (NHF) and Habia said that salons had few options if faced with higher wages because passing on the increased costs would not be acceptable to customers in the current economic climate. According to our Survey of Employers (2008), the sector had, at 75 per cent, the highest proportion of employers who said they experienced a fall in profits as a result of the October 2007 rise in the minimum wage. A June 2008 survey of NHF members found that 76 per cent of salons would consider reducing staffing if the minimum wage were to increase ahead of inflation. With the subsequent developments in the UK economy, however, the NHF and Habia believed that any rise in the minimum wage would result in job losses. They said that many of the job losses would be among younger staff still in training, damaging long-term as well as short-term employment opportunities. In our Survey of Employers (2008), hairdressing was second only to hospitality in the proportion of employers who said they had reduced staffing or hours in response to the October 2007 upratings in the minimum wage.

‘Hair salons are labour intensive small businesses with labour representing their overwhelmingly greatest costs. Salon owners have very few options when faced with higher wage bills….Our survey indicates that job losses would be the inevitable consequence of excessive wage inflation.’

3.58 NHF and Habia said that approximately 30 per cent (or 15,000) of the staff employed by members were apprentices at various stages of qualification. The issue of apprentices and the impact of the National Minimum Wage on training remains a key concern for these stakeholders. The CBI said that the sector continues to report significant levels of informal work and an unaffordable rise in the minimum wage would add to the ‘pull factors’ associated with the informal economy.

3.59 The hairdressing sector continues to be the low-paying sector that makes greatest use of the arrangements for young people and training under the National Minimum Wage.

3.60 In agriculture the picture is more positive, with rising employment and increases in income. It is one of the few sectors of the economy to be bucking the current downward trend. Output remained steady in the fourth quarter of 2008 compared with a year earlier, and is up by 6.3 per cent on the fourth quarter of 1998. Figures from the Department for Environment, Food and Rural Affairs (DEFRA) released on 29 January 2009, estimated that the total income from farming in the UK in 2008 rose by 41.9 per cent in current prices, or by 36.3 per cent in real terms, to £3.46 billion.

3.61 The proportion of jobs on the National Minimum Wage, at 3.9 per cent in April 2008, remains low, although it is higher than in April 2007 (2.6 per cent). This is because the minimum wage for workers employed in agriculture is set by the Agricultural Wages Boards (AWB) in England and Wales, in Scotland and in Northern Ireland. The minimum rate depends on several factors, including a worker’s age, experience, their qualification, and their responsibility.

‘…Labour is a significant cost component of our sector’s production costs, and many of these costs are directly set by the National Minimum Wage, and others strongly influenced by National Minimum Wage rates.’

3.62 The Board for England and Wales announced an increase for Grade 1 workers from 1 October 2008 of 3.9 per cent to £5.74 (one pence above the adult National Minimum Wage) and a rise of 4.3 per cent for Grades 2 to 6. The Scottish Agricultural Wages Board announced a minimum hourly rate of £5.73 (the same as the National Minimum Wage) from 1 October 2008 for all agricultural workers in the first 26 weeks of employment. The Agricultural Wages Board for Northern Ireland announced an increase in minimum rates of pay for agricultural workers at Grades 2 and above of 3.75 per cent on 20 February 2009. The minimum rate of £5.73 payable for the first 40 weeks of cumulative employment remains unchanged. If at any time the National Minimum Wage becomes higher than the minimum rates set by the Agricultural Wages Boards, then the agricultural minimum rates automatically become equal to the National Minimum Wage.

3.63 Agriculture made up just under 3 per cent of employee jobs in the low-paying sectors, with 240,000 employee jobs in December 2008. Between December 2007 and December 2008, there was a rise of 5,000 jobs (2 per cent). Employment in low-paying agricultural occupations also increased during the period from the fourth quarter of 2007 to the fourth quarter of 2008, by 7,000 (or 12.1 per cent), to stand at nearly 65,000.

3.64 The Worker Registration Scheme (WRS) is a register of nationals of the A8 countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) who wish to take up employment in the UK for a period of at least one month. WRS reported that agriculture is the third highest sector in which workers are registered. The proportion of registered employees working for employers in agriculture was 11 per cent in the third quarter of 2008 compared with 9 per cent in the third quarter of 2007.

’Supermarkets have held down the payment farmers receive for their produce to the extent that several fruit farmers in the area have already ceased production.’

3.65 In their evidence, the National Farmers’ Union (NFU) said the level of market uncertainty had increased since July 2008 and there was a decline in businesses’ access to credit. The NFU called for any increase in the minimum wage not to increase its ‘bite’, pointing to competition the sector faced from low-wage economies; moreover because agricultural producers tended to be price ‘takers’ rather than price ‘makers’ in the food market, they were often unable to pass on cost increases to their customers. During a visit to Dundee, we met with farmers who sell their fruit produce to supermarkets. They described the downward pressure on producer prices exerted by some supermarkets, which allowed no scope to pass on wage cost increases.

3.66 The Association of Labour Providers (ALP) again drew our attention to the interaction between the Agricultural Minimum Wage and the National Minimum Wage, citing what it regarded as complexities and the problems that arise from these. The ALP have asked us to investigate this interaction and told us it has called on DEFRA to abolish the separate Agricultural Minimum Wage. During a visit to Belfast, the Ulster Farmers’ Union also questioned the continued need for an Agricultural Wages Board given the protection already offered to workers by the National Minimum Wage.

3.67 The National Minimum Wage has a potential knock-on effect on differentials for the agricultural wage rates set by the Agricultural Wages Boards. Our Survey of Employers (2008) found that the agricultural sector stands out as the sector least likely to see a fall in profits, an increase in prices, or increased measures to control labour costs as a consequence of the October 2007 upratings in the National Minimum Wage. Agriculture is one of the few sectors to benefit from increasing employment and income. But, future prospects for farming income are difficult to predict and, more generally, there is the uncertainty of the global economy where a slowdown would be expected to lead to a dampening of commodity prices.

3.68 The picture for the manufacturing sectors is much more pessimistic with falling employment and declining output. The manufacturing sectors in the UK have been in long-term decline since before 1998. Between December 2007 and December 2008, job numbers fell by 4.3 per cent. Output fell by 8.1 per cent in the fourth quarter of 2008 compared with a year earlier and is down 3.8 per cent on the fourth quarter of 1998.

3.69 Within manufacturing, the textiles and clothing sector has generally experienced negative growth since the late 1980s and is down 31.3 per cent on the fourth quarter of 1998. This is a long-term trend that pre-dates the introduction of the minimum wage, and competition from overseas low-wage economies is the primary cause. But, output remained steady in the fourth quarter of 2008 compared with a year earlier (see Figure 3.8). The food processing sector saw a fall in output of 3.5 per cent in the fourth quarter of 2008 compared with the same period in 2007 and a slight rise of 0.8 per cent on the fourth quarter of 1998.

Figure 3.8 Output Growth, UK, and Employee Jobs, GB, in the Textile and Clothing Sector, 1999–2008

Source: LPC estimates based on ONS employee jobs series, three-monthly, not seasonally adjusted, GB, 1999–2008 and LPC estimates based on Index of Production (CKZB), quarterly, seasonally adjusted, UK, 1999–2008.

Note: As a result of the break in the employee jobs series between December 2005 and September 2006, annual changes cannot be estimated for periods from March 2006 to June 2007.

3.70 In January 2008, there were nearly 153,000 VAT-registered enterprises in the manufacturing sector. The number of enterprises fell slightly by 360 (0.2 per cent) in January 2008 compared with January 2007. In the textile and clothing sector, there were over 9,000 enterprises in January 2008. The number of enterprises fell by 110 (1.2 per cent) in January 2008 compared with January 2007. In the food processing sector, however, the number of enterprises rose by 75 (1.2 per cent) over the same period to a total of over 6,500 enterprises in January 2008. Food processing is becoming increasingly scientific in developing countries, with growing awareness of food quality among consumers. Our Survey of Employers (2008) found that, as a result of the October 2007 upratings, 22 per cent of firms in the food processing sector increased their use of new technology or processes, the highest proportion of any sector.

3.71 Earnings figures for textiles and clothing show a slight reduction in the proportion of jobs paid at the adult minimum wage between April 2007 and April 2008 to just below 7 per cent. In the food processing sector, the number of jobs paid at the adult minimum wage in April 2008 remained at just below 4 per cent. The textiles and clothing sector accounts for just over 1 per cent of all jobs in low-paying sectors. The figure is slightly higher for food processing, which accounts for over 4 per cent of all jobs in low-paying sectors.

3.72 The textiles and clothing sector has seen a reduction in the number of jobs in the year to September 2008. Between December 2007 and December 2008, the number of jobs fell by 4.6 per cent from 93,000 to 88,000 jobs. This reduction continues a long-term decline. In the food processing sector, employment has also been declining. Between December 2007 and December 2008, the number of jobs fell by 1.6 per cent, from 356,000 to 350,000 jobs. According to the LFS, employment in the low-paying textiles and clothing occupations fell by nearly 3,000 to just under 47,000 between the fourth quarter of 2007 and the same period in 2008. Employment in the low-paying food processing occupations fell by just over 14,000 to around 207,000 between the fourth quarter of 2007 and the same period in 2008.

3.73 The Food and Drink Federation reported that the National Minimum Wage has had a direct impact on the pay levels and the structure of remuneration for its members. There was pressure to maintain differentials as employees still attached a stigma to the term ‘minimum wage’ and tried to work for employers paying above this. It also advised that increases in the minimum wage have had an impact on their suppliers of cleaning, catering and security services, in contrast to the claims made to us by the cleaning and security sectors, and that these suppliers have directly passed on increases in wage costs. The British Apparel & Textile Confederation (BATC) claimed that consumer demand and confidence were falling. Its members would be negotiating pay rises below the rate of inflation and, as a consequence, any future increases above this would have a disproportionate effect on differentials.

3.74 The manufacturing sectors in the UK have been in a long-term decline with falling employment and negative growth in the period since 1998. This decline pre-dates the introduction of the National Minimum Wage and is primarily linked, particularly in the textiles and clothing sector, to competition from overseas low-wage economies.

‘Future cost pressures, economic uncertainty and continued enhancement of employee benefits require a moderation of future increases for the sustainability of the sector in the UK.’

3.75 Finally, we consider the impact of the minimum wage on small firms. Small and medium-sized enterprises (SMEs) are important contributors to the UK economy. In 2007 the 1.2 million businesses with at least one but fewer than 250 employees accounted for 43 per cent of UK employment and 44 per cent of UK turnover (BERR, Enterprise Directorate, 2008d). In 2007 small firms (1–49 employees) accounted for 97 per cent of the private sector enterprises with employees in the UK, with 31 per cent of UK employment, and 29 per cent of UK turnover. As shown in Chapter 2, those on the minimum wage are disproportionately likely to be employed by small firms; hence we take a close interest in the performance of this sector.

3.76 It has been widely reported that the credit crunch and the economic downturn the UK is facing have had an impact on small businesses, particularly in relation to their access to credit. Between October 2008 and February 2009, the Government announced a number of measures that were intended to help businesses, particularly SMEs, cope with the economic downturn. The measures announced include: providing guarantees to support bank lending to smaller firms; allowing businesses in temporary financial difficulty to pay their tax bills on an extended timetable; more generous tax relief for businesses making losses; and a working capital scheme that would secure up to £20 billion of short-term lending to companies with a turnover of up to £500 million.

3.77 Representatives from employer organisations reported to us that access to finance was the main concern of businesses at present, and many did not think the measures taken by the Government would have a positive impact on this, particularly in the short-term. This evidence is supported by the CBI’s Access to Finance Survey (CBI, 2009) in February 2009, which found that the availability of credit for firms had continued to deteriorate and firms expected credit conditions to remain difficult over the next three months. Sixty per cent of firms surveyed, which had sought new or renewed finance lines, said credit availability had deteriorated in the last three months, 41 per cent had seen no change and no firms saw an improvement. This issue is not directly linked to the minimum wage. As we have reported in Chapter 2, however, those employed on the minimum wage are disproportionately likely to be employed by small firms, so anything that has an impact on the viability of small firms will affect the low paid.

3.78 Official earnings data show that, as in previous years, small firms are more affected by the minimum wage than medium-sized or large firms. Figure 3.9 shows that over 4 per cent of jobs in small firms were paid at the adult rate of the minimum wage in April 2008. This was a slight reduction on 2007, but an increase on 2006. In April 2008, just over 3 per cent of jobs in medium-sized firms were paid at the adult rate of the minimum wage, and this reduces to just over 2 per cent for large firms.

3.79 Looking at those further up the earnings distribution in small firms, the number of workers paid between the current and forthcoming adult rate of the minimum wage has steadily decreased between 2006 and 2008. As the numbers paid at the adult minimum wage has remained relatively constant for the same period, this suggests that each year more are paid above the forthcoming rate.

Figure 3.9 Percentage of Employees Paid At the Adult National Minimum Wage Rate and Between the Current and Forthcoming Rate, by Firm Size, UK, 2006–2008

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2006–2008.

3.80 There is further evidence, from the 2006/07 Annual Survey of Small Businesses’ Opinions (BERR, 2008a), that the minimum wage continues to have an impact on small firms. Around 14 per cent said that regulations were the biggest obstacles to achieving business success. Of these, 4 per cent cited the minimum wage as the biggest obstacle, although the remainder of the respondents cited other regulations as the biggest obstacles (e.g. health and safety, employment, tax etc.). In its evidence, the Federation of Small Businesses (FSB) said 84 per cent of respondents to a recent survey had seen a rise in the costs of running a business in 2008 and 46 per cent had seen a decrease in trade. The FSB argued that to protect jobs and businesses, business owners needed the flexibility to negotiate wages with their employees. The minimum wage was taking away this option and, as a result, many of its members had reported not filling vacancies and delaying the creation of new posts.

3.81 Figure 3.10 shows that in the fourth quarter of 2008 there were 8,000 fewer employees in small firms than in the same period in 2007, falling to a total of 12.0 million employees. In comparison, over the same period, there was an increase of 49,000 to around 6.5 million employees in medium-sized firms. Large firms also experienced a reduction in employees between the fourth quarter of 2007 and the fourth quarter of 2008.

Source: LPC estimates based on LFS Microdata, quarterly, not seasonally adjusted, UK, 2006–2008

‘The one size fits all approach of National Minimum Wage rises do not reflect the economic situation of the businesses that use it.’

3.82 The Association of Convenience Stores (ACS) advised that previous increases in the minimum wage had made it increasingly difficult for many stores to employ staff. The Rural Shops Alliance (RSA) noted that the economic downturn and rapid increase in food price inflation had led to poor trading conditions for many convenience stores and thus removed any financial cushion. It reiterated that rural shops already run on very tight margins and any increase in costs translated directly through to profits. It also stated that many of its members had to pay their staff considerably more per hour than the proprietors were able to pay themselves. The British Chamber of Commerce commented that the economic downturn posed a growing threat to employment in the UK. It repeated that the potential adverse impact of the minimum wage must be examined in a wider context, taking into account the regulatory burden facing UK businesses (particularly SMEs) in areas such as employment, social legislation, and health and safety. A contrary view was expressed by the TUC, which reported that the evidence showed that the small business sector was continuing to thrive as small firms were holding their own in terms of both their share of overall employment and their share of overall turnover.

3.83 The evidence shows that the minimum wage continues to have a proportionally greater impact on small firms than larger firms. Although the economic downturn will have an impact across the whole economy, small firms are finding it particularly difficult, especially in relation to access to credit. Data available up to publication of this report show that employment in small firms is falling.

3.84 The low-paying industries have experienced a fall in jobs of a similar proportion to the fall in jobs in the overall UK economy. The majority of the job losses in the low-paying industries, in the period December 2007 to December 2008, occurred in the two largest industries, retail and hospitality. These sectors are sensitive to falling consumer discretionary spending and the decline of the economy into recession. And the fall in jobs is more likely a consequence of the general economic climate than as a result of increases in the minimum wage. Other sectors that have experienced job losses are those that have faced a longer-term decline in jobs, influenced by factors that often pre-date the minimum wage, for example manufacturing. Small firms have, so far, only seen a marginal reduction in employment. Some low-paying industries experienced an increase in jobs over the same period. Social care saw the largest rise in the number of jobs, with other industries (e.g. security, hairdressing) also experiencing increases. The low-paying occupational sector of childcare experienced a rise in employment in the year to the fourth quarter of 2008, while office work experienced a slight fall in employment in the same period.

3.85 Data continue to show that the minimum wage has had a different impact on each of the low-paying sectors, having a greater impact on some than others. Research shows that the lower increase in the National Minimum Wage in October 2007 has allowed for some restoration of wage differentials. Some sectors have been able to maintain or reduce the proportion of jobs at the minimum wage but other sectors saw a continued rise in the proportion of jobs paid at the minimum wage. In line with recommendations we made in previous reports, we have recommended that the commissioning policies of local authorities and the NHS should reflect the actual costs of provision, including the National Minimum Wage, when purchasing care from social care providers in the independent sector.

3.86 Having considered the position of the low-paying sectors and small firms, we go on in the next chapter to look at the impact of the National Minimum Wage on particular groups of workers.

[1]Totals for each year were derived by adding together numbers of paid staff for each type of childcare provider. Caution should be exercised with these totals as some double counting may have taken place because members of staff may have worked for more than one childcare provider.