WELCOME TO THE LOW PAY COMMISSION

4.1 In this year’s terms of reference the Government again asked us to review the impact of the National Minimum Wage on certain groups of workers: women, ethnic minorities, people with disabilities, migrant workers, and those of different age groups. This chapter begins by discussing each of these key groups and explaining why it is important to review their particular position in the labour market.

4.2 The groups tend to contain a large proportion of workers on low earnings and, therefore, if the National Minimum Wage has an impact on employment, they are the ones most likely to be affected. In previous years evidence has tended to show that their employment prospects have improved since the introduction of the minimum wage. Young people have been an exception to this trend, and we discuss their labour market position in Chapter 5. Young people, like the least-skilled workers in the labour market, have experienced poor employment prospects in recent years.

4.3 In addition, there are other groups of workers who, by the nature of their work, face issues around the application of the minimum wage that are of particular concern to us. These groups are affected for a range of reasons, such as the type of employment (e.g. agency workers and those on Work Trials); location (e.g. homeworkers and seafarers); and questions around whether and when employees are within the scope of the National Minimum Wage Act (e.g. voluntary workers, people on unpaid work experience, those on sleepovers, and people taking part in therapeutic activity). We consider each of these in turn.

4.4 The chapter ends by considering groups of workers affected by the accommodation offset and the treatment of tips, which also raise issues about the coverage and scope of the Act. For each of these groups we explain the reasons for our interest, report on evidence received from stakeholders and other sources on the impact of the minimum wage, and provide an update on any recent developments in government policy, including responses to the recommendations we made to the Government last year.

4.5 Each year, before recommending rates for the minimum wage, we give careful consideration to the labour market position of workers that are particularly affected by the minimum wage. We do not recommend a level for the National Minimum Wage in order to meet employment targets for specific disadvantaged groups, although this may be a positive consequence of our work.

4.6 Building on the last chapter, we consider in more detail the groups that contain a large proportion of workers on low earnings and which are therefore most likely to be affected by any increases in the minimum wage. Once we identify that the minimum wage has had an impact on earnings, we then look to investigate whether other factors have also been affected. For example, when the National Minimum Wage was introduced, it was anticipated that it would have an impact on employment. If this had occurred, it would have been likely to show up initially among the groups we have identified.

4.7 There is a substantial amount of high quality data available on earnings by gender and age from the Annual Survey of Hours and Earnings (ASHE). Data on earnings are available from the Labour Force Survey (LFS) for ethnic minority groups, people with disabilities, migrant workers, and people with no qualifications; but this is self-reported, a smaller sample and is therefore subject to greater errors. The reliability of data available to support our analysis varies accordingly.

4.8 Recent research carried out by Dickens, Riley and Wilkinson (2009) finds clear evidence that the strongest wage growth in the period 2001–2006 was in the lower percentiles of the wage distribution. Similarly, Figure 2.12 shows that since the introduction of the minimum wage, those at the bottom of the earnings distribution have received higher pay rises than those at the middle of the distribution. This implies that the National Minimum Wage upratings increased wages more for those directly affected by it.

4.9 Figure 4.1 illustrates that employees in our groups of interest were more likely to be paid below the forthcoming October 2008 adult minimum wage than workers in general or men (used here as a comparison group), and hence have a higher chance of being affected by minimum wage upratings. Workers aged 16–17 had the highest proportion paid below the forthcoming adult minimum wage rate, at around three-quarters. Those aged 18–21 were also highly likely to be paid below the October 2008 rate (34.8 per cent estimated from ASHE and 41.1 per cent from LFS). Of the other groups, the least-skilled (people with no qualifications) were most likely to be minimum wage workers, followed by older workers (defined on this occasion as those over State Pension age), ethnic minorities, women, migrant workers, and those with disabilities.

Figure 4.1 Proportion of Workers Aged 16 and Over Within Various Groups Paid Below the Forthcoming October 2008 Adult National Minimum Wage, UK, 2008

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2008 and LFS Microdata, income weights, UK, Q2 2008.

4.10 The LFS shows, as depicted in Figure 4.2, that the employment rate for the working age population as a whole has increased from 73.4 per cent in the fourth quarter of 1998 to 74.5 per cent in the fourth quarter of 2008. The only groups that have not followed this trend are young people and those with no qualifications. The position of young people is covered in more detail in Chapter 5. There has been a significant decline in the employment rate of those with no qualifications since 2001. The minimum wage might have been a factor as the decline begins after the large uprating in October 2001. Although the decline had appeared to bottom out in 2007, employment for those with no qualifications began to decline again in 2008. Along with young people, the least-skilled are probably most vulnerable to the current slowdown in the economy.

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter moving average, UK, Q4 1998–2008.

Notes:
a. Illustrates comparable quarters before the minimum wage was introduced, after the largest uprating, after the 16–17 year old rate was introduced, and the latest available.

b. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus, direct comparisons between the periods before and after should not be made.

4.11 Figure 4.3 shows that unemployment trends for these groups have generally mirrored those for employment. The increase in the unemployment rate for those with no qualifications started later and has been gentler than for young people, particularly 16–17 year olds. For the other groups, there are initial indications that the economic downturn started to have an adverse impact on unemployment rates in the third and fourth quarters of 2008.

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter moving average, UK, Q4 1998–2008.

a. Illustrates comparable quarters before the minimum wage was introduced, after the largest uprating, after the 16–17 year old rate was introduced, and the latest available.

b. The definition of ethnic groups in the LFS changed in spring 2001 to be consistent with the 2001 Census classifications; thus, direct comparisons between the periods before and after should not be made.

4.12 On the whole, we conclude that there continue to be worrying signs in the labour market for young people and those who are the least-skilled. But the labour market positions of the other groups appear to have been more resilient. We now look at the labour market position of each of the groups in more detail.

4.13 Despite their improved labour market prospects over recent years, women remain more likely to be low-paid than men. There were 12.4 million female employees in January 2008, and we explore how and where they work, their pay in relation to men, and whether the minimum wage upratings have had an impact on their earnings. We then assess whether, as a result, the minimum wage has affected their position in the labour market.

4.14 In the fourth quarter of 2008 the LFS showed 5.1 million women working part-time (40 per cent), accounting for over 76 per cent of all part-time workers. This high proportion leads to lower average pay and increased coverage of the minimum wage as part-time workers are over twice as likely to be paid at the minimum wage. We estimate using ASHE that around two-thirds of jobs covered by the October 2008 increases in the minimum wage were held by women. Around 5.6 per cent of women were covered by those upratings compared with 3.0 per cent of men. By focusing solely on full-time workers, these figures fall to 3.0 and 2.1 per cent respectively.

4.15 Women are more likely to work in low-paying sectors: Figure 4.4 shows that around two-thirds of workers in the low-paying occupations are female compared with around two-fifths in all other occupations. Occupations in sectors such as childcare, hairdressing, office work and social care are predominantly female (more than 80 per cent). Comparing the gender split for low-paying industries yields a similar picture, although it is less pronounced because they include supervisory and managerial roles, which are more likely to be held by men.

Source: LPC estimates based on LFS Microdata, four-quarter moving average, UK, Q4 2008.

4.16 Having identified the prevalence of women in part-time roles and low-paying sectors as possible reasons for the difference in pay between men and women, we can assess its magnitude by calculating the gender pay gap (i.e. the proportional difference between men and women’s earnings). In the following analysis we have used the median gender pay gap, unless stated otherwise, as it is less affected by extreme earnings than the mean. Table 4.1 shows that the median gender pay gap decreased from above 16 per cent before the introduction of the minimum wage to 11.0 per cent in April 2007. Given the higher proportion of women paid at the minimum wage, this may have had an impact on differentials further up the earnings distribution. The latest estimate for April 2008 shows an increase to 11.6 per cent. One reason for this could be that the increase in the adult rate in October 2007 was smaller than the rise in average earnings. The gender pay gap at the lowest decile is smaller, but it appears more sensitive to the level of the uprating.

Table 4.1 Hourly Gender Pay Gaps, Full-time Workers Aged 18 Years and Over, UK, 1997–2008

Source: LPC estimates based on ASHE without supplementary information, April 1997–2004, ASHE with supplementary information, April 2004–2006, and ASHE 2007 methodology, April 2006–2008, standard weights, UK.

Note: Direct comparisons before and after 2004 and those before and after 2006, should be made with care due to changes in the data series.

4.17 Figure 4.5 illustrates how the gender pay gap increases across the earnings distribution, from roughly zero at the second percentile, which tends to be at the minimum wage, to over 30 per cent at the upper end of the distribution. It also shows that the gap has decreased since the introduction of the minimum wage, except for very high earners where, unsurprisingly, the minimum wage does not appear to have had an impact.

Figure 4.5 Hourly Gender Pay Gap, by Percentile, Full-time Workers Aged 18 Years and Over, UK, 1998 and 2006–2008

Source: LPC estimates based on ASHE without supplementary information, April 1998, and ASHE 2007 methodology, April 2006–2008, low-pay weights, UK.

Note: Direct comparisons before and after 2004 and those before and after 2006, should be made with care due to changes in the data series.

4.18 Further analysis of ASHE data suggests that from the 30th percentile upwards, the gender pay gap is larger within the low-paying industries than other industrial sectors because of the inclusion of senior, predominantly male, roles. From the 20th percentile upwards, however, the gap is smaller within the low-paying occupations than other occupations, suggesting that the minimum wage continues to generate more equal pay for lower earners. Furthermore, ASHE provides evidence that there is a relationship between the gender pay gap and age. For 16–17 year olds the gap is negative, with average female earnings in April 2008 7.6 per cent greater than men’s because of the higher proportion of young men being paid below the adult minimum wage, presumably in some form of apprentice training. Between ages 18 and 29 the pay gap is minimal but then rises, reaching its peak at 18.3 per cent for 40–49 year olds. In addition, ASHE reveals that in April 2008 there is a slight negative median pay gap for part-time workers. In April 2008 median hourly earnings for part-time women were 2.5 per cent higher than for part-time men. Nevertheless, the mean gender pay gap for part-time workers is positive (affected by higher paid male roles) and the median pay gap between female full-time and part-time earnings remains above 30 per cent (as part-time work is more likely to be low-paid).

4.19 The prevalence of women in part-time roles and low-paying sectors suggests that the National Minimum Wage plays a more important role in raising women’s earnings than it does men’s. The general reduction in the gender pay gap since 1998 provides evidence that the minimum wage is having a greater impact on women’s earnings than it is on men’s. The latest increase in the median gender pay gap may be related to the smaller proportional uprating in the minimum wage in October 2007 compared with average earnings, and we will be interested to see next year whether it is going to be a one-off rise or the start of a trend.

4.20 We now focus on whether, as a result of the impact on earnings, women’s prospects in the labour market have been adversely affected. Figure 4.2 showed that the employment rate of working age women in the fourth quarter of 2008 was 70.2 per cent. It remained below the rate for men, at 78.5 per cent, because of women’s higher inactivity rates (around 26 per cent compared with 16 per cent for men). Male and female employment rates have been increasing at a similar pace since before the introduction of the minimum wage and both have seen a levelling off in the most recent quarters as a result of the economic downturn. Women generally have a lower unemployment rate than men. Since 1998, women’s unemployment rates have fluctuated between 4 and 6 per cent, although again, like men, there have been increases in the last few quarters owing to the changing economic climate.

4.21 In summary, the data do not provide strong evidence of a negative impact on women’s employment as a consequence of the minimum wage upratings. This conclusion is echoed in the research by Dickens, Riley and Wilkinson (2009) for job entry. It concludes that although there is some evidence of a negative impact on job retention for adult women, there is no systematic pattern.

4.22 As in previous years, our analysis uses LFS definitions of ethnic minority groups and compares their characteristics with those of white workers. In the fourth quarter of 2008 there were 2.5 million ethnic minority workers (around 9 per cent of all workers) and their inactivity rate was over 30 per cent. Ethnic minority groups are more likely to work in low-paying industries, with security, hospitality and textiles employing the highest proportions.

4.23 The earnings of workers from ethnic minority backgrounds are, on average, lower than the earnings of white workers, although the pay gap is generally less pronounced than for the other groups looked at in detail in this chapter. Figure 4.6 provides evidence that the minimum wage has significantly reduced the pay gap at the lowest decile. There are smaller reductions since 1998 at the second and third deciles, although the pay gap at the median was greater in 2008 at 4.8 per cent. The pay gap did not vary considerably along the earnings distribution in 2008, although it was smaller at the lower decile which could be a result of the minimum wage. In their written evidence to our consultation, the Equality and Human Rights Commission (EHRC) also concluded that the ethnic minority pay gap has improved since the introduction of the National Minimum Wage.

Source: LPC estimates based on LFS Microdata, not seasonally adjusted, UK, spring seasonal quarter 1998 and Q2 calendar quarter 2008.

4.24 If we look at the different ethnic backgrounds separately, rather than collectively, we see a different story unfold. For example, Chinese workers (included in the ‘other non-white’ category below) had higher median hourly earnings than white workers in the second quarter of 2008, at £12.06 compared with £9.45 per hour respectively. In fact, their average earnings were higher at every decile. Up to the 70th percentile, black workers are also estimated to have higher average earnings compared with white workers. Because of the different earnings profiles for the various ethnic groups, our analysis continues by examining the groups separately.

4.25 We estimate that in the second quarter of 2008, the proportion of adult ethnic minority employees paid at the National Minimum Wage was greater than for all employees by more than a half (defined by the 5 pence band from £5.52 to £5.57). Similarly, Figure 4.7 shows that the estimated proportion of ethnic minority adults covered by the October 2008 minimum wage uprating was around 2 percentage points higher than for white adults. It also illustrates, however, that white workers were around twice as likely to be covered as black or Indian workers.

Note: Covered employees are defined as adults (aged 22 and over) earning less than £5.63 in April 2008.

4.26 Despite some specific ethnic minority groups receiving higher earnings than white workers on average and some having a lower minimum wage coverage, the earnings of ethnic minorities generally have fared worse than those of their white counterparts. A significant proportion of ethnic minority workers were paid at the minimum wage in April 2008. Given that, in the absence of the minimum wage, it is not a typical hourly rate, this provides evidence that the minimum wage is having an impact on their earnings and we now examine their resulting labour market outcomes.

4.27 Figure 4.8 shows that people from ethnic minority groups have lower employment rates than white people, with Indians the closest, at around 70 per cent since 2005. Although they are less likely to be employed, these groups have seen faster growth in employment than white people since the introduction of the minimum wage. The Pakistani and Bangladeshi communities had the lowest rates, with a combined employment rate of 47.5 per cent in the fourth quarter of 2008. By splitting the information by gender, we found that women in this combined group were far less likely to be employed than men (26.0 per cent compared with 68.2 per cent), because of their high inactivity rates.

Figure 4.8 Working Age Employment Rates for Ethnic Minority Groups, UK, 1998–2008

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter moving average, UK, 1998–2008.

Note: The definition of ethnic groups in the LFS changed in spring 2001 to be consistent with the 2001 Census classifications; thus, direct comparisons between the periods before and after should not be made.

4.28 Figure 4.9 shows that the unemployment rates for ethnic minority groups are all higher than for white people, but they decreased slightly faster between 1998 and 2005 and have since continued to see more fluctuation. Again, we identify that Pakistanis and Bangladeshis experience the worst labour market outcomes.

Figure 4.9 Working Age Unemployment Rates for Ethnic Minority Groups, UK, 1998–2008

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter moving average, UK, 1998–2008.

4.29 There is no evidence to suggest that the labour market position of ethnic minority workers has been adversely affected by the upratings in the minimum wage. In terms of the changing patterns over time, ethnic minorities have seen faster improvements than their white counterparts. The employment and unemployment gaps had been closing since before the introduction of the National Minimum Wage. We take a further look at the interaction between ethnicity and the minimum wage in the section on migrant workers later in this chapter.

4.30 In their evidence submitted this year, UNISON highlighted the problems people with disabilities face in the labour market. It called for us to consider their higher living costs when making our recommendations. According to the LFS, there were 5.3 million people with work-limiting disabilities in the fourth quarter of 2008, making up 12.4 per cent of the working age population. Their participation rate is low, with 54.1 per cent inactive, although the activity rate has generally been increasing over the last ten years. Around 2.1 million of the group were working in the fourth quarter of 2008, accounting for 7.1 per cent of the UK population in work. People with work-limiting disabilities are less likely to be in work than those without a disability. Part-time work is more prevalent for people with work-limiting disabilities: a third of the group have reduced hours, accounting for around 1 in 10 of all part-time workers. They are only slightly more likely to work in low-paying occupations, with cleaning containing the highest proportion (13 per cent) of employees with work-limiting disabilities.

4.31 Figure 4.10 illustrates that a pay gap exists; that is, median hourly earnings for people with a work-limiting disability are lower than for workers without a disability. There is evidence that the minimum wage has caused a similar reduction in the pay gap at each of the lowest five deciles. The gap is smaller at the lower end of the earnings distribution at around 5.5 per cent in 2008, which could also be a result of the minimum wage.

Figure 4.10 Pay Gap for People with Work-limiting Disabilities Compared with People without Work-limiting Disabilities, UK, 1998 and 2008

Source: LPC estimates based on LFS Microdata, not seasonally adjusted, UK, spring seasonal quarter 1998 and Q2 calendar quarter 2008.

4.32 Having identified that people with work-limiting disabilities are generally lower paid than other workers, we have investigated the proportions being paid at the minimum wage. Using the LFS, we estimate that 4.3 per cent of adults in this group were paid at the National Minimum Wage in the second quarter of 2008 compared with 3.1 per cent of all workers. Figure 4.11 shows a clear spike in the earnings distribution in the second quarter of 2008. It occurs at the minimum wage, the five pence band from £5.52 to £5.57.

Figure 4.11 Earnings Distribution for People with Work-limiting Disabilities, UK, 2008

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

4.33 The employment rate of those with a work-limiting disability, as shown in Figure 4.12, has been around 40 per cent since 2000, which is approximately half the rate for other employees. In the first quarter of 1999 the rate was 37.7 per cent; hence since before the introduction of the minimum wage this group has seen a marginal increase in employment. Their unemployment rate has been more volatile. It decreased between 1998 and 2004 and then, most recently, increased to 12.3 per cent, which is more than twice as high as for other employees. The initial decrease suggests that the introduction of the minimum wage did not increase their likelihood of being unemployed, although we note that the upturn appears to coincide with the larger upratings. In our last two reports we discussed the link between the upturn and the number of people coming off incapacity benefit around this time. The number of people of working age receiving incapacity benefit decreased from 2.77 million in May 2004 to 2.69 million in May 2006 and the latest figure shows a further fall to 2.59 million in August 2008 (DWP, 2009). Nevertheless, although the increase in unemployment also occurred for other employees, we will continue to monitor the position for any impacts from the minimum wage.

Figure 4.12 Working Age Employment and Unemployment Rates for People with Work-limiting Disabilities, UK, 1998–2008

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter moving average, UK, 1998–2008.

4.34 Many migrant workers are highly skilled and are paid well above the National Minimum Wage but, according to LFS, a significant proportion are low-paid. This has been particularly true of migrant workers who have arrived from the accession (A8) countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) since 2004. Although many are skilled, large numbers have taken up jobs in unskilled, low-paying occupations (Dustman, Frattini and Preston, 2007). We are therefore interested in the impact of this increase in the labour supply of workers on unemployment and wage inflation at the lower end of the labour market. Migrant workers have been identified throughout our consultations as a group that are particularly vulnerable to exploitation. We also report on a number of stakeholder views and action taken by the Government in relation to migrant workers and enforcement in Chapter 7.

4.35 In their written evidence, the devolved administrations raised concerns over the treatment of migrant workers. The Northern Ireland Assembly Executive reported that migrant workers had been playing an increasingly significant role in its economy in recent years, with a considerable proportion likely to be paid at or around the National Minimum Wage. The Executive asked for the needs of migrant workers to be taken into account. The Welsh Assembly Government reported significant inward migration and advised that a recent study commissioned by Wales TUC raised concerns about the treatment of migrant workers in terms of pay and employment conditions. It said it would welcome closer examination of the effect of the National Minimum Wage on this particular group. Citizens Advice Northern Ireland reported a rise in the proportion of complaints it had received from migrant workers, up from 5 per cent in 2006/07 to 14 per cent in 2007/08. Citizens Advice Scotland called for better targeting at the industries employing workers from abroad.

4.36 There is no definitive data set for the number of migrants to the UK and we have therefore examined a variety of sources in our analysis. We have used Office for National Statistics (ONS) estimates of Total International Migration, which are based on the International Passenger Survey. The survey is used to identify numbers of ‘possible migrants’ and ‘long stay visitors’, which are combined with Home Office data to derive estimates of total inflow and outflow of migrants. ONS is undertaking a programme of work with a range of government departments to improve the quality of migration statistics. The programme is currently focusing on consulting users, providing secure access to the data, and planning the timing of publications. In the longer term, ONS is investigating new methodologies to use for monitoring migration, which could involve new surveys or use of the 2011 Census. We encourage ONS in its work in this area and we will be interested in future developments.

4.37 In addition to ONS, there are two other main sources of information. The first is the Department for Work and Pensions’ (DWP) National Insurance Number (NINo) Allocations to Adult Overseas Nationals Entering the UK. A NINo is required by any overseas national looking to work or claim benefits in the UK, including the self-employed. The second is the Worker Registration Scheme (WRS) that is collated by the Home Office. Since the enlargement of the EU in May 2004, workers from the A8 countries wishing to take up employment in the UK for a period of at least a month have been required to register with the WRS. Both sources provide a measurement of inflow to the UK but neither measure outflow.

4.38 We have previously noted the substantial increase in the number of migrant workers in the UK over a number of years. Table 4.2 contains the most comparable figures available over recent years from the three data sources, with all showing increases in the number of migrants since 2002. The DWP NINo inflow series shows the fastest increases because of the influx of short-term workers. Although the NINo series was the only one not showing an inflow decrease in 2007, figures to the third quarter of 2008 show the number of applications for NINos has since declined. The latest figure from the WRS is 165,000 for 2008, a 24 per cent reduction in the number of applicants since 2007.

b. DWP NINos are based on the number of registrations; they include self-employed, whereas WRS do not.

c. WRS figures are for applicants, rather than the number of applications made; 2004 is May to December.

4.39 The most recent Home Office Accession Monitoring Report, May 2004 – December 2008 (HO, 2009) reports that there were 27,000 applicants to the WRS in the fourth quarter of 2008 compared with 51,000 for the same period in 2007 and 63,000 in 2006. The decrease is mainly attributed to a fall in applications by Polish nationals, from 36,000 in the fourth quarter of 2007 to 16,000 in the fourth quarter of 2008. Since 2004, the highest proportion of applicants has been Polish (66 per cent of the total) followed by Slovakian (11 per cent) and Lithuanian (9 per cent). According to the report, in 2008 nearly all workers (96 per cent) registered with the WRS were working more than 16 hours per week and 86 per cent more than 35 hours per week. About four-fifths (78 per cent) of those registering in 2008 were between 18 and 34 years of age.

4.40 In previous reports we have referred to the range of research and evidence suggesting that these recent migrants from the A8 have not affected employment or unemployment in the UK. Research for DWP concluded in 2006 that the economic impact of migration from the new EU member states has been modest, but broadly positive (Gilpin, Henty, Lemos, Portes, Bullen, 2006). We have not received any evidence against the view that migrant workers have been contributing to the success of the UK economy by filling gaps in the labour market. On pay, Dustman, Frattini and Preston (2007) found that overall there was a slight positive effect on UK wages from recent immigration, although the effects were negative at the lower end of the earnings distribution.

4.41 ONS has carried out an analysis of the earnings of migrant workers (data from LFS) that is based on people born outside the UK (Khan, 2008b). Although this definition takes no account of nationality or citizenship, using country of birth may be more useful for comparisons over time because it does not change. The analysis shows that these workers are paid less than UK-born employees. Since 2005, median gross weekly earnings for full-time employees have been lower for non-UK-born employees than for UK-born employees. In 2008, earnings were lowest for those born in the A8 countries, followed by those born in Pakistan and Bangladesh. Around 58 per cent of non-UK-born employees who arrived in the UK between 2001 and 2008 worked in occupations with median earnings below those for all workers. In particular, 44 per cent of all workers in elementary occupations,[1] which are among the lowest-paid occupations, were born in either the A8 countries, Pakistan or Bangladesh.

4.42 We have built on ONS’s work with our own analysis of the LFS by country of birth. We estimate that 8.8 per cent of adult workers (aged 22 and above) born outside the UK were covered by the October 2008 minimum wage uprating (i.e. were paid less than £5.63 in April 2008). This compares with 5.6 per cent of UK-born adult workers and 6.0 per cent of adult workers overall.

4.43 The WRS also provides some valuable information on the pay levels of migrants from the A8 countries (HO, 2009). Of the 27,000 applications in the fourth quarter of 2008, around a third were in low-paying sectors. Thus changes in the minimum wage would have an effect on the earnings of migrant workers. Hospitality was the most common sector with around 5,000 migrant workers.

4.44 We now focus on whether the National Minimum Wage has affected the employment prospects of migrant workers. Figure 4.13 shows that of those not born in the UK, the employment rate has been increasing since before the introduction of the National Minimum Wage. In fact, since April 1999, when the minimum wage was introduced, the difference between the UK-born and non-UK-born employment rates has decreased by 4.3 percentage points to 6.4 per cent (fourth quarter, 2008). The two regions of birth we have identified as having the lowest-paid UK workers have seen the largest increases in employment rates since 1999: the rate for those born in the A8 countries rose by 17.6 percentage points and that for those born in Pakistan or Bangladesh by 9.5 percentage points. Without seasonal adjustment, the employment rate for employees born in the A8 countries increased by 15.8 percentage points between the first two quarters of 2004 following the enlargement of the EU and remained higher than the employment rate for the UK-born workforce to the fourth quarter of 2008.

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter moving average, UK, 1997–2008.

4.45 Supporting the ONS data, research undertaken by the Tenon Forum in July 2008 (Tenon, 2008) showed that the number of small and medium-sized enterprises (SMEs) employing migrant workers had more than doubled in the past two years. Around 48 per cent of the SMEs said they employed non-UK nationals, compared with 21 per cent in 2006. With the downturn in the UK economy, however, 29 per cent of entrepreneurs who employ non-UK nationals were concerned that foreign workers may choose to return home. The research also showed that 30 per cent of entrepreneurs said they do not employ migrant workers and have no intention of doing so, although nearly half said the reason was because they do not receive applications from migrant workers.

4.46 In February 2008, the Government began to phase in a new scheme to replace the work permit system with a Points Based System (PBS) for immigration from outside the European Economic Area. Although it is too soon to see the impact of this scheme on employment trends, it is something we will monitor in future. The PBS consists of five tiers and the Home Office has recently drawn up criteria for Tiers 1 and 2. Tier 1 covers highly skilled workers (introduced in February 2008) and Tier 2 covers shortage occupations (introduced in November 2008). The Government advised that as a result of the PBS, the number of jobs available to non-EU workers would fall from 1 million to fewer than 800,000. One of the restrictions imposed by the PBS is that only skilled care workers in UK jobs earning over £8.80 an hour will be allowed to work here. The United Kingdom Home Care Association estimated that as migrant workers accounted for 23 per cent of the homecare workforce, the new PBS will limit the ability of its members to recruit from outside the EU and EU migrants will not be sufficient to meet the gap.

4.47 The evidence for migrant workers strongly suggests that the minimum wage has not had a detrimental impact on their employment prospects. We have highlighted changes that have begun to take effect, such as the PBS, and we will continue to monitor these.

4.48 We analyse the earnings and labour market position of those workers with no qualifications using data from the LFS. As might be expected, workers with the fewest skills in terms of qualification levels tend to fare worse than others as employers seek experience and evidence of educational attainment. Nevertheless, there were 2.1 million people with no qualifications in employment in the fourth quarter of 2008. They are more likely to work in low-paying sectors and they make up around half of workers in the cleaning and textile occupations.

4.49 The difference in earnings between workers with no qualifications and all employees is reasonably modest at the lowest decile (4.8 per cent). As expected, however, the gap increases considerably along the earnings distribution, rising to 43 per cent at the top decile. This is the largest pay gap within our groups of workers.

4.50 In terms of coverage of the minimum wage, Figure 4.14 shows our estimate that adult workers with no qualifications were nearly three times as likely to be covered by the October 2008 upratings as workers in general. Just under 18 per cent of jobs held by the least-skilled were covered compared with just under 2 per cent of jobs held by workers with an NVQ Level 4 or above. Given the high coverage and the relatively low pay gap at the lowest decile, the minimum wage upratings are likely to have a positive impact on the earnings of the least-skilled workers.

Note: Covered employees are defined as adults (aged 22 and over) earning less than £5.63 in April 2008.

4.51 As already highlighted in Figure 4.2, people with no qualifications are one of the few groups to see their employment rate deteriorate since the introduction of the minimum wage. The decrease began following the large upratings in 2001, suggesting that the minimum wage might have been a contributing factor. On the other hand, their unemployment trend over time, shown in Figure 4.3, is similar to the trends for ethnic minority groups and people with work-limiting disabilities. Although there is an upturn in the unemployment rate for those with no qualifications from around 2005, it is unclear whether this is the result of the minimum wage upratings or another factor, such as the general downturn in the economy. We will continue to monitor the impact of the minimum wage on the employment prospects of the least-skilled workers.

4.52 Age is arguably the most important distinguishing factor with regard to the minimum wage. It is the only factor by which the minimum wage varies. Young people often lack experience in the workplace and older workers can find it difficult to find employment as they near or pass State Pension age. As a result, they are likely to be more vulnerable than other workers. From the outset, we argued that 18–21 year old workers should be subjected to a lower minimum wage than the adult rate. The Government initially only introduced a lower rate for 18–21 year olds but extended the coverage to 16–17 year olds by introducing a separate rate in 2004. We continue to monitor the earnings and labour market position of younger and older workers to identify any potential impacts of the minimum wage. Here we consider older workers, defined as those aged between 55 and 59 (for women) or 64 (for men) plus those past State Pension age. Young people are discussed separately in Chapter 5.

4.53 As discussed in Chapter 2 (Figure 2.5), the expected coverage of the October 2008 minimum wage upratings decreases up to ages 45–54 and then begins to increase from the age of 55, with those over State Pension age significantly more likely to be covered by the minimum wage (8.6 per cent). This pattern also emerges in the proportion of workers paid at the adult minimum wage in April 2008, with 5.8 per cent of those over State Pension age. Their median hourly earnings are £8.01 compared with £10.38 for all workers aged 18 and above. We received similar evidence from the EHRC of pay gaps for older men compared with prime age men. Although there is some evidence that earnings of workers aged between 55 and retirement age are affected by the minimum wage, workers over retirement age are paid less as a group and have a much higher minimum wage coverage. Hence the minimum wage is likely to have a more significant impact on the earnings of the latter.

4.54 We showed in Figure 4.2 that although the employment rate for older workers aged 55 to retirement age is lower than for the whole working age population, it has seen the fastest growth since the introduction of the minimum wage. The rate increased from 56.6 per cent in the fourth quarter of 1998 to 66.2 per cent in the fourth quarter of 2008. They have also fared well in terms of unemployment, having the lowest rate of all our groups since 1998, with 3.4 per cent in the fourth quarter of 2008 as shown in Figure 4.3.

4.55 Given that those over State Pension age are the lowest paid older workers with higher minimum wage coverage, we focus specifically on their labour market position. Figure 4.15 shows that this group has seen a rapid growth in employment since 1998 and a slight decrease in unemployment. The rates for the fourth quarter of 2008 are 11.7 per cent and 1.9 per cent respectively. In summary, the minimum wage has had a positive impact on the earnings of older workers with no evidence of an adverse effect on their employment prospects.

Figure 4.15 Employment and Unemployment Rates for Workers Over State Pension Age, UK, 1998–2008

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter moving average, UK, 1998–2008.

4.56 Nearly 10 per cent of agency workers are paid at the minimum wage and many agency workers are migrants. Some stakeholders continue to raise concerns in relation to agency workers and the minimum wage.

4.57 Flexible working has become a feature of working life in the UK. Agency workers are an important source of temporary, flexible labour to cover short-term absences or fill skills gaps at short notice. Agency contracts can also offer employment opportunities by helping workers gain new skills and experience, or allowing them to fit work around other responsibilities or interests. Workers are fully entitled to the minimum wage but are not required to have the same pay and conditions offered to directly employed staff.

4.58 The treatment of agency workers in the UK is changing. In April 2008 a number of amendments to the Conduct of Employment Agencies and Employment Business Regulations 2003 came into force, which were intended to address abuse affecting vulnerable workers. In September 2007 the Government announced that the number of Employment Agency Standards (EAS) inspectors would be doubled from 12 to 24 and that the expanded inspectorate would be able to investigate a greater proportion of agencies. We received a number of responses to our consultation this year referring to these changes and other issues around enforcement concerning agency workers, which are covered in Chapter 7.

4.59 In December 2008, the Agency Workers Directive (AWD) reached the end of the European legislative process and was published in the Official Journal of the EU. The Directive allows the UK to implement the CBI/TUC agreement, which means that an agency worker would be entitled to equal treatment (at least the basic working and employment conditions that would apply to the workers concerned if they had been recruited directly) after 12 weeks in a given job.

4.60 In their written evidence, UNISON called for agency staff to be given the same employment rights as permanent staff to protect both local and migrant workers from exploitation. The CBI commented on the cost to business of the AWD, pointing out that surveys suggest that, at present, around a quarter of agency workers are paid less than direct employees. This, it said, means that those firms who are paying agency staff less will have to absorb an additional wage cost when the Directive comes into force. The CBI reported, however, that many employers were more concerned by the prospect of a complex process being created for firms to follow in order to ensure equal treatment for agency staff. In a CBI survey, 62 per cent of firms reported that they foresaw a significant increase to the regulatory burden from equal treatment.

4.61 The impact of the minimum wage on hourly earnings for agency jobs is clearly shown in Figure 4.16 as the spike of the distribution tracks the uprating. The proportion of agency workers paid at the minimum wage increased from 9.6 per cent in 2007 to 10.2 per cent in 2008. In each year these proportions are significantly higher than for all workers aged 18 and over (2.8 per cent in 2008). There were also typical spikes at £6.00 and £6.50 an hour in 2006, 2007 and 2008.

Figure 4.16 Hourly Earnings Distribution for Agency Workers Aged 18 and Over, UK, 2006–2008

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

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

4.62 Research undertaken as part of the Gangmasters Licensing Authority‘s (GLA) Annual Review for 2008 (Balch, Brindley, Geddes and Scott, 2009) included a survey of agency workers. The survey found that the average net income for agency workers was just under £200 per week (based on an average 33–48 hours per week); most workers would prefer permanent employment; and that just over a third of those surveyed felt the treatment of workers by employers and agencies was getting worse.

4.63 The LFS records that in the fourth quarter of 2008 there were around 232,000 jobs classified as ‘agency temping’ compared with 264,000 for the same period in 2007. Examining all types of temporary jobs, some of which will not involve the use of an agency, we find that there were 1.3 million temporary jobs in the fourth quarter of 2008, 161,000 fewer than in the same period for 2007.

4.64 In February 2009, the joint Report on Jobs from the Recruitment and Employment Confederation (REC) and KPMG (REC/KPMG, 2009) showed further marked reductions in permanent and temporary staff employment during January. Although the reductions were not as steep as in December, the rates of decline remained steep by the survey’s historical standards. The demand for short-tem staff continued to fall in January, extending the period of decline to seven months. But there was growth in the demand for temporary workers in the nursing/medical/care sectors in January, albeit at the weakest rate in over two years. The figures contrasted with those produced in the middle of 2008, where vacancies for temporary staff had risen at their fastest rate for five months. We welcome the changes to the regulation of agency workers that have come into effect and we will monitor their impact over the coming year.

4.65 There is a range of people who work from home, including the self-employed, those in well-paid professional and managerial jobs, as well as those who perform unskilled manual work often on a piece-rate basis. It is very difficult, however, to get information on homeworkers, partly because they are spread out across different industries and occupations and partly because there are few organisations directly representing them.

4.66 Those working at home on a piece-rate basis are likely to be paid at or around the minimum wage and face particular difficulties in enforcing their employment rights. In October 2004 a new system of fair piece rates was introduced to overcome difficulties with the existing arrangements for paying the minimum wage for output work. This new system was based on the time a person working at average speed would take to produce an item. Since April 2005, employers have been required to multiply the fair piece rate by a factor of 1.2 so that most workers (not just those at average speed or above) receive at least the minimum wage.

4.67 For our 2008 Report, we received evidence that homeworkers and those paid through fair piece rates faced difficulties in enforcing their right to be paid at least the minimum wage. The fair piece rate system had been in place for three years but it was difficult to obtain meaningful evidence on how it was working in practice. We therefore recommended that the Government take stock and evaluate whether the fair piece rate arrangements were meeting their objectives. In response, the Government has advised that it is undertaking an evaluation and that it will report back to us in autumn 2009.

4.68 The National Group on Homeworking (NGH) supplied us with details of the evidence it submitted to the Government’s evaluation on how the fair piece rate system was operating. In this evidence, the NGH said that although it was open to suggestions as to how the existing system could be made more effective, and there was room for improving employer awareness, the underlying principle that the vast majority of workers should receive at least the minimum wage must not be undermined. Again, we have received evidence from Employment Information Services (EIS) of piece rates not being properly applied in the door-to-door distribution sector, and alleged underpayment of the minimum wage. It called for targeted enforcement of the sector.

4.69 During a visit to Leeds in 2008, we met and spoke to a group of homeworkers who experienced underpayment of the minimum wage through piece rate arrangements. During the same visit, however, we met an employer of homeworkers and members of his workforce and were shown how fair piece rates could be used properly. In its written evidence to us, the TUC expressed concern about the difficulty of getting access to homeworkers. It believed that the Government was unlikely to get to the bottom of the issue on the strength of a single consultation and called for a broader research project to map out the scope of the abuse of output-only work in general, followed by appropriate steps to combat the abuse. We share the concern over the difficulty in getting access to homeworkers. This will now be even more difficult following the loss of the NGH last November. But, we hope that the Government’s review of the operation of fair piece rates will be able to reach those affected or concerned with this system. We look forward to receiving the outcome of the review.

4.70 Seafarers are covered by the minimum wage while they are employed on a ship registered in the UK while it is working in UK internal waters. In addition, a seafarer working on a ship registered in the UK must be paid at least the minimum wage wherever in the world that ship may be. That is, unless either all the work takes place outside of UK internal waters or they are not normally resident in the UK and the ship is outside UK waters. In its evidence, the National Union of Rail, Maritime and Transport Workers (RMT) argued that the minimum wage should apply to all ships of any flag trading solely within UK territorial waters, including the offshore sector, and all UK-flagged ships within UK territorial waters. It stated that other legislation, such as various taxation measures and the Maritime Working Time Directive, are applied to vessels of all flags in UK territorial waters. The TUC supported what it regarded as the need to close the current minimum wage ‘loopholes’ that exclude many seafarers from its protection.

4.71 The Government said that international maritime law, and specifically the right of innocent passage, meant that the UK is unable to apply legislation to ships sailing under the flag of another country. This is reciprocal for British ships. The Government reaffirmed its commitment to consider the issues around seafarers and the minimum wage and had entered into dialogue with interested parties. We understand that this is a complex matter as there are implications for international law and the UK’s EU obligations. The issues involved go beyond just the minimum wage. We urge the Government to continue this dialogue and to seek ways to address the concerns of all stakeholders.

4.72 Work Trials offer individuals who have been unemployed for six months or longer the opportunity to try out an actual job vacancy while remaining on benefits. They are voluntary arrangements between an employer and an individual, who continues to receive benefits throughout the Work Trial. As a result, participants are exempt from the minimum wage but are eligible for travel expenses and a meal allowance. They are used only for jobs of 16 hours or more per week that are expected to last for more than 13 weeks. The period of each Work Trial is agreed between the individual and the employer and either can terminate the trial at any time without it affecting the individual’s benefits.

4.73 In July 2008 the Government announced that the length of a Work Trial had been extended from three to up to six weeks. This extension required an amendment to the National Minimum Wage regulations to ensure Work Trials continued to be exempt from coverage of the minimum wage. The Government believes that short-term measures aimed at improving jobless individuals’ employability and supporting a transition to paid work should not be subject to the National Minimum Wage. Unpaid work experience is an area of concern for the Commission and there has been concern that Work Trials are encroaching into this area, with people on unemployment benefits being encouraged back to work via unpaid full-time work experience. We will continue to monitor how the extended exemption operates.

4.74 Voluntary workers provide an important resource for many organisations and are outside the scope of the National Minimum Wage. The National Minimum Wage Act 1998 defined voluntary workers as: those working for specific organisations (a charity, voluntary organisation, associated fund-raising body, or a statutory body) and receiving only very specific payments and benefits-in-kind (such as necessary expenses incurred, reasonable subsistence, or training required to perform the work). The objective of this arrangement was to ensure that genuine volunteers may continue to work (and receive necessary expenses) without minimum wage liability, while workers in the voluntary sector retain their right to be paid at least the minimum wage.

4.75 In our 2008 Report we set out our response to the Government’s consultation on voluntary workers (DTI, 2007b). Our response raised a number of concerns about how a proposed exclusion for participants on schemes operating under the Russell Commission’s National Youth Volunteering Framework would operate and the possible implications for the minimum wage. We were also not convinced of the case for an exemption from the minimum wage for Ministry of Defence Cadet Force Adult Volunteers.

4.76 The Government subsequently announced that it would create a specific exemption for Cadet Force Adult Volunteers, and a provision was included in the Employment Act 2008, which now has Royal Assent. It also extended the expenses that can be reimbursed to voluntary workers to include those to enable them to perform their duties, such as the cost of care of dependents or the cost of lunch during a break while volunteering. The Government also advised us that although a national framework is no longer anticipated, schemes set up after, and as a result of, the Russell Commission Report have worked with the Government on a solution that continues to protect those volunteering and those who should be entitled to the minimum wage. It believed this would be best achieved through developing a better understanding of the minimum wage and the voluntary worker exemption already in place rather than through further exemptions. The Government advised us that it had updated the guidance on voluntary workers (as part of their general guidance), which is now published on Business Link. The guidance was developed with numerous stakeholders and covers volunteers, voluntary workers and related areas (such as work experience).

4.77 The TUC expressed concern over the Government’s proposal to exempt from the minimum wage full-time voluntary workers in the National Youth Volunteering Framework in order for them to be paid an allowance of £60 per week. It advised that a number of voluntary sector organisations were campaigning to have this exemption extended to allow them to treat other voluntary workers in a similar way. The TUC was against the creation of any further exemptions to the minimum wage in the voluntary sector. We will need to assess the impact of changes to the law in respect of voluntary workers and the updated guidance; so we will monitor these developments closely over the coming year.

4.78 Students who undertake work experience as part of a higher education or further education course are exempt from the minimum wage where the work experience placement does not exceed one year. There may also be other situations where the minimum wage does not apply to those on work experience, such as in the case of voluntary workers or where the individual does not have an obligation to perform work and is therefore not a ‘worker’. In our 2008 Report, however, we noted that there were situations where the term ‘work experience’ was being applied to activities that were clearly work and for which the minimum wage should be applied.

4.79 Our view was that wider dissemination of existing guidance and better enforcement was required rather than any change to the rules. We recommended that material concerning work experience should be updated in order to help raise awareness. The Government accepted the recommendation and advised us that the guidance had been updated and published on Business Link.

4.80 We again received evidence on this topic this year from a number of stakeholders. The National Council for Work Experience (NCWE) stated that employers in the media industry continue to exploit students through unpaid work experience, and it believed there was some inconsistency and confusion with the existing guidance and advice by the Department for Business, Enterprise and Regulatory Reform (BERR), the Department for Innovation, Universities and Skills (DIUS), and HM Revenue & Customs (HMRC). It was concerned that unpaid work experience could lead to the exclusion of less wealthy students and reported little policing of the minimum wage as it applied to this group. NCWE believes that if there were more publicity of those cases where employers had breached the law this would help clarify the minimum wage requirements. Evidence from the National Union of Journalists (NUJ) suggested that, particularly in the television industry and consumer magazines, people were taken on for months of unpaid work experience to fill staff shortages. The union advised that few individuals were willing to stand up and complain and called for third party enforcement procedures to allow them to act without having to name individuals. Mark Watson has again produced examples of adverts which appear to breach minimum wage rules, and which he has passed on to HMRC. Equity also reported a continuing problem with unpaid work in the performance industry.

4.81 There continues to be concern from a number of stakeholders regarding people being exploited through unpaid work experience. These concerns echo what we were told last year. We continue to believe that concerns will be addressed through better guidance and enforcement of the existing law. We will monitor the impact of the updated guidance.

4.82 A sleepover occurs where workers are required by their employer to sleep at or near their place of work. If the worker is provided with suitable sleeping facilities, the time they are sleeping will not be treated as time when the minimum wage is payable. If the worker gets up to do work during the night, they are eligible for the minimum wage for the time spent working. Official guidance emphasises that if the employment contract clearly sets out when the worker is permitted to sleep and sleeping facilities are provided, the minimum wage need not be paid for these periods of sleep. It also states that if the employment contract does not clearly specify sleeping time, Employment Tribunals are likely to conclude that the minimum wage should be paid for the whole time the worker is at work.

4.83 Stakeholder views in 2007 suggested that a number of court and Employment Tribunal judgements had created uncertainty about the obligations to pay the minimum wage during sleepovers. The cases were complex and the existing guidance was not sufficient. We recommended in our 2008 Report that the Government review the existing official guidance as soon as practicable. The Government accepted this recommendation and advised us that guidance on sleepovers was reviewed, updated and published on Business Link. We will monitor the impact of the revised guidance.

4.84 Therapeutic work or activity are terms used to describe the arrangements whereby people who have problems functioning in the normal labour market, because of a mental or physical impairment, are given the opportunity to undertake some form of work-like activity for which they may receive some type of payment. If they are not workers, the minimum wage will not apply. However, if the activity is work, then they should be paid at least the minimum wage.

4.85 Following concerns raised by the Commission about how the minimum wage was operating in respect of this group, the Government updated and distributed widely its guidance note on the minimum wage and therapeutic work in January 2007 (DTI, 2007a). In our 2008 Report we noted the concerns of stakeholders and concluded that it was too early to assess the impact of the revised guidance issued in January 2007. We have received little evidence from stakeholders this year but will continue to monitor the situation and will report again in 2010.

4.86 Accommodation is the only benefit-in-kind to count towards the minimum wage. It provides a mechanism to enable employers to offset against the minimum wage the cost of accommodation provided to workers, up to a maximum daily limit. The provision of accommodation is significant in some low-paying sectors such as, for example, agriculture and hospitality. Offset arrangements provide protection to the worker and give some recognition of the value of the benefit but are not intended to reflect the actual costs of provision to the employer or the commercial market value.

4.87 We undertook a detailed review of the offset for our 2006 Report, in particular focusing on its application outside traditional tied accommodation. Consideration was given as to whether there was a case for relaxing the offset rules. We remained concerned whether workers (some of the most vulnerable) would have a genuine choice if accommodation was provided as an option, outside the contract of employment. We therefore recommended that the current provisions should continue to apply to all workers housed by their employers. This recommendation was accepted by the Government.

4.88 This year, we have received evidence again from a number of stakeholders, raising concerns over the low value of the offset to the provider. In its evidence, the Association of Labour Providers (ALP) has again argued that many labour providers have ceased to provide accommodation because it is not cost effective. Workers, therefore, have to obtain accommodation from the open market where they may face exploitation from landlords. The ALP repeated its call for the Commission to conduct a study on the accommodation costs paid by low-paid workers, including particular schemes designed to help them. In their joint submission, the British Hospitality Association (BHA), the British Beer and Pub Association (BBPA) and Business In Sport and Leisure (BISL) drew our attention to the fact that although the offset has risen in line with the adult rate, it remains at a level below the economic rate for what is being provided. During our visit to Nottingham, members of the BBPA said they would like to see two offset rates to reflect different types of accommodation: one rate for multiple occupancy and one for single occupancy. The Association of Licensed Multiple Retailers (ALMR) said in its written evidence that it would like to see an increase in the offset (to £60 per week) to provide a suitable inducement to employers to continue to provide accommodation.

4.89 The GLA also expressed concern about the number of labour providers no longer providing accommodation because it was not economically viable to do so. It was concerned that this led to a situation where workers may be exploited by unscrupulous landlords, something outside its control. It suggested one approach could be to have local variations of the offset; the level could be linked to the Fair Rent Rates used by local authorities (which are set by the Rent Service). A survey of workers conducted as part of the GLA’s Annual Review (Balch, Brindley, Geddes and Scott, 2009) reported that 40 per cent of migrant workers felt that their accommodation was worse or much worse in the UK than in their home country (although it was not specified who provided the accommodation). A survey of gangmasters as part of the same review found that 25 per cent had a direct link to their workers’ accommodation, although it was reported that anecdotal evidence suggested that the link between accommodation and labour provision may be stronger but was not always direct or formal. The TUC reported that it has continued to receive reports that the offset is being abused, especially for migrant workers. It proposed that we recommend BERR set up a special project to ensure the guidance is being followed and to direct further action on enforcement.

4.90 The low-paying sectors in which the offset arrangements are used most employ a large number of migrant workers who, as already discussed in this chapter, are some of the most vulnerable to exploitation. We continue to receive submissions from employer stakeholders that more and more employers are not finding it economically viable to offer accommodation. The TUC reported that the offset continues to be abused, especially for migrant workers. The GLA deals with employers who use the offset arrangements and has this year also voiced its concerns over the current arrangements. As part of our general review next year, we will invite stakeholders to submit further and more detailed evidence so we can better understand the impact of the offset.

4.91 The National Minimum Wage Act permits the use of tips as payment, or part payment, of the minimum wage where they have been paid through the employer’s payroll. In recent years, the issue of tips has not featured greatly in our stakeholder consultations. When it has, the main issue has been around the treatment of National Insurance Contributions (NICs). It is very difficult to obtain any reliable data on the level of tips, gratuities and service charges paid to workers in the UK, and our 2008 Report noted there was little evidence on the impact of changes to arrangements for NICs and tips. We have also been monitoring an appeal in an Employment Tribunal case considering whether tronc payments could count towards minimum wage pay. We await the appeal judgement.

4.92 In 2008 there was a high profile campaign supported by the media and trade unions to change the law so that tips could no longer be used by employers to make up payment of the minimum wage. In July the Government announced that it planned to amend the National Minimum Wage Regulations so that tips could no longer be used to meet the minimum wage and that it would be developing a transparency initiative to encourage employers to make it clear how tips were distributed.

4.93 The Government launched its consultation on proposed changes to the regulations in November. Its intention was to prevent employers using tips, gratuities and service charges to make up minimum wage pay. It also proposed greater transparency for consumers and workers on what happens to these monies, probably through the introduction of a voluntary code of practice and guidelines. We responded to the Government’s consultation on 16 February 2009, taking account of research findings and stakeholders’ views. Additional information on stakeholders’ views is given in Chapter 8.

4.94 In our response, we set out the following views. We believed that the Government was right to review the treatment of tips under the National Minimum Wage legislation because most customers expect tips to be paid on top of wages in recognition of good service. We recognise that, if the proposals are successfully implemented, some workers could be better off. But we highlighted to the Government that its proposal could lead to losers as well as winners and undesired consequences as well as potential benefits. Further, because there is not one standard system used by employers to distribute tips, it was difficult to predict how such a change in the law would modify practice and what the impact would be, either for businesses or for workers. The only way to ensure that its proposals improve the pay of those receiving tips would be to place employers under a legal obligation to pass on tips. This would involve a change to the law on ownership of these monies, though, and we recognised the complexities of doing this.

4.95 We also drew the Government’s attention to a number of other areas that we believed it needed to consider. These included: the need to ensure the efficacy of any code of practice; the sectoral impact of the proposed change, primarily on hospitality and leisure businesses; that cover charges could still be used to make up minimum wage pay, and any change in employer practice needs to be watched; and other undesired consequences, such as some employers retaining a greater share of tips to offset the additional wage costs. We undertook to carefully monitor the changes to the law that are eventually introduced, and said it would be helpful if the Government were more explicit in the role it expected us to play. Our response can be viewed in full on our website at www.lpc.gov.uk.

4.96 The Government asked us to review the impact of the National Minimum Wage on certain groups of workers. We have found evidence that the minimum wage has had a positive effect on the earnings of low-paid groups. For women, the upratings have helped to close the gender pay gap, which has generally reduced since the introduction of the minimum wage. We have also found that the pay gaps for ethnic minority workers and those with work-limiting disabilities have reduced at the lowest deciles. Various sources have indicated that migrant and least-skilled workers are highly likely to be working in low-paying sectors and thus their earnings would be directly affected by increases in the minimum wage. For older workers, we have estimated that those over retirement age were significantly more likely to be covered by the October 2008 uprating compared with those aged over 22.

4.97 Having found an impact on earnings, we have drawn mixed conclusions about whether the labour market positions of these low-paid groups have been affected. Women have experienced similar employment and unemployment trends to men since 1999, indicating that the introduction of the minimum wage and its subsequent upratings have not had a negative impact on their employment prospects. The employment rates of ethnic minority and migrant workers have increased faster than their white and UK-born counterparts. Similarly, workers over State Pension age have experienced a rapid increase in their employment rate. We have concluded that there is no evidence of a detrimental impact on the labour market position of these four groups.

4.98 Although the employment prospects of those with work-limiting disabilities have improved significantly since 1999, for those with no qualifications, there is evidence to suggest that the introduction of the minimum wage may have contributed to a deterioration in employment prospects. Nevertheless, there may have been other contributory factors and we will continue to monitor the impact of the minimum wage on this group.

4.99 Looking beyond the direct impact of increases in the minimum wage, we are pleased that the Government has accepted previous recommendations we have made and has updated the guidance on sleepovers, voluntary workers, and unpaid work experience. We will monitor the impact of this updated guidance. We will also monitor the operation of the extended exemption for work trials.

4.100 We received little evidence this year on the impact of the minimum wage on people undertaking therapeutic activity, but we will again look to gather information to cover this issue in our next report. Similarly, although we understand that it is difficult to reach those affected by the fair piece rates system, we encourage the Government to do all it can to consult those concerned as part of its review. We look forward to receiving the Government’s report. We have responded to the Government’s proposals to no longer allow employers to use tips to make-up minimum wage pay, and we will carefully monitor the changes to the law that are eventually introduced. The accommodation offset continues to be of concern to stakeholders and we look forward to receiving more detailed information on this next year so that we can better understand its impact.

4.101 This chapter has highlighted the different impact the minimum wage has on various groups of workers. The next chapter considers the impact of the minimum wage on the employment prospects of young people.

[1]Elementary occupations generally involve performing routine tasks, the majority of which do not require formal qualifications. They include, for example, farm labourers, postal workers, office juniors, unskilled factory workers and shelf fillers.