WELCOME TO THE LOW PAY COMMISSION

8.1 In recommending the rates for 2010, in addition to our analysis of the recession and the impact of the minimum wage on earnings, employment and competitiveness, we have taken account of the prospects for the economy, international comparisons of the minimum wage, the views of stakeholders, and forthcoming changes to government regulations.

8.2 In the first five chapters, we have given our analysis of the impact of the recession on the economy and investigated how firms and workers had been affected by changes in the minimum wage.

8.3 We noted that the UK has suffered its longest and deepest recession since at least the 1930s with a total loss of gross domestic product (GDP) of around 6 per cent since the first quarter of 2008. Expenditure has been weak across the economy with business investment declining sharply, consumer spending falling and the growth in government spending slowing. The recession has been spread across the economy but manufacturing has been worse hit. Although the distribution sector has been adversely affected, retail sales, particularly for food stores and online shopping, have held up. Hospitality, on the other hand, has been severely hit as consumers switch from eating and drinking in restaurants and bars to consuming food and drink at home.

8.4 In contrast to previous recessions, when the percentage falls in employment and hours were around twice the fall in output, the labour market this time has been remarkably resilient with employment and hours not falling as fast as output. This has therefore led to productivity falling sharply and unit wage costs rising. While this might suggest that firms still need to make further adjustments, the labour market actually started to show signs of improvement in the second half of 2009. Employment and total hours worked appear to have bottomed out; vacancies are no longer falling and have started to increase; both the ILO and claimant count measures of unemployment have stopped rising; and redundancies have fallen back sharply, although they remain higher than before the recession started.

8.5 Firms appear to have retained labour and have financed this by restricting wage growth, running down inventories and cutting investment. Real wage growth had been weak leading up to the recession and remains so, depending on the price comparator. Compared with previous recessions, private sector firms’ financial balances are much healthier; profits, albeit lower than at the start of this recession, are higher; and there have been fewer insolvencies.

8.6 As with previous minimum wage upratings, the distribution of earnings was again affected by the minimum wage increase in October 2008 with the numbers paid at the adult minimum wage rising to a record high of nearly 750,000. The bite (the value of the minimum wage relative to the median) remained at just under 51 per cent. Our commissioned research found that the minimum wage did affect the earnings of the lowest paid but that the evidence on differentials was mixed with Stewart (2009) finding smaller effects than Butcher, Dickens and Manning (2009). As few data were available, we were unable to assess fully the impact of the 2009 minimum wage upratings. The 1.2 per cent increase was in line with median pay settlements, private sector and whole economy average earnings growth (including and excluding bonuses) and was between the increases in the two main measures of inflation (Consumer Prices Index (CPI) and Retail Prices Index (RPI)).

8.7 Our analysis, and commissioned research from Incomes Data Services (IDS, 2009b), showed that the minimum wage continued to be an important determinant of wages in the low-paying sectors and small firms. Overall, the decline in low-paying sector jobs was slower than in the whole economy throughout the recession, although there were variations across sectors. The falls in retail and hospitality jobs tended to follow a slightly shallower path than the whole economy. But the declines in jobs in cleaning and the manufacture of textiles and clothing were much deeper. In contrast, the number of jobs in social care, childcare and hairdressing increased.

8.8 Although the labour market has performed better than expected in the recession, young people have continued to fare badly. Relative to adults, the labour market activity of young people generally has been deteriorating since 2001, and since 1998 for 16–17 year olds. This decline has been exacerbated in this recession by greater falls in employment and increases in unemployment for young people than for older workers. There was also evidence that employers were making greater use of youth minimum wage rates for those aged under 21. Our analysis of other groups of vulnerable workers (women, ethnic minorities, migrants, disabled people and older workers) showed few signs of them being more adversely affected by the recession than workers in general. The one exception was those with no qualifications. Their labour market performance has followed a remarkably similar pattern to that of young workers, with a marked deterioration after 2001 made worse by this recession.

8.9 At our meeting in January 2010, the economy had been in recession for six consecutive quarters and the outlook remained uncertain. However, most indicators suggested that the economy was likely to have come out of recession in the fourth quarter of 2009.[1] The National Institute of Economic and Social Research (NIESR) estimated that the UK economy would grow by 0.3 per cent in the final quarter of 2009, but noted that this would still represent a fall in output of 4.8 per cent in 2009. It claimed that this would be a larger fall than in any one year during the Great Depression and the largest annual fall since 1921.[2]

8.10 The world has suffered the most sustained and deepest global recession since World War II, with both advanced and developing economies affected. World economic growth was poor in 2009 with the International Monetary Fund (IMF) forecasting that world output will have fallen by 1.1 per cent and the Organisation for Economic Co-operation and Development (OECD) forecasting that world trade will have fallen by 12.5 per cent.

8.11 The United States, Japan and the largest countries in the Eurozone (Germany, France and Italy) are now out of recession after massive fiscal and monetary boosts to the system and a pick up in trade, as growth rates in China and India have returned to those prior to the recession. However, in the third quarter of 2009, the UK (like Spain, Greece and Iceland) was still in recession. IMF and OECD expected world growth to pick up in 2010 but with growth below trend in the United States (1.5–2.5 per cent) and weak in Europe (0.3–0.9 per cent). IMF forecasts UK output growth of 0.9 per cent in 2010, while OECD suggests that a pick up in investment and trade will lead to growth of 1.2 per cent in 2010 and growth of 2.2 per cent in 2011, supported by consumer spending.

8.12 This improvement in growth prospects was also reflected in the latest forecasts for the UK from the Bank of England and HM Treasury. In its November Inflation Report, the Bank of England forecast that the economy would come out of recession in the last quarter of 2009, and that growth would pick up towards trend by the end of 2010 and be above trend in 2011. This was in line with the latest HM Treasury forecasts as set out in the 2009 Pre-Budget Report (PBR), where the Government expected growth to pick up to 1–1.5 per cent in 2010 and 3.25–3.75 per cent in 2011. These forecasts squared with the consensus of City and independent forecasts for 2010 but were much higher than the current consensus for 2011 (around 2.0 per cent), as shown in Table 8.1.

8.13 The consensus outlook for 2010 is much brighter than for 2009 and it has improved over time. At the time of making our recommendations for the 2009 minimum wage upratings, the consensus forecast was that the economy would barely grow in 2010 after suffering a fall of over 3 per cent in 2009. As it turned out, the economy is likely to have shrunk by nearly 5 per cent in 2009 but forecasters have become more optimistic about the strength of recovery in 2010.

8.14 Despite rising optimism about the outlook for growth in 2010 it is still expected to be modest and may be volatile quarter-on-quarter. Two factors, in particular, could act to dampen the recovery. Unlike previous post-war recessions, this latest recession was driven by a financial crisis that has led banks to seek to rebuild their balance sheets, in turn reducing the finance available to business and domestic consumers. Although this particular drag on the economy should ease over time as banks’ finances are restored, possible future actions to rein back the public deficit, for example by cutting public spending and/or increasing taxes, could also dampen demand.

8.15 On the other hand, there may be some offsetting upward pressures on private activity. Growth in 2010 is expected to be robust in the major developing economies and to return towards trend in the United States. This should benefit the UK as a major international financial and business centre. Furthermore, sterling is at a very competitive rate against the euro, and Europe is the UK’s main export market. As the European economy recovers, British exporters should be particular beneficiaries. On balance, these are likely to be more important influences in 2011, when the consensus forecast is for growth to rise to around 2.0 per cent.

8.16 Overall, the immediate future outlook is for comparatively weak growth in 2010, strengthening somewhat in 2011. However, the future path is extremely uncertain, partly because of the factors mentioned above, but also because the eventual effect of the unprecedented global monetary easing of the last two years remains difficult to assess.

Source: HM Treasury (March 2009 (median of forecasts for 2009 and 2010), January 2010 (median of forecasts for 2010) and November 2009 (median of forecasts 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), 2008–2009.

a. 2011 forecasts for average earnings growth, employment growth and RPIX not available.

b. Estimate of average earnings growth based on January to November 2009 compared with the same period a year earlier.

c. Estimate of economic growth based on NIESR estimates, current forecasts and LPC extrapolations.

8.17 Although we have noted that the labour market appears to be recovering, the latest consensus forecasts are that the slow growth expected in 2010 may not be accompanied by a pick up in employment or reduction in unemployment in the short-run. Employment, as measured by workforce jobs, fell by 2.1 per cent in 2009 and the median forecast is for a further 0.7 per cent fall in 2010, despite the expected upturn in growth. This fall of around 215,000 jobs is in line with the anticipated increase in unemployment from 1.62 million to 1.82 million. However, the median forecasts for 2010 have been revised downwards over the year and no longer predict claimant count unemployment rising above 2 million. Further, the latest forecasts diverge widely and may not reflect the improvement in the labour market towards the end of 2009.

8.18 Looking at the outlook for prices and pay, we noted in Chapter 2 that inflation on all the main measures fell during the early part of 2009, but started to rise again from June onwards in the case of RPI and RPIX (RPI excluding mortgage interest payments), and from September onwards in the case of CPI. Two factors explain this upturn and are likely to continue to be influential in determining inflation rates in 2010. First, the effects of downward pressures on the indices in 2009 from lower energy and transport prices, the Value Added Tax (VAT) reduction, and, in the case of RPI, cheaper housing costs, will steadily weaken. Second, prices have started to rise again across a broad range of areas; in fact, prices rose in 10 of the 12 components making up the CPI in December. In addition, the reduction in VAT in December 2008 was reversed from 1 January 2010 and could add up to 1.5 percentage points to the rate of CPI inflation (or 0.9 percentage points in the case of RPI). This will depend on the extent to which the increase is passed on to customers. A survey of retail and leisure firms by the Bank of England regional agents found that most were not intending to pass on the full increase.

8.19 Inflation is consequently expected to rise in the first half of 2010. It is, however, then expected to fall back later in the year. In the case of CPI, the Governor of the Bank of England (King, 2010) said that the impact of technical and price effects could push CPI above 3 per cent for a while – or even higher – before easing. The consensus median of independent forecasts collected by HM Treasury has CPI at 1.8 per cent for the fourth quarter of 2010, close to HM Treasury’s own forecast contained in the December PBR. RPI is expected to rise more sharply and to move above CPI, peaking in the summer. It is also expected to fall back later in the year, with the median forecast for the fourth quarter at 2.9 per cent (above HM Treasury’s PBR forecast of 2.5 per cent). In part, the forecast paths for these measures reflect the steady decline in the various recent upward pressures on the indices as the year progresses, thereby mirroring the waning downward pressures on the indices apparent from last summer onwards. However, recent price volatility, continued economic uncertainty, and the, as yet, unclear implications of the Bank of England’s quantitive easing programme, make forecasting inflation rates particularly difficult this year.

8.20 Inflation plays a role, along with affordability and considerations of retention and recruitment needs, in determining basic pay awards. Earnings depend not only on these awards but also on factors such as progression, hours worked, overtime and other pay premia. We start our analysis by looking at pay settlement data, which measure increases in basic pay rates. We then go on to look at prospects for earnings. Although there are no forecasts for settlements, a number of commentators have carried out surveys of employers’ pay expectations in 2010. The general message of most of these surveys was that, where private sector employers were able to give an indication of their 2010 award, they expected some pick up in settlement levels, and the proportion implementing pay freezes would be lower than that registered late last year for the economy as a whole (a quarter to a third of all awards). Responses to surveys by IDS and Industrial Relations Services in the latter half of 2009 suggested that the median of private sector settlements in 2010 could fall in the range of 2–3 per cent, somewhat above the 1–2 per cent range they reported in the final quarter of 2009. A CBI survey published in November 2009 found that nearly half of respondents planned a pay freeze – a slightly lower proportion than in its 2008 survey – with only a quarter expecting an award at or above inflation. The Bank of England’s agents reported in January 2010 that the pay outlook remained subdued, with many employers planning a pay freeze in 2010, but that there was a marginal increase in the proportion planning a positive award.

8.21 Discussions with pay researchers in January 2010 indicated that very few pay awards had yet been agreed for 2010, and that most of those were pre-determined stages of long-term pay deals. Researchers also noted that many pay bargainers were still undecided on the nature and level of their pay awards. It was, therefore, not possible to draw any firm conclusions about the shape and level of pay awards in 2010 from the existing settlement data.

8.22 The latest average earnings figures showed a marked difference in growth between the public and private sectors, with the former at 2.7 per cent for the three months to November 2009 and the latter at 1.3 per cent. The inclusion or exclusion of bonus effects made little difference to these figures. Historical analysis shows that public sector earnings growth might be expected to exceed that of the private sector at this stage of the economic cycle. However, the relationship should reverse as the economy picks up. Pay researchers suggested that settlement levels in the public sector would decline from this year, bringing down the rate of earnings growth. On the other hand, earnings growth in the private sector would rise if higher pay settlement expectations were realised. Some economic analysts anticipated a partial restoration of variable payments this year, particularly in the finance sector, which would lead to an increase in the earnings index including bonuses, particularly in the first few months of the year. Overall, forecasts suggested that whole economy earnings growth would be higher in 2010 than last year, with a median consensus expectation of 2.2 per cent for the year as a whole. This compares with an average rate of earnings growth of 1.3 per cent in the 11 months to November 2009. For the reasons outlined above, however, we would not be surprised if average earnings growth in 2010 turned out a little higher than currently forecast.

8.23 The National Minimum Wage for adults increased in October 2009 to £5.80 per hour. If it increased further in October 2010 by the anticipated growth in average earnings (2.2 per cent over the year in 2010), it would rise to £5.93 per hour. If, instead, the minimum wage were to rise in line with the expected increase in prices (1.8 per cent (CPI) or 2.9 per cent (RPI) in the year to the fourth quarter of 2010), the adult minimum wage would be somewhere between £5.90 and £5.97 an hour, depending on the price index used. If the adult minimum wage were to rise in line with current median pay settlements (around 1.5–2.0 per cent in December 2010), it would rise to between £5.89 and £5.92 per hour in October 2010.

8.24 In our deliberations, we also took account of the value of the UK minimum wage relative to that of other OECD countries with minimum wages. Any change in this value depends on three main factors – the degree to which countries raise their minimum wages; the extent of any change in exchange rates; and relative inflation rates. In terms of comparisons with other OECD countries in the last two years, these three factors have all contributed to a fall in the relative value of the UK minimum wage.

8.25 We start by looking at the increase in the minimum wage in terms of national currencies. The UK minimum wage rose by 1.2 per cent in 2009, similar to France and Japan (1.3 and 1.4 per cent respectively), but significantly lower than most other OECD nations. The largest increases occurred in Belgium (11.4 per cent), the United States (10.6 per cent) and Canada (7.8 per cent). A further 5 countries had increases ranging from 3.0 per cent in the Netherlands to 5.7 per cent in Portugal. In contrast, the minimum wage was frozen in both Australia and Ireland in 2009.

8.26 Since 2007, sterling has depreciated by over 20 per cent against a general basket of currencies (the Bank of England Exchange Rate Index). Over the year to December 2009, sterling has appreciated but still remains below its value in mid-2008 against the dollar, the euro and the yen. As a consequence, the value of the UK minimum wage in common currency has fallen relative to many other countries since we last looked at this comparison in our 2009 Report. For example, although the Irish have frozen their minimum wage since 2007, its value in pounds sterling using the exchange rate rose by 7.4 per cent from £7.18 to £7.71. Accounting for exchange rate movements, only Japan (with a 1.3 per cent rise from 701 to 713 yen) had a smaller minimum wage increase than the UK at 1.1 per cent. The highest increase was in Australia (23 per cent), despite a freeze (in AU$ terms), with the next highest in New Zealand (22 per cent), which increased its minimum wage by 4.2 per cent (in NZ$ terms).

8.27 Exchange rate comparisons do not fully reflect inflation in the various countries. Purchasing power parity (PPP) does take inflation into account. In terms of PPP, the Irish minimum wage increased its value in pounds sterling by 6.7 per cent from £5.09 to £5.43. In PPP terms, the UK had the lowest increase (1.2 per cent) with the next lowest Australia (1.5 per cent) and then France (2.6 per cent). The highest increases were in Belgium (12.8 per cent) and the United States (10.7 per cent).

8.28 In summary, the increase in the minimum wage in the UK relative to that of other countries tended to be at the lower end, whether we looked at national currencies or adjusted for exchange rates and inflation. The level of the UK minimum wage, however, remained towards the upper end in all these comparisons.

8.29 Another measure that is useful for international comparisons is the degree to which the minimum wage bites (its value relative to the mean or median) in different countries. On this measure the UK minimum wage has changed little in recent years and remains roughly in the middle of the 13 OECD countries that we study. Further details of minimum wages in other countries can be found in Appendix 3 (and Appendix 5 in our 2009 Report).

8.30 We continue to seek views on the minimum wage from stakeholders including employers and their representative organisations, trade unions, and youth organisations. We conducted a formal written consultation over the summer of 2009 that was in two parts. The first part was on issues surrounding an apprentice minimum wage including an appropriate rate. The second part focused on the minimum wage, the rates for October 2010, and whether we should make provisional arrangements for 2011. In addition, we undertook a comprehensive programme of visits to individuals and organisations at eight locations in the UK. We heard oral evidence from key interest groups over two days in October 2009, and the Secretariat held informal meetings with interested parties throughout the year.

8.31 We received 59 responses to our general consultation and 52 to the apprentice consultation. Views were received from a broad range of sectors, from worker and employer representatives, from individuals, and from all the countries within the UK. A list of individuals and organisations that responded to 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 our analysis of macroeconomic and labour market data and commissioned research, helps inform our deliberations.

8.32 There were divergent views on the appropriate level of the adult minimum wage for October 2010. Of the 59 responses received on the general consultation, 36 gave a view on what the rate should be. Employers and their representatives asked us to exercise caution in reviewing the rates, given the current economic situation, with 12 recommending a freeze. 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. Most submissions remained silent on whether we should make a recommendation for the adult minimum wage in 2011, but of those who expressed a preference, all but Unite and the Communication Workers Union thought that it would be undesirable.

8.33 A number of employer organisations recommended freezing the minimum wage because of economic conditions. The Association of Convenience Stores claimed any further increase in 2010 would be funded through hours being reduced or job cuts. The Federation of Small Businesses in its oral evidence said that the minimum wage should not be set at a level that deterred employment or growth and called for a freeze. The Association of Licensed Multiple Retailers (ALMR) said that there was real evidence of harm from minimum wage upratings. It proposed that the minimum wage should be frozen in 2010 and said it was not appropriate to recommend a rate for 2011. The British Chambers of Commerce (BCC) called for a freeze. It said that the minimum wage had to respond to the labour market and current economic conditions and a year of solid recovery was required before additional costs could be imposed on businesses. The Scottish Licensed Trade Association called for a freeze until there were ‘green shoots of recovery’.

‘…businesses cannot afford any increase in the National Minimum Wage, and any increase above zero per cent risks adding to the unemployment total.’

8.34 The CBI reported that the recession was comparable in severity to the 1980s and continued weakness in the banking sector could act as a drag on the economy over the coming years. It thought that the economic and unemployment outlook strongly supported the case for a freeze in the minimum wage. It added that we should avoid making decisions for 2011 due to current economic volatility.

‘Caution is required in the face of the worst labour market situation in many years – no rise is the right choice for workers and employers in 2010.’

8.35 The British Hospitality Association (BHA), British Beer & Pub Association (BBPA) and Business In Sport and Leisure (BISL) said that the hospitality and leisure sectors continued to be affected by the downturn with lower sales and employment levels. In oral evidence the associations said that some small businesses were struggling to pay wages and were heavily indebted. They called for a minimal increase in the minimum wage in 2010 arguing that any recommendations must assume that the climb from recession will be long and hard. They said no provisional rate should be set for 2011. The Food and Drink Federation argued that we should adopt a cautious approach when making our recommendations due to the uncertain economic climate.

8.36 The British Retail Consortium (BRC) said that although it appeared the worse of the recession was now over, the outlook for the retail sector in 2010 was still challenging with consumer spending expected to continue to fall well into 2010. It called for any increase in the minimum wage to be kept to no more than 0–1 per cent and proposed that it should not exceed 1.2 per cent. Morrisons urged us to keep any rise in the minimum wage consistent with inflation to help guard against the narrowing of differentials. It said any increase should not exceed 1 per cent.

8.37 In summary, submissions to us from employers were cautious regarding any rise in the minimum wage, because of the worsening economic situation. Some business organisations foresaw a fragile recovery in the economy; many cited subdued business investment and consumer spending as possible constraints to recovery. When employers proposed a particular figure for an increase in their written evidence, this generally ranged from a freeze to a 1 per cent increase. As we took oral evidence in October 2009, an increasing number of employer organisations proposed no increase in the minimum wage, citing ongoing difficult economic conditions. One organisation, the Unquoted Companies Group, recommended a reduction in the minimum wage of 1 per cent.

‘A target increase of 3.5 per cent could easily be managed without any detrimental economic or employment side effects.’

8.38 Trade unions recognised the slowdown in the economy but were more positive about economic recovery. Submissions from unions cited forecasts that predicted the economy would rise out of recession in 2010 and the peak of unemployment would have passed. In its written evidence, the Trades Union Congress (TUC) reported that the low-paying sectors, other than retail and hospitality, had performed better than the economy as a whole through the recession. It added that unemployment should have improved by late 2010 and that there were signs the retail sector was starting to recover. The TUC believed that, with the exception of the retail sector, the recession had most affected the finance, construction and manufacturing sectors and that minimum wage workers were spread thinly in these sectors.

8.39 The TUC thought that the adult rate of the minimum wage should be increased to £6.00 an hour in 2010. This would take into account average earnings, an increase in consumer demand and combating in-work poverty. It believed that the increase in the minimum wage could be managed without risking any detrimental economic or employment side effects. It said that there was a danger in setting the minimum wage too low, as well as too high, as this would create unnecessary in-work poverty, would have an impact on public finance, and restrain consumer demand which would otherwise aid recovery.

8.40 The TUC argued that although there had been reports of pay freezes, this had not been the general experience across the economy with the current crop of pay freezes largely confined to the finance, construction and manufacturing sectors. It said that despite the constraints on public sector pay, its members had negotiated pay settlements significantly higher than average earnings. It believed pay settlements and average earnings growth had been unusually low in 2009 but that the situation would change in 2010 as GDP growth was accompanied by a return to moderate inflation. It said that the Commission should wait until next year before recommending an increase for 2011.

‘By increasing the wages of the lowest paid, money is being put in the pockets of those most likely to spend any additional income.’

8.41 The Union of Shop, Distributive and Allied Workers (Usdaw) said that despite the recession, the overwhelming number of companies it had an agreement with continued to award pay rises. It believed that retail remained a vibrant sector of the economy where opportunities for employment continued to rise. It called for a 3.5 per cent increase in the adult minimum wage to £6.00 per hour in 2010. Usdaw said that increasing the minimum wage would be a small but important stimulus to boosting consumer spending at a time when the UK would be coming out of recession.

8.42 The GMB called for an above-earnings growth increase in the adult minimum wage in order to narrow pay inequality and help eradicate child poverty. It said that ideally the minimum wage should be increased to £7.00 an hour in October 2010 but in the current economic conditions it endorsed the £6.00 per hour recommended by the TUC.

8.43 Unite said that the fall in employment in the low-paying sectors was in line with that for the whole economy. It believed that the negative effects on the labour market were due to the recession and not the minimum wage. It called for the adult minimum wage to increase to £6.69 an hour by October 2010 and close to £6.85 an hour by October 2011. These increases, it argued, would make up for previous small rises in the minimum wage. In its oral evidence Unite said that the rise should be at least higher than the average earnings growth forecasts in 2010, if the gap between the lowest-paid and average-paid workers in our society was not going to grow.

8.44 UNISON argued that in a recession the most vulnerable workers needed to be supported and the temptation to apply downward pressure on wages by freezing or restraining increases in the minimum wage should be avoided. It called for an adult minimum wage of £7.45 per hour arguing that the adult minimum wage should be set at a level to ensure an adequate standard of living for all workers.

8.45 The National Union of Rail, Maritime and Transport Workers (RMT) said that the minimum wage must be set at a significantly higher level to ensure that all workers were kept out of poverty. It wanted the minimum wage to be set at half male median earnings. The Public and Commercial Services Union said that as economic growth was due to return in 2010, an increase in the minimum wage could be absorbed by employers. It called for a minimum adult wage of £8.25 per hour, which it reported was around two-thirds of average pay.

8.46 In summary, trade unions argued that because the economic forecasts for the UK were positive in 2010, employers could afford a further increase in the minimum wage. Where specific rates were proposed by unions in their written evidence in summer 2009, they ranged from £6.00 to £8.25. Unions were keen to point out that the recession was not caused by the minimum wage. Some said that the minimum wage was not a talking point this year given the impact of the recession on the economy. Unions noted that the 1.2 per cent increase in the minimum wage in October 2009 was below average earnings growth and CPI inflation. Any decision to freeze the minimum wage would be regarded by trade unions as unfair when most employees continued to receive pay rises during the recession.

8.47 We received little evidence from employers and their representatives on youth rates this year. The BCC said that the recession had affected the employment of 16–17 year olds and proposed a separate consultation on whether a decrease in the 16–17 Year Old Rate would increase employment or training for this group. The BRC in its oral evidence said that although the Youth Development Rate was not heavily used there was evidence retailers were falling back on it during the recession. It said removing the youth rates would not have a large impact on the cost of employment but would affect some retailers’ flexibility. The ALMR argued that youth and development rates gave members the incentive to embark on in-house training and it wanted youth rates to be retained. However, Morrisons said that the Youth Development Rate led to confusion and called for it to be abolished. It paid all employees over the age of 18 the same rate.

8.48 Trade unions and organisations representing young people called for the abolition of youth rates. The TUC called for an increase in the Youth Development Rate to £5.00 per hour and an increase in the 16–17 Year Old Rate to £3.69 per hour. It said that a modest increase in the youth rates would be unlikely to have any negative effect on young people’s employment prospects. UNISON welcomed the move entitling 21 year olds to receive the adult minimum wage in October 2010 but called for the adult rate to start at age 16. It argued that lower age rates were discriminatory and did not reflect the value of the work young people did. The GMB called for the adult minimum wage to be paid at age 18. Unite said that ultimately it would like the adult minimum wage to be paid at age 16, and as a move in the right direction the adult minimum wage should start at age 20. The RMT called for the full adult rate of the minimum wage to be paid at age 16.

8.49 The YWCA said that the lower youth rates assumed that all young people had a family to support them, which was not always the case. It thought everyone from age 16 should receive the adult minimum wage in the long term. The British Youth Council said that youth rates did not take into account that young people have the same costs and responsibilities as others. It wanted a minimum wage to be paid to everyone aged over 16. The National Union of Students thought that all workers regardless of age should receive the adult minimum wage. It did not support the view that 16–17 year olds were less productive than older workers.

8.50 A number of employer organisations commented on the rate of the accommodation offset in their evidence. In its oral evidence the BHA, BBPA and BISL said that the current offset was too low and should be doubled to reflect the true cost of providing accommodation. The 50 Horticultural Employers’ Association argued that it was vital to find a mechanism where investment could be made in accommodation to reflect the true cost of providing it. The National Farmers’ Union called for the offset rate to be substantially increased to raise the standard of the accommodation provided. The Association of Labour Providers claimed that the current offset arrangements had resulted in most labour providers no longer providing accommodation as it was not economically viable. The ALMR wanted the rate to rise to £60 per week, arguing that the current disparity between the amount that can be deducted and that which would be available commercially acted as a disincentive to employers to provide accommodation. In contrast, the TUC and trade unions including Usdaw called for the increase in the accommodation offset to be in line with the increase in the adult minimum wage.

8.51 A number of employer organisations brought to our attention details of statutory changes which had been or are due to be implemented and that will affect their costs. These organisations said we should take these changes, and the pressures they will put on businesses, into account when considering increases to the minimum wage. Some of the regulatory changes referred to are listed below and we took these into account in our deliberations where appropriate.

8.52 Our report last year was published at a time of great volatility in the economy and labour market. Our recommendations reflected our caution in the face of that volatility. This year, uncertainty remains on many indicators. Forecasts for average earnings growth anticipate increased earnings, but while some commentators predict both increased earnings and a return to bonuses, others foresee continued wage constraint. It is judged that there will be volatility in inflation through 2010, with rises early in the year followed by falls in the latter part of the year, and inflation flat or falling in 2011. Opinion varies too on the speed of economic recovery. Although the consensus among forecasters now is that there will be economic growth in 2010 and 2011, the predicted strength of that growth varies considerably.

8.53 In discussion on this year’s adult rate, the argument was made that the recession had been long and deep, with a significant downturn in the labour market. The return to growth was uncertain and could be weak at best. The fall in employment relative to output had not been as great as in previous recessions, so productivity had fallen and unit wage costs had risen. Business investment had been cut back significantly, which might hold back economic recovery. While tax deferrals had helped some businesses weather the storm, those payments would come due in the future, which would increase financial pressures. In addition, attention was drawn to the fact that wage freezes still formed a third of settlements and that there was wage constraint in the private sector.

8.54 On the other hand, it was argued that the low-paying sectors had performed better than the economy as a whole. Unemployment remained significantly below forecasts, and employment and hours had held up better than in previous recessions. Business confidence was rising and profits had held up comparatively well. Labour market indicators showed that the worst was behind us, with average hours and vacancies rising, and redundancies falling. Growth forecasts suggested the recession was over, with modest growth likely in 2010 and a more confident return to growth from 2011. Inflation was rising, as were average earnings. As inflation had hit the lowest paid harder, a significant increase to the minimum wage would ensure they would not suffer a real terms pay cut.

8.55 On balance, we therefore recommend that the adult minimum wage should increase from £5.80 to £5.93 from October 2010.

8.56 Although in long-term decline, the position of young people in the labour market has been adversely affected by the recession, with employment of young people falling significantly faster than that of their older counterparts. While the earnings of 21 year olds have continued to hold up strongly, the use of youth rates has increased for those aged under 21, and more young people than ever are falling within the coverage of the minimum wage. We judge it appropriate to treat young people differently to adults. We therefore recommend that the Youth Development Rate should increase from £4.83 to £4.92 and that the 16–17 Year Old Rate should increase from £3.57 to £3.64 from October 2010.

8.57 Historically, the relationship between the adult rate and youth rates has varied, but in the last two years the youth rates have increased in line with the National Minimum Wage. It has become increasingly evident that the employment prospects for younger workers have deteriorated consistently over a period of years, with a more substantial decline during the recession. The reasons for this long-term decline are complex and doubtless multi-faceted. The position of young people will be affected not only by their skill level and relative productivity, but also by the success of government programmes and social policy changes. The extent to which the minimum wage may have been a contributory factor remains unclear. However, coverage of young people within the youth rates has almost doubled in the last five years and young people’s rates of pay have increased more slowly than those of adults. We are commissioning new research for our 2011 Report to enable us to understand better what is happening in these youth labour markets. The results of this research will importantly inform our recommendations in the future. At this time, without clearer evidence, we concluded that a larger change in the relationship between the youth and adult rates was not to be recommended.

8.58 In our invitation to provide evidence this year, we asked for more detailed information on the operation of the accommodation offset. Nothing was received that led us to conclude that substantial change to the current arrangements was necessary or desirable. We therefore believe that the offset should increase in line with the adult rate. We recommend that the accommodation offset should increase from £4.51 to £4.61 per day from October 2010.

8.59 In addition to recommendations for 2010, our remit this year asked us to make provisional rate recommendations as appropriate for 2011. In consultation, of those who expressed a view on whether a recommendation should be made for 2011, the overwhelming majority believed it was not appropriate at this time. When the Commission met in January there was emerging evidence that the economy was moving out of recession. The outlook remains uncertain but the consensus forecasts are that the rate of growth will increase in 2010 and 2011 and the labour market will improve. We do not yet believe that the trajectory is clear enough that we can confidently recommend the rates for 2011 and ask that we be given a new remit to consider those rates. In making those recommendations, the Commission’s judgement will, as ever, be driven by the prevailing economic evidence.

8.60 In assessing the likely impact of our minimum wage recommendations, we have looked at various factors, including coverage and bite (its value relative to average earnings), as well as changes to household income, wage bills and the Exchequer.

8.61 The recommended increase in the adult minimum wage rate from October 2010, at around 2.2 per cent, is in line with the forecast increase in average earnings. The increases in the two youth rates are in line with the forecast change in consumer prices. If implemented, these changes are likely to cover a larger proportion of jobs compared with the proportion covered by the 2009 upratings (assuming earnings for low-paid workers grow in line with average earnings) and a smaller proportion compared with previous years when the upratings exceeded the growth in average earnings.

8.62 In April 2009, according to the Annual Survey of Hours and Earnings (ASHE), there were around 1.44 million jobs that paid less than the minimum wage rates we are recommending for October 2010. These were made up of 1.29 million jobs held by those aged 21 and over (5.3 per cent), 126,000 jobs held by 18–20 year olds (10.6 per cent), and 30,000 jobs held by 16–17 year olds (8.8 per cent).

8.63 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 2010 minimum wage rates at April 2009 (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.

8.64 Assuming that 21 year olds would be entitled to the adult minimum wage from October 2010, in line with government announcements, and that the wages of the lowest paid would increase in line with forecast average earnings, we estimate that about 853,000 jobs or 3.5 per cent of all jobs held by those aged 21 and over would be covered by the new rate of £5.93 in October 2010, as shown in Table 8.2. If we assume instead that the wage growth of the lowest paid would match forecast price inflation, a smaller number of jobs would be estimated to be covered (as the growth in prices between April 2009 and October 2010 is expected to be higher than that of earnings) – between 177,000 and 741,000 jobs (0.7 to 3.1 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 slightly higher level of coverage than the £5.80 uprating in October 2009 (when 768,000 or 3.2 per cent of jobs held by those aged 22 and over were covered). Alternatively using prices, estimated coverage of the new adult rate would also be higher than for the previous year (136,000 to 170,000 jobs or 0.6 to 0.7 per cent using RPI or CPI respectively).

8.65 We have recommended increases for the Youth Development Rate and the 16–17 Year Old Rate from October 2010 that are slightly lower than our recommendation for the adult minimum wage: 1.9 per cent and 2.0 per cent for the Youth Development Rate and the 16–17 Year Old Rate respectively. These increases are roughly in line with the forecast increase in consumer prices.

8.66 Assuming that young workers’ wages would increase in line with average earnings, we estimate that 91,000 jobs held by those aged 18–20 would be covered by the October 2010 Youth Development Rate, representing around 7.7 per cent of jobs held by these young workers. Based on the price assumption, the coverage would be lower and our estimates range from 31,000 to 38,000 jobs (between 2.6 and 3.2 per cent of all jobs held by that age group).

8.67 We estimate, based on the earnings assumption, that 23,000 jobs (6.7 per cent) held by 16–17 year olds would be covered by the October 2010 uprating. Using the price assumption, the coverage would decrease to between 12,000 and 14,000 jobs for this age group (between 3.5 and 4.0 per cent of jobs).

8.68 Overall, we estimate, therefore, that the total coverage of the recommended October 2010 upratings would be just under 1 million jobs (3.8 per cent of all jobs), if the wages of the low paid were to increase by the forecast growth in average earnings between April 2009 and October 2010. If they were to increase in line with predicted prices, we estimate coverage of between 220,000 jobs (0.9 per cent of all jobs) and 793,000 jobs (3.1 per cent of all jobs).

Table 8.2: Estimated Number and Percentage of Jobs Covered by the Recommended October 2010 National Minimum Wage Upratings, UK, 2010

Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2009; ONS, AEI including bonuses (LNNC), seasonally adjusted, RPI (CZBH) and CPI (D7G7), not seasonally adjusted, UK (GB for AEI), April 2009 to October 2009; and HM Treasury (January 2010), UK, 2010.

8.69 As we discussed in Chapter 4, women were more likely than men to be working in low-paid jobs. Based on the earnings assumption, we estimate that the October 2010 adult minimum wage would cover around 310,000 jobs (2.5 per cent) held by men and 544,000 jobs (4.5 per cent) held by women. Using our alternative price assumption, we expect that up to 269,000 jobs (2.2 per cent) held by men and 472,000 (3.9 per cent) jobs held by women would be covered by the increase to £5.93. On all measures, jobs held by women aged 21 and over would be expected to make up just under two-thirds of all jobs covered by the 2010 October increase in the adult rate.

8.70 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 2009, according to ASHE, the median gross hourly earnings (excluding overtime) of all employees aged 21 and over (full and part-time) was £11.15 an hour. In order to properly compare median earnings with the October 2010 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 £5.93 is expected to be about 51.7 per cent of estimated median earnings for those aged 21 and over (£11.48) in October 2010. This is slightly higher than the bite of the October 2009 rate of £5.80 for employees aged 22 and above (51.0 per cent), reflecting the impact of including 21 year olds in the adult rate. Without including 21 year olds, we estimate that the bite would remain the same (51.0 per cent).

8.71 Using the mean, we estimate that the bite in October 2010 would be around 40.0 per cent for employees aged 21 and over based on the earnings assumption. This is 0.3 percentage points higher than the bite at the mean for the October 2009 adult rate and the highest it has been since the introduction of the minimum wage. This again reflects the addition of 21 year olds to the adult rate. If it had continued to apply from age 22, the bite would have remained the same as last year.

8.72 When the adult minimum wage increased to £5.80 in October 2009, gross weekly income would have been £203.00 for a 35 hour week. Using HM Treasury estimates for the 2009/10 tax year, this gross income would have been equivalent to a net income of £197.30 for a single person working full-time with no children (a net wage of £5.64 an hour for a 35 hour week). The corresponding amount for a couple with one child (one partner working and the other not) would have been around £306.41 (equivalent to a wage of £8.75 an hour for a 35 hour week).

8.73 Again assuming a 35 hour week, gross weekly income would increase by £4.55 to £207.55 following the minimum wage increase to £5.93 in October 2010. Taking into account the minimum wage uprating and the 2010/11 tax year, the net weekly income for a single person would rise by £2.29 to £199.59. For the one-child family, net income would rise by £4.34 to £310.75 (their gains would be higher including housing and council tax benefits). The effective hourly rate for the single person would be £5.70 and for a one-child family would be £8.88 an hour. In conclusion, a low-paid one-child family is expected to keep the increase in their gross pay in their take-home pay, whereas a single person is expected to lose around half. At this stage we are unable to assess the impact of the changes to the tax and benefit regime for 2011/12.

8.74 We anticipate that the direct impact of our recommendations on the wage bill is likely to be limited as the recommended increase in the minimum wage is in line with the predicted rise in average earnings.

8.75 The lowest rates of pay in the public sector tend to be above minimum wage levels and, as we saw in Chapter 3, 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 2010 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.

8.76 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 8.3 is based on information supplied by the Government and illustrates our best estimates of the effects of the 13 pence increase in the adult rate of the minimum wage.[3] We estimate that in total the Government would gain around £238 million from the 2010 minimum wage uprating, nearly two-thirds of which consists of additional yield from income tax (£101 million) and National Insurance Contributions (£53 million) as the earnings of minimum wage employees increase. The Government would also stand to make savings from a reduction in Working Tax Credits (£35 million) and other benefits (around £48 million in total).

Table 8.3: Estimated Exchequer Yield and Savings from the Recommended 2010 Adult National Minimum Wage Uprating, UK, 2010/11

Source: LPC estimates extrapolated from HM Treasury calculations using 10 pence increases based on Family Resources Survey 2007/08, uprated to 2010/11, UK, tax year 2010/11.

a. The Family Resources Survey derives hourly wages from weekly income and hours worked, which overestimates the number of individuals on the minimum wage. As a result the Exchequer savings presented above are also likely to be overestimated.

b. 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.

c. The figures take no account of wage changes for those paid just above the National Minimum Wage or changes in Exchequer yield from business or indirect taxes.

d. The figures 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.

8.77 Following two years of economic volatility, the outlook for 2010 and 2011 remains uncertain. Our recommendations this year have been guided by the evidence we have received and the data available to us. We continue to believe that the Commission’s open and evidence-based approach is a strength and has contributed importantly to the success of the National Minimum Wage. We look forward to receiving our remit from the Government for future years.

[1] At the time we met, official data for the fourth quarter of 2009 had not been published.

[2] Official quarterly data for GDP growth are not available before 1955. Pre-war annual data are estimates from NIESR.

[3] The Government provided us with estimates of yield and savings for hypothetical increases to the minimum wage of 10 pence and 20 pence.