Setting the Rates

8.1 As in previous years, the Commission has gathered a wide range of evidence and data to inform its recommendations. In this final chapter we focus on three areas: the broad economic climate, the findings of our wide-ranging research programme, and stakeholder views on the rates. In addition, we summarise the findings of our continued monitoring of the increase in annual leave entitlement to 5.6 weeks in April 2009, and consider other regulatory changes.

8.2 We then go on to set out our recommendations for the National Minimum Wage for adults and young people for October 2009 and comment on the position for October 2010. We make our recommendation concerning the accommodation offset and conclude the chapter by giving our assessment of the likely impact of the recommended rates on coverage, the wage bill, and public finances.

Economic Climate

8.3 From its inception to the spring of 2008, the National Minimum Wage existed in a period of unprecedented, continuous economic growth. Forecasts at the time of our last report anticipated that the economy would slow after the growth experienced in 2007, but they did not anticipate the sharp decline that saw it move into recession in the third quarter of 2008, nor the likelihood that the UK would still be in recession in the autumn of 2009. The rate and timing of the slowdown influenced the timing of this report. Our remit from the Government requested our report by the end of February 2009. To meet this timetable, we would have had to have agreed our recommendations in January of this year, at which time the latest data covered the third quarter of 2008, with limited monthly data on employment for October and November 2008. Given the scale of the change in the economic climate and because the third quarter was the first quarter of negative growth, we judged that further data would allow a better understanding of the trajectory of the recession and its impact on the low-paying sectors. In January this year, therefore, we wrote to the Secretary of State for Business to request an extension to our reporting deadline. This allowed us access to two months’ additional information, including a further Inflation Report from the Bank of England, employee jobs data for December 2008, Gross Domestic Product (GDP) data for the fourth quarter of 2008, and average earnings information up to January 2009. The additional months also enabled us to conduct further in-house analysis of the current recession, to complement research commissioned earlier and to seek additional views from stakeholders.

Recession

8.4 Technically, a recession is defined as a period in which there are at least two consecutive quarters of negative growth in output. During a recession the demand for (and output of) goods and services in the economy contracts. This has consequences for employment and wages. The reduction in output reduces the need for labour. How businesses react to this depends on how long and how severe they believe the recession will be.

8.5 Firms are generally reluctant to make workers redundant, particularly if they are skilled or experienced. Thus in the early stages of a recession they typically restrict hours, particularly overtime hours and the hours of temporary workers, and introduce short-time working. In this way they constrain labour costs without recourse to redundancies. We therefore expect the first signs of a recession to show up in hours worked (especially paid overtime). When firms have to cut employment they try to do this through natural wastage, by reduced hiring and not filling vacancies as they arise. This will have the greatest impact on new entrants to the labour market, particularly school leavers and women seeking to return to work. Both groups will find their opportunities limited.

8.6 If the recession continues, firms will resort to redundancies. Where the choice is available, they will seek redundancies from among those who are least skilled. For this reason it is young people who will be the most affected by a recession. They will find it difficult to get a job and may also be the first to lose their jobs if employers decide to reduce their workforce. In the extreme, firms will close and all their workers will be made redundant.

8.7 Prior to 2008, there had been three major recessions since World War II: from the third quarter of 1973 to the third quarter of 1975 (the 1970s recession); from the first quarter of 1980 to the first quarter of 1981 (the 1980s recession); and from the third quarter of 1990 to the third quarter of 1991 (the 1990s recession). These major recessions generally had an adverse impact on output for around two years, on employment for about three years, and on unemployment for about four years.

8.8 When we met in March to agree our recommendations, official data confirmed that the UK economy had stalled in the second quarter of 2008 and had gone into recession in the third quarter of 2008. By the fourth quarter of 2008, output had fallen by 2.2 per cent from its peak in the second quarter of 2008 (falling by 0.7 per cent in the third quarter and 1.5 per cent in the final quarter of 2008). The National Institute of Economic and Social Research (NIESR) estimated that the economy declined by a further 1.8 per cent between December 2008 and February 2009, suggesting a fall of at least a further 1.5 per cent in the first quarter of 2009. As shown in Figure 8.1, this loss of output over these three quarters would be cumulatively larger than that in both the 1980s and 1990s recessions, and more than that in the very severe early stages of the prolonged 1970s recession, when the cumulative fall over the first three quarters was 3.4 per cent.

Figure 8.1 Comparison of Output Growth in Previous Recessions, UK, 1973–2008ab

Source: ONS, GDP quarter on quarter growth (IHYQ), constant prices, quarterly, seasonally adjusted, UK, 1973–2008.

Notes:

a. Quarter 0 is the first quarter of the recession (Q3 1973 for the 1970s, Q1 1980 for the 1980s, Q3 1990 for the 1990s and Q3 2008 for the 2008 recession).

b. The hatched area is a forecast for Q1 2009.

8.9 The current recession technically started in the third quarter of 2008, although growth stalled in the second quarter, and it appears to have different causes than the other post-war recessions. Unlike the two most recent recessions, this one was triggered by difficulties in global financial markets that have squeezed credit availability and reduced demand worldwide. Consumer spending has fallen sharply in the UK and this will affect many of the low-paying sectors. Another difference is that the previous recessions have been characterised by high levels of inflation, which constrained policy options. Interest rates had been raised and fiscal policy tightened. This recession has been very different, with reverse policies enacted. Interest rates have been reduced until they are close to zero and governments across the globe have implemented fiscal stimuli.

8.10 Table 8.1, comparing the current recession with the three previous ones, shows that the 1980s recession was eventually the deepest in terms of output loss, a cumulative fall of 4.7 per cent (or 6.1 per cent if starting in the third quarter of 1979). It also had the greatest impact on the labour market with unemployment rising by between 1.75 million and 2.03 million, depending on the measure used. The 1990s recession had less impact on output than the one in the 1970s but it had a much greater impact on the labour market. The 1970s recession revealed the quickest initial recovery, though there were quarters of negative growth for up to two years after the onset of the recession.

8.11 Initial recession forecasts at the third quarter of 2008 suggested that the overall loss in GDP would be between the levels recorded in the 1980s and 1990s recessions. Table 8.1 shows that after the first two quarters of the current recession, the loss in output is less than in the 1980s but more than in the 1990s recession. A major difference between the current recession and those of the 1980s and 1990s is that the forecast reduction in GDP for the first quarter of 2009 is much greater than the reduction in the third quarter of either of the two previous recessions, as Figure 8.1 clearly shows.

8.12 As the latest recession has progressed, the initial forecasts have been revised and now imply that this could be at least as deep as the 1980s recession. Some forecasters are even predicting that it may be closer to the Great Depression of the 1920s and 1930s.

8.13 At this stage in the current recession, the picture concerning the labour market is still somewhat mixed. The reduction in employee jobs and rise in claimant unemployment have both been greater in this recession. Although data from the Labour Force Survey (LFS) suggest that up to the fourth quarter of 2008 unemployment on the ILO definition had risen only slightly less rapidly than in the 1980s, the data also show that employment had fallen substantially less than in either of the two previous recessions at this stage. As Table 8.1 clearly shows, however, on the claimant count the cumulative rise in unemployment is greater than in the two previous recessions.

8.14 In the three previous recessions, consumer spending had declined less rapidly than output but investment had fallen more sharply, particularly in the recessions of the 1980s and 1990s. Government spending, on the other hand, had generally been a positive factor. Again these have been features of the current recession. The fall in consumer spending in particular will have an adverse effect on many low-paying sectors.

8.15 In 2005, when commissioning the research projects for our 2007 Report, there had been a slowdown in the economy, particularly among those sectors – retail and hospitality – dependent on consumer spending. Concerned to understand what might happen in a less positive climate, we commissioned Incomes Data Services (IDS) to investigate the impact of the early 1990s recession on pay increases and the low paid.

8.16 In the 1990s recession, claimant unemployment increased to nearly 3 million. IDS (2006a) found that recession had mainly affected the manufacturing, construction and financial services sectors and that the low-paying sectors had been much less affected than those sectors in terms of employment or earnings. It found that employment in the two biggest low-paying sectors – retail and hospitality – remained relatively stable throughout, as did employment in other low-paying sectors. In this recession, the impact on the low-paying sectors is expected to be much greater. As we showed in Chapter 3, the number of employee jobs in retail and hospitality has fallen faster in the current recession than the number of jobs in the economy as a whole.

8.17 IDS (2006a) found that in the 1990s recession, pay increases did not vary much by sector. Earnings in the low-paying sectors generally kept pace with consumer price inflation, which fluctuated a great deal. It argued that the Wages Councils, which set minimum wages and working conditions in many of the low-paying sectors, provided a wage-rise floor for many low-paid workers. Further, it noted that organisations started to lift their lowest rates of pay in 1991 in anticipation that the Labour Party might be elected and a minimum wage introduced in 1992.

8.18 IDS (2006a) concluded that, despite the large increase in aggregate unemployment, employment in the low-paying sectors remained reasonably stable throughout the recession of the 1990s, even though pay increases in the low-paying sectors matched or slightly exceeded inflation. But it noted that a recession that had different causes, such as a collapse in consumer spending, might have a greater impact on the low-paying sectors than the recession of the early 1990s.

8.19 One important difference between the current and the three previous recessions is that the rates of increase in average earnings, pay settlements and inflation were all much lower entering the current recession than when going into any of the three earlier recessions. Prior to the start of the recessions of the 1970s, 1980s and 1990s, inflation was around 10 per cent, 20 per cent and 10 per cent respectively, with average earnings growth mirroring the increase in prices. In stark contrast, inflation was much lower, at around 5 per cent, with earnings growth flat or falling in real terms for six of the seven quarters prior to the fourth quarter of 2008. Forecasters expect Retail Price Index (RPI) inflation to turn negative during 2009, with positive inflation returning in early 2010. There was no period of deflation in any of the three earlier recessions, so none of these provide any guide as to what will happen to pay awards in a period of deflation.

8.20 In response to the onset of the recession and concerns about inflation subsiding, interest rates have now fallen to their lowest level since the Bank of England was established in 1694. This has reduced mortgage interest payments but also lowered the return on savings. Inflation, as measured by the Consumer Price Index (CPI), RPI and the Retail Price Index excluding mortgage interest payments (RPIX), has also started to decline from its peak of around 5 per cent in September 2008. The decline in the RPI measure, which includes housing costs, has been sharpest, falling to just 0.1 per cent in January 2009. The falls in mortgage payments, house prices and motoring costs outweighed the continued rises in food and energy costs (especially electricity and gas). As housing costs do not form part of CPI, it had only fallen to 3 per cent by January 2009. Business-to-business services price inflation, as measured by the Services Producer Price Index (SPPI), has been relatively muted, with price rises in line with CPI. This might imply that firms have been able to increase prices but they may have had to absorb some costs, such as energy prices, which have risen faster.

8.21 Wage growth has been relatively stable throughout 2008 on various measures. Across the economy the difference between base pay settlements and average earnings growth, known as pay drift, is zero or marginally negative. This is particularly pronounced in the private sector. Average earnings growth excluding bonuses fell from 3.9 per cent in April 2008 to 3.5 per cent in January 2009 but pay settlements generally remained between 3.5 and 4.0 per cent.

8.22 Average earnings growth including bonuses fell more sharply from 4.0 per cent in January 2008 to 3.1 per cent in December 2008, falling below growth excluding bonuses in the spring of 2008. The evidence suggests that there are substantial downward pressures on the aggregate measures of settlements and earnings, especially in the private sector. The bonus season is concentrated between January and April and it was evident that there had been a widespread reduction in bonuses in January 2009 when the average earnings including bonus series fell to 1.8 per cent, with growth of just 1.4 per cent in the private sector. Public sector pay growth has been above that in the private sector since the summer of 2008. These pressures are likely to continue and the gap between public and private sector earnings growth may widen further.

8.23 There is significantly more variation than previously in pay changes across companies and sectors, and focusing on averages can be misleading. The latest analysis from IDS and Industrial Relations Services (IRS) suggests the emergence of two distinct groups of settlements: those above 3 per cent and those at zero. Increasing proportions of pay settlements in the private sector are freezes or deferrals, and some employers are postponing their decision until their circumstances become clear. There is, however, also a substantial group of awards over 3 per cent, and the overall settlement median lies around 3 to 3.5 per cent. The median is likely to fall over coming months as pay settlements decline in the private sector.

Prospects for the UK Economy in 2009 and Beyond

8.24 In recommending the rates for 2009, in addition to our analysis of the recession, we took account of the prospects for the economy. We considered the latest data on the economy and the labour market in particular, focusing our attention on employment, unemployment and earnings information. We also noted the trends in inflation.

8.25 The recession is global. In January 2009, the International Monetary Fund (IMF, 2009) forecasted that the world economy will shrink for the first time since World War II. This continued weakness in world demand will affect the prospects for the UK economy. The two largest UK export markets, the US and the Eurozone, both contracted by over 1.5 per cent in the final quarter of 2008. This recession is now looking likely to be more severe than the 1980s recession in terms of the fall in output.

8.26 The UK economy (along with the world economy) is forecast to be in recession throughout 2009 and forecasts available when we met to discuss our recommendations in March 2009 predicted that it may last into 2010. Some commentators were even predicting that it might persist until 2011. Almost all sectors and regions are likely to be affected. High debt levels and the fall in house and equity prices are likely to affect the UK more than many other nations. As a consequence, consumer spending is forecast to be severely squeezed as consumers look to reduce debts.

8.27 By March 2009, the consensus forecast was that GDP in 2009 would fall by 3.1 per cent, which is considerably lower than the positive growth of 2.1 per cent forecast by the same panel of experts in January 2008. The consensus expert view now is that growth over 2008 and 2009 combined will be considerably below the consensus at the time we met to make our recommendations for 2008.

8.28 Table 8.2 shows the consensus of forecasts available in March 2009 for 2009, 2010 and 2011 for a range of variables that we took into account when making our recommendations. Actual data for 2008 are given for comparison. As discussed above, output is expected to weaken further in 2009 but it is then forecast to slowly pick up in 2010. The fall in output and consequent sluggish recovery will have adverse effects on employment and unemployment. The consensus forecast is that employment will fall by 2.6 per cent in 2009 and by a further 1.6 per cent in 2010. That suggests a fall in the number of jobs of over 800,000 in 2009, followed by another fall of around 500,000 in 2010. In all, this implies that the number of jobs is forecast to fall from 31.7 million in 2008 to 30.4 million in 2010. Claimant count unemployment is forecast to rise from its current level of 1.2 million in February 2009 to nearly 2 million by the end of this year, peaking at around 2.4 million in the last quarter of 2010.

Table 8.2 Actual Outturn and Independent Forecasts of GDP Growth, Inflation, and Average Earnings, UK, 2008–2011

Source: HM Treasury (March 2009 (forecast for 2009 and 2010) and February 2009 (forecast for 2011)) and ONS, GDP growth (ABMI); AEI including bonuses (LNNC); total employment as measured by Workforce Jobs (DYDC); claimant unemployment (BCJD), seasonally adjusted, RPI (CZBH); RPIX (CDKQ); and CPI (D7G7), not seasonally adjusted, UK (GB for AEI), 2008.

8.29 The UK is likely to experience deflation (in terms of RPI inflation) for much of 2009. The consensus forecast is for inflation to be negative, on two of the three measures, with CPI inflation only just above zero by the end of 2009. The downward pressure from mortgage payments and the reduction in VAT is likely to persist through 2009. Low-paid workers, however, are less likely to benefit from interest rate cuts as they are less likely to have a mortgage. These downward pressures are likely to increase as energy prices also fall but the depreciation in sterling might prevent food prices from falling. By early 2010, the VAT reduction will have been reversed and mortgage payments are unlikely to fall further, which is likely to lead to inflation picking up. It is forecast to rise towards the target rate by the end of 2010. There is, though, still an uncertain impact on inflation from the aggressive monetary and fiscal policies that policymakers across the globe have implemented.

8.30 The consensus forecast for annual average earnings growth is 2.7 per cent in the fourth quarter of 2009 and 2.6 per cent in the fourth quarter of 2010. These are much lower than the growth in earnings forecast for recent years (4–4.5 per cent). These forecasts reflect the lower earnings growth in the private sector, which has fallen back sharply following lower base pay awards in some areas, lower bonus payments, and moves to shorter hours to reduce costs. This downward pressure is likely to continue over the coming months. The Bank of England Regional Agents suggest that pay settlements will be lower in 2009 with a large number of freezes and moderation (2–3 per cent) for the others. Different pressures exist in the public sector where pay settlements can be more directly influenced by government policy. In the early stages of this recession public sector earnings growth was largely immune from these pressures. The limited number of public sector awards agreed for 2009/10 by the time of this Report have set base pay increases at around 2.5 per cent, which is only slightly lower than a year ago.

Implications of the Forecasts for Setting the Rates

8.31 The National Minimum Wage for adults increased in October 2008 to £5.73 per hour. If it increased further in October 2009 by the anticipated growth in average earnings (2.7 per cent in the year to the fourth quarter of 2009), it would rise to £5.88 per hour. If, instead, the minimum wage were to rise in line with the expected increase in prices (-3.2 per cent to 0.4 per cent in the year to the fourth quarter of 2009), the adult minimum wage would be somewhere between £5.61 (a cut of 12 pence an hour) and £5.75 an hour, depending on the price index used. If the adult minimum wage were to rise in line with current median pay settlements (around 3.1 per cent in January 2009), it would rise to about £5.91 per hour in October 2009.

International Comparisons

8.32 We also considered the position of the UK’s minimum wage in relation to those in other countries. We again looked at the level of the National Minimum Wage in comparison with the 12 Organisation for Economic Co-operation and Development (OECD) countries that we have examined in previous reports, using data provided by British Embassies, High Commissions, and the OECD. We have described the approaches adopted across countries for uprating their minimum wages, enforcing the provisions, and applying age variations under minimum wage systems. This year, taking into account our remit to review the current apprentice exemptions, we have included details, where available, of exemptions for apprentices in other countries. Detailed information for each country, including the UK, is provided in Appendix 5.

8.33 We can compare the monetary value of the minimum wage across countries by using exchange rates or purchasing power parity (PPP). The exchange rate, the price of one currency expressed in terms of another, generally reflects the costs of goods and services and financial assets that are traded internationally but does not take account of those goods and services that are not traded internationally. PPP measures the monetary amount needed to buy the same representative basket of consumer goods and services in each country. Differences in internal price levels mean that goods and services may cost more in one country than in another. Thus PPP allows a more accurate comparison of standards of living across countries than exchange rates.

8.34 The UK has experienced depreciation in its exchange rate which has reduced the value and purchasing power of the pound. This has resulted in a fall in the relative value of the National Minimum Wage compared with the minimum wages in other countries. When we compared minimum hourly wage rates across countries, as at the end of 2008, the UK minimum wage was 6th highest of the 13 countries we examined in terms of exchange rates and 4th highest in terms of purchasing power. This is in contrast to the previous year when the UK minimum wage, as at the end of 2007, was 4th highest in terms of exchange rates and 3rd in terms of purchasing power.

8.35 When we measure minimum wage rates relative to full-time median earnings in each country (the bite), the UK minimum wage expressed as a proportion of median earnings is ranked in the middle of the 13 countries, a position unchanged from last year. As part of the Government’s evidence (BERR, 2008f) to us on the economic effects of the minimum wage, it provided international comparisons of the minimum wage as a percentage of median earnings. The Government’s data showed that the bite of the UK minimum wage was above the G7 average and 4th highest in its list of 13 countries. It is, however, difficult to compare our estimates directly with those of the Government because of differences in methodology. We have used the most recent data that are available from the OECD. They are for mid-2007 and are produced using a consistent methodology. The Government has used a mixture of OECD and country data. Where it has used OECD data it has extrapolated the data in order to calculate the bite at more recent dates, but it has not done this consistently between countries. Caution should always be exercised when drawing comparisons between countries as definitions of what counts towards the minimum wage differ. There are also differences with regard to the age at which the minimum wage rates apply, whether there are any exemptions, and in the overall coverage of the respective mechanisms.

8.36 We continue to take an interest in developments among the countries with an established minimum wage like New Zealand, which replaced its youth minimum wage in April 2008 with a new entrants’ minimum wage, and in countries like Germany, where there is a debate about the possibility of implementing a statutory national minimum wage.

Research Findings and Analysis

8.37 Previous econometric research had focused on the introduction and initial upratings of the minimum wage. Our research programme for this report has concentrated on the impact of the more recent, larger upratings in the minimum wage between 2003 and 2006. As such, it does not cover the recent downturn in the economy but it does help paint a clearer picture of the impact of the minimum wage prior to the current decline.

8.38 The research and other evidence continue to show that the minimum wage is having a significant impact on the earnings of individuals at the bottom end of the earnings distribution. Our Survey of Employers (2008), commissioned research by IDS (2009), and anecdotal evidence from our visits and meetings with various organisations found that, over time, more firms had been affected and that pay structures had been changed as a result of the minimum wage. Although employees had seen increases in their base pay, IDS also found that many firms had reduced premia payments (for example, for overtime, shift-work and unsocial hours) and other perks (for example, bonuses, subsidised meals, staff discounts and pensions). In contrast, annual leave entitlement had generally increased as legislation was enacted that increased paid leave to 5.6 weeks by April 2009.

8.39 Despite the evidence showing that the minimum wage has had a significant impact on wage costs for the most affected firms and has led to increased total labour costs, our in-house analysis and commissioned research found that firms generally appear to have been able to absorb these additional costs without an adverse impact on employment, hours or productivity. In line with previous research, Dickens, Riley and Wilkinson (2009), and Dolton and Wadsworth (2009) found little evidence that the minimum wage had adversely affected employment opportunities. The latter study even found small positive effects on employment after 2003. At the same time, however, the former study found evidence that the larger upratings may have had small adverse impacts on hours worked for particular groups. This supports the negative findings on hours from previous research by Stewart and Swaffield (2004). Experian (2009) found that the introduction of the minimum wage had increased job retention but that the subsequent upratings had not. It concluded that the minimum wage had not significantly affected job-to-job moves among low-paid workers nor had it affected recruitment difficulties among their employers.

8.40 Forth, Harris, Rincon-Aznar and Robinson (2009) found some industry-level evidence of a negative impact on profitability and that increases in the minimum wage were associated with increased exit from the industry (firm closure). But their plant-level investigations were generally inconclusive. In neither analysis did they find significant effects on productivity and they concluded that the overall muted impact of the minimum wage on business performance was consistent with the modest impact found on industry wage bills. In previous research, Wadsworth (2008) found that, since the introduction of the minimum wage, prices had risen at a slightly faster rate for minimum wage goods and services than in the economy as a whole. The research programme is summarised in greater detail in Appendix 2.

8.41 The impact of the minimum wage to date was investigated in detail and summarised in Chapters 2–5. These showed that the minimum wage had maintained its value against both prices and wages in recent years. Coverage had, however, been a little lower. Despite the impact on earnings, we found little evidence of any impact of the minimum wage on employment, hours, profits, prices or productivity at the aggregate level. Looking at the low-paying sectors and low-paid workers in detail also failed to reveal substantive evidence of the impact of the minimum wage on these key indicators.

8.42 We have set out the impact of the minimum wage on the low-paying sectors and noted some developments in these industries in Chapter 3. We now incorporate further developments in the low-paying sectors in our discussions of stakeholder views and the impact of changes to various government regulations.

Stakeholder Views

8.43 We continue to seek views from stakeholders with an interest in the minimum wage. As in previous years, we undertook a comprehensive visits programme, visiting individuals and organisations at 9 locations in the UK. We heard oral evidence from 15 key interest groups over 2 days in December 2008, and the Secretariat held informal meetings with over 40 interested parties throughout the year.

8.44 We conducted a formal written consultation over the summer of 2008 that was in two parts. The first part was on the current apprentice exemptions and whether they are still appropriate. The second part focused on the National Minimum Wage, the rates for October 2009, and whether we should make provisional recommendations for 2010. We received 36 responses to the first part of our consultation and 80 responses to the second part. The deadline for the submission of our Report to the Government was extended from February 2009 to May 2009 to enable us to consider additional economic data. As a result of this extension, 14 organisations submitted further written evidence.

8.45 A list of individuals and organisations that were involved in our consultation, and gave consent for us to publish their names, can be found in Appendix 1. We pay considerable attention to the evidence gathered from our consultation exercise and this, alongside the macroeconomic data we have access to, helps inform our deliberations.

8.46 Views on the appropriate level of the minimum wage for October 2009 can roughly be divided into two camps. There were those, including employers, who asked us to exercise caution in reviewing the rates, given the worsening economic situation; while others, mainly unions and independent lobby groups, argued that minimum wage increases needed to be higher than inflation to help maintain or increase the real value of the income of the low paid.

‘It is vital that the Low Pay Commission does not exacerbate pressures on employment by increasing costs for the lower-paying sectors at a time when they are unaffordable for most businesses.’

CBI evidence

8.47 The CBI said that the UK was likely to enter an economic downturn greater than any faced since the minimum wage was introduced, and called on us to take a ‘risk averse’ approach for 2009. It also said we should avoid definitive decisions about setting a rate for 2010 because of the unpredictable economic situation. In oral evidence the CBI revised its position and proposed a freeze in the minimum wage in 2009. In March 2009 the CBI submitted further evidence calling for no change in the minimum wage in 2009 in order to protect employment. It believed that the low-paying sectors were being particularly affected by the recession, with firms having to let staff go. Raising the minimum wage would place additional pressure on employers facing increasing costs from such changes to employment regulation as the increase in statutory annual leave.

8.48 The British Retail Consortium (BRC) said that the minimum wage had started to reach a point where harm was being caused to business, with 18 per cent of retailers attributing a decrease in average staffing levels to an increase in the minimum wage. The outlook for the retail industry had deteriorated with retail sales being negative in six of the last seven months on a like-for-like basis. In its written evidence the BRC called for future increases in the minimum wage to fall on the lower side of average earnings – which for 2009 meant not exceeding 3 per cent. In March 2009 the BRC submitted further evidence that reflected more up-to-date data, illustrating the difficult trading conditions and the number of casualties within the sector. It called for any increase in the minimum wage to be kept to no more than 1–1.5 per cent.

8.49 The British Hospitality Association (BHA), British Beer & Pub Association (BBPA) and Business In Sport and Leisure (BISL) reported in their written evidence a deteriorating economic situation for the hospitality and leisure sectors. In oral evidence to us later in the year, the associations said there should be a freeze in the minimum wage in 2009 because of the impact on jobs and, because of uncertainty over the economic situation, no provisional rate for 2010 should be recommended in this Report. In further evidence in March 2009, the BBPA and BISL repeated the call for no rise in 2009 and the BHA included examples of businesses in the sector implementing wage freezes and recruitment embargoes.

‘The current downturn in economic conditions means there could hardly be a less propitious time to raise minimum wages.’

UCG evidence

8.50 The Association of Convenience Stores (ACS) said in its oral evidence that it did not believe any increase was justified at this time, but if there is to be an increase, any amount greater than the recent public sector pay awards, of around 2 per cent, would not be justifiable. The ACS submitted further evidence in March 2009 recommending that the minimum wage be frozen in 2009 and 2010 to prevent job losses and a reduction in working hours. The British Shops and Stores Association (BSSA) wanted any increase in 2009 and 2010 to reflect the current economic challenges faced by the sector. The Federation of Small Businesses (FSB) called for no rise in the minimum wage in 2009 and recommended that businesses give a rise that is affordable to them.

8.51 The British Chamber of Commerce (BCC) said that even a moderate increase in the minimum wage could pose serious risks to future employment prospects, particularly among small and medium-sized enterprises (SMEs). The BCC wrote to us again in December 2008 calling for a freeze in the minimum wage. The Scottish Licensed Trade Association (SLTA) thought that any increase in the minimum wage should be in line with inflation and believed that an independent wages council should be re-introduced. The British Apparel & Textile Confederation (BATC) pointed out that, as a result of a ‘devastating decline’ in business across the sector, there were delays in wage negotiations, pay freezes and reductions in pay levels. It urged us to recommend no increase in the minimum wage in 2009 and postpone a decision regarding a rise in 2010. The National Hairdressers’ Federation (NHF) said a survey of its members found that 47 per cent wanted no increase in the minimum wage and 43 per cent wanted an increase of no more than 3 per cent. The Unquoted Companies Group (UCG) thought that as the UK was facing recessionary conditions, wages should go down, not up.

8.52 In summary, submissions to us from employers became more cautious regarding any rise in the minimum wage, because of the worsening economic situation. At the time of the written consultation in October 2008, when employers proposed a particular figure for an increase, this generally ranged from a freeze to a 3 per cent increase, although a couple of submissions advocated a reduction in the rates. As we took oral evidence in December, an increasing number of employer organisations proposed no increase in the minimum wage. And by the time of additional written evidence in March 2009, an overwhelming majority of employers who responded supported this position.

‘Setting the highest levels of minimum wage that can be sustained without adverse side effects will be a vital part of the broader fight against poverty.’

TUC evidence

8.53 Trade unions recognised the slowdown in the economy but pointed to possible future improvements and argued that there was room to make larger increases in the minimum wage. In its written evidence, the TUC referred to predictions that the current economic slowdown would reach its lowest point early in 2009, with economic growth improving by 2010. It said that the adult rate of the minimum wage should be more than £6.10 by October 2009 and at least £6.50 by October 2010. The TUC believed that a freeze in the minimum wage would have a detrimental effect on low-paid workers at a time when food and fuel prices were rising. In its oral evidence in December 2008, it reiterated its view that the UK was well placed to ride out the recession. In further evidence, submitted in March 2009, the TUC recommended an increase in the minimum wage for October 2009. It said that the effects of a further reasonable increase in the minimum wage on employer costs would be modest and employers would find them easy to absorb. It noted that many low-paid workers were covered by Wages Councils in previous recessions, and they consistently received reasonable pay rises in difficult times, with no Wages Council finding it necessary to impose a pay freeze during the recession of the early 1980s.

8.54 The TUC also reported that employment in low-paying industries was holding up well so far. It argued that a minimum wage increase would generate a modest fiscal stimulus as low-paid workers have a high propensity to spend minimum wage rises. As a result, it believed that increases in wage costs would be likely to be offset by increased sales in the retail and hospitality sectors. It cited evidence from the USA that showed minimum wage workers spent 100 per cent of wage rises. In its response, the GMB said that the minimum wage should be increased to £7.00 per hour to become a ‘living wage’, but it recognised that this was a high rate and supported the minimum wage recommendations of the TUC.

8.55 Unite called for the minimum wage to increase to at least £6.71 an hour in 2009 and at least £6.91 by 2010, to have an impact on the gender pay gap and income inequality. It said that the UK labour market remained healthy with total employment and hours worked increasing. In its oral evidence in December 2008, Unite said that even allowing for falling prices, the economy could afford a 4.7 per cent increase in the minimum wage, which would boost spending. UNISON said that a worker needed around £7.37 for a ‘living wage’ without recourse to in-work benefits, and recommended a minimum wage of £7.45 an hour by October 2010. It maintained this stance in its oral evidence in December 2008. Oxfam also referred to a ‘living wage’ and said that the minimum wage should aspire to keep people out of poverty. It would like to see a minimum annual increase equal to the rate of inflation (including housing costs) or average earnings growth, whichever was higher. Usdaw acknowledged the major economic uncertainty that existed but said that an increase in the minimum wage was needed to improve the living standards of the low paid. In its oral evidence in December 2008, Usdaw said that an increase in the minimum wage would be a small part of overall business costs and is affordable.

‘Previous LPC recommendations have been too cautious and only by forcing reluctant employers into paying a significantly higher minimum wage will ensure that workers are kept above the poverty threshold.’

RMT evidence

8.56 The National Union of Rail, Maritime and Transport Workers (RMT) said that the minimum wage is an essential legal safeguard in preventing the exploitation of workers and ensuring that the lowest paid receive an annual pay increase. It wanted the minimum wage to be set at half male median earnings, working towards its eventual goal of two-thirds of male median earnings. The Public and Commercial Services Union (PCS) called for a minimum wage of £8.25 per hour, which it said was close to two-thirds of median earnings. It thought this level, which reflected the impact of increases in living costs on low income households, should be affordable to good employers.

8.57 In summary, trade unions argued that despite the economic situation in the UK, a further increase in the minimum wage could be afforded. Where specific rates were proposed by unions, they ranged from £6.10 to £6.71 in 2009, and from £6.50 to £7.45 in 2010. One union called for £8.25, but without specific timing for its introduction. Unions also highlighted that the low paid had faced higher rates of inflation than the headline official rates for the economy. Any decision not to increase the minimum wage would, therefore, be regarded by trade unions as unfair and as having a particularly detrimental impact on low-paid workers. They did not believe there was an economic necessity to take this course.

8.58 Employer organisations and trade unions had conflicting views on whether to maintain or abolish the youth rates. Employer groups generally supported the retention of the youth rates, while trade unions and organisations representing young people called for their abolition. The CBI stressed the importance of maintaining the youth rates and their differential, citing international experience of the correlation between youth unemployment and the level of the minimum wage. The Association of Licensed Multiple Retailers (ALMR) said that the youth and development rates should be maintained in order to provide incentives for members to embark on training in-house rather than recruiting those with existing skills. The National Day Nurseries Association (NDNA) said that any changes in the development rate would have an impact because 40 per cent of the nursery sector’s workforce is under the age of 24.

8.59 The TUC supported a reduction in age for the adult rate to 21, and an increase in the 18–20 year old rate by more than predicted average earnings growth. It sought similar rises in the 16–17 year old rate so that it reached £4.00 by 2010. Unite thought that the removal of the Youth Development Rate would have a minimal impact on employment prospects for 18–21 year olds and called for the adult rate of the minimum wage to be paid at age 18 rather than 22. PCS wanted young workers to be paid adult rates, calling for the 18–21 year old rate to be phased out. The GMB would like the adult rate to be paid at age 18 and, as a first step, supported our recommendation to lower the adult rate to age 21. UNISON said that as well as being discriminatory, the lower minimum wage rates for young people do not reflect the value of the work they do and result in hardship. It called for the elimination of differential rates based on age. The RMT called for the full adult rate to be paid from age 16.

8.60 The National Union of Students (NUS) said that unequal minimum rates of pay compounded workplace age discrimination and recommended abolishing youth rates. Canterbury College Students’ Union also said that the age rates constituted unfair age discrimination and pointed out that some students have to work to support themselves and their families. The British Youth Council (BYC) campaigned for a minimum wage for everyone aged over 16 and submitted a petition of letters signed by around 1,800 young people calling for equal treatment under the minimum wage. The BYC said that the principle of age-related pay did not take into account that young people often have the same costs and responsibilities as those aged over 22. The YWCA said that the youth rate is lower than the basic income required to live on and called for the youth rate to be abolished. Like the BYC, it said that it did not cost any less for a young person to pay rent and bills than for an adult. Richard Huish College students said that long hours of work had a negative impact on education. The NUS also made this point and argued that many students needed to support themselves and said they would work fewer hours if they were paid more.

8.61 A number of employer organisations commented on the accommodation offset rate in their evidence. The BHA, BBPA, BISL and ALMR said that the current level of the offset fell short of its economic value. The ALMR called for the rate to rise to £60 per week, arguing that the current rate acted as a disincentive for employers to supply accommodation. The National Farmers’ Union (NFU) said that that the current rate is mirrored by the Agricultural Wages Order and that the figure is too low in terms of providing accommodation to a reasonable standard. The Association of Labour Providers (ALP) said that the current offset arrangement had led to a shortage of accommodation provided by employers. It called for workers to be given free choice to agree to accommodation outside any requirement in their employment contracts. The Gangmasters Licensing Authority (GLA) also said that a number of labour providers were not providing accommodation because it was not economically viable to do so and suggested local variations on the offset linked to fair rates used by local authorities.

Consideration of Other Government Legislation

8.62 A number of employer organisations referred to statutory measures other than the minimum wage that have an impact on their costs, or ability to recruit and retain their workforce. They thought that the Commission should assess the impact of the minimum wage and any future revisions in the context of these wider regulatory changes by the Government. The CBI said that the cost of legislative change since 1998, based on BERR figures, was £48 billion, which CBI members considered a conservative estimate. The regulatory changes referred to by stakeholders included the following.

Annual Leave

8.63 A number of employer organisations referred to the impact of the increase in statutory leave entitlement, which had seen an additional four days introduced in October 2007, with a further four days in April 2009. We were required by our terms of reference for both our 2007 and 2008 Reports to take these changes into account. In our 2008 Report we noted that, in coming to our recommendation on the rate of the National Minimum Wage, the available evidence on the impact of the increased statutory entitlement was deficient. We said we would, therefore, keep the matter under review during the coming year in light of our analysis of relevant data from the LFS and the results of our ongoing consultations with stakeholders.

8.64 Some organisations again submitted evidence to us on the impact of the increase in statutory leave, particularly in the social care and hospitality sectors. The EEF called on us to once again take into account the forthcoming increase, of a further 4 days, in April 2009. The CBI said that members in affected sectors did not believe it had been fully taken into account and that we should consider its impact in a year of economic slowdown. It said the rise from 24 to 28 days is expected to cost £2.2 billion in April 2009, with some firms seeing it as a 1.7 per cent rise in wage levels. In social care the United Kingdom Home Care Association (UKHCA) said each increase in leave had added approximately 2 per cent to the wage bill of care providers, but in a 2007 survey it found only 18 per cent of councils recognised this increased cost when commissioning care. The English Community Care Association (ECCA) also said that, in reality, the cost of the increased leave is not covered by higher fees from local authorities. The BHA, BBPA and BISL reported that it was still probably too early to draw firm conclusions about the impact of the increase in paid holidays, but they estimated from a BHA survey of its members that the combined costs of both four-day increases will be around £150 million.

8.65 Evidence from the research we commissioned from IDS (2009), which looked at the low-paying sectors, found some 30 per cent of the organisations in the study were affected by the increase to 24 days in October 2007. It showed the increase had most impact in social care; fast food, pubs and restaurants; childcare; and leisure. It found little impact in hotels and retail, where most employers already met the new statutory requirements. The research found a higher level of impact for the April 2009 increase, with 40 per cent of organisations saying they would be affected. The main impact would be on costs, but problems in recruiting and providing staff cover were also mentioned. Almost three-quarters of those organisations in the social care sector that said they would be affected were small organisations employing up to 100 people.

8.66 Our latest estimates of the cost, based on the fourth quarter of the 2007 LFS and the BERR Paid Annual Leave Survey 2006, give results similar to those available to us at the time of our 2008 Report: namely, broadly in line with sector estimates. The cost to the whole economy of the increase in April 2009 to 5.6 weeks from 4.8 weeks is estimated at 0.3 per cent of the total wage bill. The impact rises to 0.6 per cent of the total wage bill in the low-paying sectors and is highest in the hospitality sector, at a cost of 0.9 per cent of the total wage bill.

Tips

8.67 Our response to the Government’s proposals for no longer allowing tips to be used to make up minimum wage pay is summarised in Chapter 4. Although trade unions welcomed the move to end this practice and called on us to consider how the Government’s commitment to exclude tips from minimum wage pay will be implemented and enforced, some employer organisations voiced concern. The CBI said that the Government’s proposals would have a pronounced impact on the hospitality sector, with roughly half of the 30,000 restaurants in the country estimated by the BHA as being affected. It said the BHA argued that some staff, through the interaction with National Insurance Contributions, may find themselves worse off. The CBI also referred to BHA estimates that the change could cost the hospitality sector £400 million and lead to the loss of up to 45,000 jobs. In contrast, the TUC’s view was that the number of beneficiaries would not exceed 20,000 across all industries, and that the overall impact would therefore be very modest.

Workforce Regulation and Registration

8.68 Employer organisations in social care voiced concern at increased costs for providers through changes to their access to migrant workers and developments in registration of their workforce. The UKHCA claimed that the wage rates in social care, which are achievable through local authority commissioning, do not attract sufficient British workers to the sector, and the migrant workforce is essential to fill the gaps. It claimed that migration from EU countries was not meeting this shortfall and that the new points-based migration system would limit the ability of homecare providers to recruit from outside the European Union. In addition, UKHCA advised us that there would shortly be an obligation on homecare workers in England to register and pay an annual fee of £20 – likely to be subsidised by providers – with the other countries of the UK also preparing for registration. There would also be a new vetting and barring system in England, Wales and Northern Ireland in October 2009, at an estimated cost to the sector of £18 million. The UKHCA thought this was not likely to be reflected in local authority fees paid to social care providers.

8.69 The CBI expressed concern that the Agency Workers Regulations will add to costs for business and may increase unemployment. It said that, given the likely employment situation in 2009 and 2010, there was a need to avoid unnecessary barriers to creating alternative employment, such as high minimum standards.

Changes to the Law on Public Smoking and Gambling

8.70 The ban on smoking in public places was introduced in Scotland in 2006 and then later in other parts of the UK. The SLTA said a survey it conducted found that 34 per cent of respondents had to reduce staffing levels as a result of this change in the law. The BHA, BBPA and BISL said the smoking ban had an impact on pubs and bingo clubs, with the latter also affected by the Gambling Act 2005, contributing to a substantial fall in revenues and a rise in establishment closures.

Recommended Rates

8.71 Since its first recommendations for April 1999, the Low Pay Commission has sought to balance the potential benefits of the National Minimum Wage to low-paid workers against the risk of adverse economic effects. In each of its first ten years, research showed that around 1 million low-paid workers benefited from the minimum wage, with no measurable adverse effects on employment or inflation. This reflects the cautious approach that the Commission has taken in difficult times, balanced with more generous recommendations when times were good.

8.72 This year the UK faces a significant economic challenge. GDP growth, which at the time of our last report was forecast to be 2.3 per cent for 2009, has taken a significant turn for the worse, with forecasts for 2009 now at -3.1 per cent. The fall in employee jobs since the beginning of the recession is greater than the falls in both the 1980s and 1990s recessions. Consumer spending, vital to hospitality and retail, two of the largest low-paying sectors, has declined sharply since the beginning of 2008. Both sectors, employing around a half of all low-paid workers, are performing worse than the economy as a whole.

8.73 In discussion about this year’s recommendations, one argument was that the minimum wage should rise in line with forecast average earnings. It was acknowledged that the economy was in recession, but noted that there were still over 29 million people in employment and that the number of employee jobs in the low-paying sectors was falling more slowly than in the economy as a whole. Pay settlements were still between 3 and 4 per cent for the majority of workers, underlying average earnings growth (excluding bonuses) was 3.5 per cent in the three months to January 2009 and the economy is forecast to pick up towards the end of 2009 and into 2010. Further, the forecasts for inflation were driven by the falls in mortgage interest payments and the temporary reduction in VAT, and minimum-wage workers, who spend much more of their incomes on food and energy, were likely to face higher inflation rates than those forecast for the average household.

8.74 On the other hand, an argument was also made for a freeze in the minimum wage. The economy has been in recession since the middle of 2008 and is forecast to return to growth in late 2009 at the very earliest. Consumer spending has fallen sharply, with the low-paying sectors and unskilled workers disproportionately affected. The number of employee jobs in the low-paying sectors, particularly retail and hospitality, fell sharply in the year to December 2008. Deflation is widely forecast for most of 2009, with the fall in prices being greatest around the time of the October 2009 implementation. RPI could be lower than -3.0 per cent at that time, with CPI just above zero. Average earnings growth including bonuses has fallen from 3.2 per cent in December 2008 to just 1.8 per cent in January 2009. This has been particularly acute in the private sector as bonuses have fallen sharply compared with last year. This is likely to continue through 2009. There has also been downward pressure on pay settlements, with evidence provided of an increase in the number of pay freezes across the economy, although most have been in manufacturing.

8.75 These are unprecedented times for the minimum wage and the Commission has concluded that a cautious approach is the only option. We believe that the pressures on average earnings are on the downside and that the forecasts on earnings for the fourth quarters of both 2009 and 2010 could prove optimistic. Companies in the low-paying sectors are under great pressure from a combination of different factors: the reduction in consumer spending, the paucity of credit available, and the removal of credit risk insurance. We therefore recommend that the adult minimum wage rate should increase from £5.73 to £5.80 in October 2009.

8.76 We have again recommended that 21 year olds be entitled to the adult minimum wage. We believe that the evidence supports this conclusion. Fewer than 60,000 21 year olds (about 10 per cent) are currently paid less than the adult rate. Some of these will be on apprentice schemes and will be exempt anyway. Our analysis also suggests that most of these work in large firms in the retail and hospitality sectors. We have again found that their employment and unemployment rates are closer to those of 22 year olds than of the 18–20 year old age group. Despite the current climate, we believe that the impact on individual employers will be minimal, that any additional costs that arise can be absorbed, and that 21 year olds will not suffer detrimental employment effects from the change.

8.77 In considering the rates for those aged below 21 years old, we noted the calls from many organisations that there should be a single minimum wage for everyone regardless of age. But, we continue to believe that it is right that young people, in their initial entry to the labour market, should share with their employers some of the costs of training and gaining work experience. As explained earlier in this report, young people are likely to experience a larger adverse effect from the recession than other, more experienced groups. We are concerned that we should not do anything to price young people out of the labour market, but we were not persuaded of the case for a freeze or a cut to young people’s wages. We note that Bell and Blanchflower (2009) concluded that ‘it does not appear that young people are pricing themselves out of work currently, unless their relative productivity is falling especially sharply, but we have no evidence to suggest that this is the case’. They also found no evidence of an impact from the National Minimum Wage on the employment of young people.

8.78 After careful consideration, we concluded that the relative value of the youth rates to the adult rate should be maintained. We recommend that the Youth Development Rate should increase from £4.77 to £4.83 in October 2009 and that the rate for 16–17 year olds should increase from £3.53 to £3.57 in October 2009.

8.79 The Government asked us, as appropriate, to consider recommending rates for the minimum wage in 2010. As there is a great deal of economic uncertainty at this time, we do not believe it is appropriate to make a recommendation for 2010. If economic forecasts prove unduly pessimistic, and key labour market indicators are out of line with our expectations at this time, this will be reflected in our deliberations for 2010.

8.80 In Chapter 4 we set out the views of stakeholders and our conclusions on the accommodation offset. There continue to be concerns from employer representatives about the low level of the offset and that more employers are ceasing to provide accommodation because it is not economically viable to do so. The TUC again raised concerns that the offset is being abused, especially for migrant workers.

8.81 In our 2005 Report we gave reasons why we believed the offset should increase by the same proportion as the proposed increase in the adult rate of the minimum wage. To date, the daily rate has broadly risen in line with the hourly adult rate, remaining at around 77–79 per cent of the hourly adult National Minimum Wage. The evidence received this year has not persuaded us to deviate from our normal practice. We recommend that the accommodation offset should increase from £4.46 per day to £4.51 per day in October 2009. We are concerned, however, by the views expressed by stakeholders on the offset and so, as part of our review next year, we will invite stakeholders to submit further and more detailed evidence so we can better understand the impact of the offset.

Implications of the Recommended Rates

Coverage

8.82 The recommended increases in the minimum wage rates for October 2009, at around 1.2 per cent, are lower than the forecast increase in average earnings but higher than the forecast change in prices. If implemented, these changes are likely to cover a slightly smaller proportion of jobs compared with the proportion covered by the 2008 upratings (assuming earnings for low-paid workers grow in line with average earnings) and a smaller proportion compared with previous years when the upratings were in line with, or exceeded, the growth in average earnings.

8.83 In April 2008, according to ASHE, there were around 1.73 million jobs that paid less than the minimum wage rates we are recommending for October 2009. These were made up of 1.57 million jobs held by those aged 21 and over (6.4 per cent), 120,000 jobs held by 18–20 year olds (9.2 per cent), and 36,000 jobs held by 16–17 year olds (8.5 per cent).

8.84 In order to estimate coverage, we need to make assumptions about how the wages of the low paid would have changed in the absence of any minimum wage upratings. In other words, we need to estimate the real value of the October 2009 minimum wage rates at April 2008 (the date of the latest earnings data) by downrating using estimated wage growth. We use actual and forecast changes in prices or earnings to estimate this growth.

8.85 Assuming that 21 year olds would be entitled to the adult minimum wage from October 2009, in line with our recommendation, and that the wages of the lowest paid would increase in line with forecast average earnings, we estimate that about 833,000 jobs or 3.4 per cent of all jobs held by those aged 21 and over would be covered by the new rate of £5.80 in October 2009, as shown in Table 8.3. If we assume instead that the wage growth of the lowest paid would match forecast price inflation, a greater number of jobs would be estimated to be covered (as the forecast growth in prices is lower than that of earnings) – between 1.13 million and 1.62 million jobs (4.6 to 6.6 per cent) held by the adult workforce, depending on the price index used. Using the earnings assumption, we estimate that the new adult rate for the minimum wage will achieve a lower level of coverage than the £5.73 uprating in October 2008 (when 985,000 or 4.1 per cent of jobs held by those aged 22 and over were covered). Alternatively using prices, estimated coverage of the new adult rate is higher than for the previous year (862,000 to 985,000 jobs or 3.6 to 4.1 per cent using CPI or RPI respectively).

8.86 We have recommended increases for the Youth Development Rate and the 16–17 Year Old Rate roughly in line with our recommendation for the adult minimum wage: 1.3 per cent and 1.1 per cent for the Youth Development Rate and the 16–17 Year Old Rate respectively in October 2009.

Table 8.3 Estimated Number and Percentage of Jobs Covered by the Recommended October 2009 National Minimum Wage Upratings, UK, 2009

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2008; ONS, AEI including bonuses (LNNC), seasonally adjusted, RPI (CZBH) and CPI (D7G7), not seasonally adjusted, UK (GB for AEI), April 2008 to October 2008; and HM Treasury Panel of Independent Forecasts at March 2009, UK, 2009.

8.87 Assuming that young workers’ wages would increase in line with average earnings, we estimate that 88,000 jobs held by those aged 18–20 will be covered by the October 2009 Youth Development Rate,
representing around 6.8 per cent of jobs held by these young workers. Based on the price assumption, the coverage is higher and our estimates range from 105,000 to 121,000 jobs (between 8.1 and 9.3 per cent of all jobs held by that age group).

8.88 We estimate, based on the earnings assumption, that 29,000 jobs held by 16–17 year olds (or 6.8 per cent of all jobs held by these workers) will be covered by the October 2009 uprating. Using the price assumption, the coverage increases to between 29,000 and 36,000 jobs for this age group (between 6.9 and 8.5 per cent of jobs).

8.89 Overall, we estimate, therefore, that the total coverage of the recommended October 2009 upratings will be approximately 950,000 jobs (3.6 per cent of all jobs), if the wages of the low paid were to increase by the forecast growth in average earnings between April 2008 and October 2009. If they were to increase in line with predicted prices, we estimate coverage of between 1.26 million jobs (4.8 per cent of all jobs) and 1.77 million jobs (6.8 per cent of all jobs).

8.90 As we discussed in Chapters 2 and 4, women are more likely than men to be working in low-paid jobs. Based on the earnings assumption, we estimate that the October 2009 adult minimum wage would cover around 289,000 jobs held by men and 544,000 jobs held by women. Using our alternative price assumption, we expect that up to 531,000 jobs held by men and 1.09 million jobs held by women would be covered by the increase to £5.80. On all measures, jobs held by women aged 21 and over are expected to make up around two-thirds of all jobs covered by the 2009 October increase in the adult rate.

Position Relative to Average Earnings

8.91 The ‘bite’ of the minimum wage, that is its relationship to average earnings (measured at the median or the mean), is another way of assessing the impact of the minimum wage on the earnings distribution. In April 2008, according to ASHE, the median gross hourly earnings (excluding overtime) of all employees aged 21 and over (full and part-time) was £10.74 an hour. In order to be able to compare median earnings with the October 2009 adult rate, we need to uprate it by the growth in average earnings (including bonuses), both actual and predicted. On that basis, the adult rate of £5.80 is expected to be about 51.6 per cent of forecast average earnings for those aged 21 and over (£11.23) in October 2009. This result is slightly lower than the bite of the October 2008 rate of £5.73 for employees aged 22 and above (51.7 per cent), which implies that increasing the rate by less than predicted average earnings offsets the impact of including 21 year olds in the adult rate. In comparison with previous years, the bite for the adult rate was 45.7 per cent when the minimum wage was introduced in 1999, around 51.0 per cent for the October 2006 rate of £5.35, and was around 50.7 per cent for the October 2007 rate of £5.52.

8.92 Using the mean, we estimate that the bite in October 2009 will be around 40.0 per cent for employees aged 21 and over based on the earnings assumption. This is 0.2 percentage points lower than the bite at the mean for the October 2008 adult rate.

Impact on Household Income

8.93 When the adult minimum wage increased to £5.73 in October 2008, gross weekly income would have been £200.55 for a 35 hour week. Using HM Treasury estimates for the 2009/10 tax year, this gross income would be equivalent to a net income of £196.57 for a single person working full-time with no children (a net wage of £5.62 an hour for a 35 hour week). The corresponding amount for a couple with one child (one partner working and the other not) would be around £317.17 (equivalent to a wage of £9.06 an hour for a 35 hour week).

8.94 Again assuming a 35 hour week, gross weekly income would have increased by £2.45 to £203.00 following the minimum wage increase to £5.80 in October 2009. The net weekly income for a single person would rise by 74 pence to £197.30. For the one-child family, net income would rise by just 11 pence to £317.28. The effective hourly rate for the single person would be £5.64 and for a one-child family £9.07 an hour. In conclusion, changes in the minimum wage are expected to lead to low-paid workers, on average, increasing their net take-home pay by less than the increase in gross pay. At this stage we are unable to assess the impact of the changes to the tax and benefit regime for 2010/11.

Wage Bills

8.95 We anticipate that the direct impact of our recommendations on the average wage bill is likely to be smaller than in recent years as the recommended increase in the minimum wage is lower than the predicted rise in average earnings. But our recommendation that 21 year olds should be entitled to the adult minimum wage could lead to an increase in wage bills for some firms. As we saw in Chapter 5, around 90 per cent of jobs held by 21 year olds are already paying at least the adult rate, so the impact of this recommendation on the wage bill should be small. We estimate that it would add up to 0.06 per cent, at most, to the wage bill for 21 year olds.

Public Sector

8.96 The lowest rates of pay in the public sector tend to be above minimum wage levels and, as we saw in Chapter 2, very few jobs in the public sector are paid at the minimum wage. We therefore expect a very small direct impact on the public sector wage bill from the recommended October 2009 rates. Given that many public bodies employ private sector firms under contract to provide services such as cleaning, our recommended increase may lead to a small indirect impact.

8.97 An increase in the minimum wage can also affect the public sector through savings to the Exchequer, resulting from increased tax receipts and reduced benefits. Table 8.4 is based on information supplied by the Government and illustrates the effect of the 7 pence increase in the adult rate of the minimum wage.[1] We estimate that in total the Government will gain around £100 million from the 2009 minimum wage upratings, over half of which consists of additional yield from income tax (£38 million) and National Insurance Contributions (£20 million) as the earnings of minimum wage employees increase. The Government also stands to make savings from a reduction in Working Tax Credits (£22 million) and other benefits (over £21 million in total).

Table 8.4 Estimated Exchequer Yield and Savings from the 2009 National Minimum Wage Uprating, £ million, UK, 2009/10

Source: LPC estimates extrapolated from HM Treasury calculations using 10 pence increases based on Family Resources Survey 2006/07, uprated to 2009/10, UK, full year 2009/10.

Note: These figures take account of changes in tax credits, benefits, taxes and National Insurance Contributions but do not take any account of likely behavioural change caused by an increase in hourly pay, such as changed levels of employment or hours worked. In addition, they do not include the effect of the £25,000 disregard in tax credits, which allows income to rise between one year and the next by up to £25,000 before tax credits begin to be withdrawn. This means that the reductions in tax credits would in practice be significantly smaller, at least in the initial tax year.

Conclusion

8.98 The Commission is fully committed to ensuring that low-paid workers are treated fairly in these difficult economic times. Our recommendations were made this year in a climate of economic volatility and reflect the difficulty of making a judgement in such conditions. They were shaped by the need to help low-paid workers by protecting their jobs as well as their earnings. The minimum wage has been a huge success for ten years and is there to uphold the principle of fairness whatever the economic climate. After a finely balanced discussion, we reached the conclusion that the evidence pointed to the need for a modest increase.

8.99 In reaching our conclusions, we took account of a range of labour market forecasts. Our recommendations are based on the expectation that employment levels in the low-paying sectors will fall more sharply than those for the economy as a whole. We are aware that predictions for the growth in average earnings have continued to fall on a month-by-month basis, and so our recommendations are informed by the assumption that current predictions will prove to be too high. Our recommendations are also based on an assumption of falling prices during 2009, which means that even a very modest increase in the rates would lead to a real increase in the living standards of minimum wage workers. Finally, our recommendations are intended to ensure that the National Minimum Wage will broadly keep pace with the modest growth in pay settlements and average earnings forecast for the coming year.

8.100 The Commission is committed to protecting low-paid workers through the recession. As the Commission works on its 2010 Report this autumn, it will review whether these assumptions were upheld and will take this into account when considering the rates that should apply from October 2010. In doing so, the Commission will pay particular attention to the volatility of the current economic climate and how it can best communicate its thinking to employers and low-paid workers so as to help them with their forward planning.

8.101 This year’s proposed rates should not be taken as a sign that we will continue to make such modest recommendations. In the period between 2003 and 2006, our evidence-based approach led to a series of increases that outstripped the growth of average earnings, since when our recommendations have become more moderate in order to take account of the higher probability of job loss in the cooling economy. It follows that, when economic conditions improve, the minimum wage could once again increase at a faster rate. In making its recommendations, the Commission’s view will always be driven by the prevailing economic evidence.