Chapter 1: Introduction

1 Last year, we presented our report during some of the most turbulent economic times the UK had seen for decades. The recession has proven to be the most severe since World War II, with a steep decline in gross domestic product growth. Employment, although adversely affected, held up better than expected, particularly in the low-paying sectors and for the lowest paid. Looking ahead, it seems the UK economy is now on track for recovery and it is in this light that the Commission presents its report this year.

2 In our remit, the Government again asked us to monitor and evaluate the impact of the minimum wage and to consider its effect on different groups of workers. In addition, following the recommendation in our last report, we were asked to consider the detailed arrangements for an apprentice minimum wage under the National Minimum Wage framework. We were asked to do this with reference to particular issues and groups.

3 As ever, we relied heavily on consultation and the evidence presented to us by employers, workers and their representatives. Our wide-ranging consultation provided an invaluable source of information and we took written evidence from over 100 organisations, heard oral evidence over a two-day period and undertook a series of visits throughout the UK. This, along with our analysis of a wealth of data and commissioned research, has provided a sound evidence base for our deliberations.

Chapter 2: Aggregate Impact of the National Minimum Wage

4 The UK has suffered its longest and deepest recession since at least the 1930s with a total loss of output of around 6 per cent between the first quarter of 2008 and the third quarter of 2009. However, the labour market has been remarkably resilient with employment and hours falling by less than output. This is in stark contrast to the 1980s and 1990s recessions when employment and hours fell by more than output. The latest data suggest that the labour market has already begun to recover: the falls in employment, hours and vacancies, and increases in unemployment and redundancies appear to have stopped. Firms seem to have retained labour and have financed this by restricting wage growth, running down inventories and cutting investment. Nominal wage growth had been weak leading up to the recession and remains so. 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. However, productivity has fallen and unit wage costs have risen so there may be further reductions in employment to come. In addition, the reductions in investment may have a downward impact on the future rate of output growth.

5 The economic growth outturn was worse than we had anticipated in our 2009 Report when recommending the minimum wage increases for October 2009. However, employment falls and unemployment increases were less than expected. As we anticipated in our last report, average earnings growth was not as strong as forecast. The 1.2 per cent increase in the minimum wage was in line with median pay settlements, private sector and whole economy average earnings growth (including and excluding bonuses) and it was between the increase in the two main measures of inflation (Consumer Prices Index and Retail Prices Index).

6 Data limitations prevented us from assessing fully the impact of the latest minimum wage upratings, but we have investigated the impact of the 2008 minimum wage upratings on the economy and found that they continue to exert a significant influence on wages at the bottom of the earnings distribution. The numbers paid at the adult minimum wage rose to a record high of nearly 750,000 (3.2 per cent of all jobs held by adults) in April 2009, as a result of the 3.8 per cent increase in the minimum wage in October 2008. The bite (the value of the minimum wage relative to the median) remained just under 51 per cent.

Chapter 3: Low-paying Sectors and Small Firms

7 We have again assessed the impact of the minimum wage on sectors with either a large number or high proportion of jobs paying at or around the National Minimum Wage. In doing this we have drawn on a variety of material, including multiple data sources, our commissioned research, other independent research, surveys of the market and employers, and our consultation.

8 This year it has proven difficult to separate out any potential impact of the minimum wage from that of the recession more generally. Between September 2008 and September 2009, the low-paying industries experienced a smaller proportional fall in jobs than across the economy as a whole. The majority of these job losses fell in the two largest industries, retail and hospitality, which are sensitive to falling consumer spending. Other sectors have also experienced a decline in jobs, including agriculture, textiles and cleaning. Not all of the low-paying sectors have seen a reduction in jobs over the same period, though. Social care has seen the largest increase, with childcare and hairdressing also experiencing increases.

9 Small firms remain of interest as workers on the minimum wage are disproportionately likely to be employed by them. Between the third quarter of 2008 and the third quarter of 2009, small firms saw a reduction in employment that was greater than in medium-sized or large firms.

10 Data continue to show that the minimum wage has had a different impact on earnings in each of the low-paying sectors. Overall, the proportion of jobs paid at the minimum wage has increased slightly between April 2008 and April 2009. Cleaning and hospitality continue to have the highest proportions of jobs paid at the minimum wage, with hospitality and hairdressing having the highest proportions paid below the minimum wage. Research has shown that the relatively higher increase in the minimum wage in October 2008 compared with 2007, coupled with the impact of the recession, has affected firms’ ability to maintain, or increase, differentials.

Chapter 4: Particular Groups of Workers

11 Our remit asked us to review the impact of the National Minimum Wage on certain groups of workers. Again, it proved difficult to separate out any effect of the minimum wage from that of the recession. All the groups we looked at remain vulnerable, but not all of them have been adversely affected by the recession to the same degree. In terms of job loss, this recession has particularly affected men. Women, older workers and disabled people have seen less of an impact on their earnings and labour market prospects than the working age population. Overall, ethnic minorities and migrant workers have also been less affected by the recession, although the impact varies within these groups. It is young people and those without qualifications who have experienced the largest adverse impact from the recession.

12 Some workers are vulnerable not because of who they are, but because of the nature of their work or where they conduct it. We have heard again this year about the problems faced by those in the entertainment sector and this has led us to recommend that sector specific guidance be produced for that sector. In addition, we received evidence of alleged misuse of the Fair Piece Rate system by contractors and agencies operating in the hotel cleaning sector. We are concerned about the treatment of these workers and the apparent widespread nature of the problem. We have recommended that HM Revenue & Customs (HMRC) investigates whether contract and agency cleaners in the hotel sector are receiving their entitlement under the National Minimum Wage for their hours worked.

13 There have been widespread media reports of misuse of the exemptions under the National Minimum Wage Act in relation to volunteers and interns. Submissions to our consultation supported the view that internships are being used as a price of entry into certain professions and that interns are often workers in these instances. We encourage the Department for Business, Innovation and Skills to engage directly with those sectors in which lengthy unpaid internships are prevalent and HMRC to tackle abuse through effective enforcement.

14 Last year, we requested more detailed evidence on the operation of the accommodation offset but received little. On the basis of information available to us, we have concluded substantial change is not necessary. We will continue to review the operation of the offset each year.

Chapter 5: Young People

15 Since the Commission’s establishment, we have made the case that young people should be treated differently to their older counterparts. The relative position of young people aged 16–20 in the labour market has been worsening for a number of years. Median pay levels have not increased at the same rate as those of older workers, so while the bite of the minimum wage for older workers has stabilised over the last four years, the bite for young people has continued to rise. Over and above the overall longer-term decline, the position of young people in the labour market has been adversely affected by the recession. Employment of young people has fallen significantly faster than that of their older counterparts, and employers are making increased use of the youth rates for those aged under 21. Whereas the employment prospects for adults appear to be improving, those of young people do not.

16 Last year, the Government accepted the Commission’s recommendation that the adult rate should begin at age 21, but delayed implementation until October 2010. In light of this, the Commission has again reviewed the position of 21 year olds in the labour market, looking at those in employment and those seeking work. Taking account of both long-term trends and the latest evidence on earnings and employment, the Commission continues to believe that the adult rate should start at age 21.

Chapter 6: Apprentice Minimum Wage Rate

17 The Government asked us to recommend the rate and arrangements for a statutory apprentice wage that would replace the existing apprentice exemptions from the National Minimum Wage, and its date of introduction. Our remit asked us to take into account a number of factors, including the need to ensure that a sufficient volume, quality and sectoral variety of apprenticeship places was available in order to meet government targets. This was particularly in the context of the education and training participation age increasing in England from 16 to 18 between 2013 and 2015.

18 We gathered and considered a range of evidence, including available data, research and submissions from stakeholders through formal written consultation, meetings and Commission visits. Our recommendations are for a prudent structure for apprentice pay within the National Minimum Wage framework. We have recommended that the new rate should apply to all employed apprentices who are currently exempt from the National Minimum Wage. It should be a single hourly rate of £2.50 covering all hours of work and training (both on- and off-the-job) in an apprenticeship.

19 We believe that this will be a framework for the apprentice minimum wage that is simple, robust and straightforward to administer. The wage marks an important extension of minimum wage protection across the UK, and we will wish to monitor its impact, including on the provision, take-up and completion of apprenticeships. We have therefore also recommended that the Government includes the review of the apprentice minimum wage rate and arrangements in our annual terms of reference.

Chapter 7: Compliance and Enforcement

20 We continue to believe that a rigorous compliance and enforcement strategy is essential to the success of the minimum wage. Those who are dependent on work paid at or around the National Minimum Wage will be some of the lowest earners in the UK.

21 We recognise that some positive developments have taken place in relation to enforcement, in particular the work being done to increase awareness. We are concerned, though, about a number of issues that have arisen this year in light of the evidence we have gathered. Some of these relate to how HMRC is perceived to be operating, rather than specific functions it is carrying out.

22 The Commission very much supports the Government’s decision to establish and publicise a new compliance strategy. To be effective, we believe the strategy should clearly set out how the Government will use its resources to ensure all workers receive their entitlement to the National Minimum Wage. In future years, as a result of the strategy, the Commission believes there should be: a more flexible enforcement regime which can tackle systemic and sectoral issues; wider publicity of enforcement success; and a measurable reduction in non-compliance through Government action.

23 It is important that the strategy is publicised, along with an annual report of actions taken by HMRC, to increase the transparency of the enforcement regime. We believe it should be possible to provide more information on what is being done, and that greater openness and transparency could be achieved without compromising confidentiality. To underpin this, it will be necessary for sufficient funding to be in place. This is why we have recommended that funding for enforcement is maintained at its current level in real terms until at least March 2014.

Chapter 8: Setting the Rates

24 At our meeting in January 2010, the economy had been in recession for six consecutive quarters and the outlook remained uncertain. The UK economy is thought to have shrunk by nearly 5 per cent in 2009. However, most indicators suggested that the economy was likely to have come out of recession in the fourth quarter of 2009 and the consensus outlook for 2010 was much brighter. Despite rising optimism about the outlook for growth in 2010, it is still expected to be modest and may be volatile quarter-on-quarter.

25 The position for employment and unemployment is similarly uncertain. With a weak return to growth, recovery 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 of the labour market towards the end of 2009.

26 Inflation is expected to rise in the first half of 2010 but then to fall back later in the year. Where private sector employers were able to give an indication of their 2010 award, they expected some pick up in settlement levels, and that the proportion implementing pay freezes would be lower than that registered late last year for the economy as a whole. This, and the anticipated restoration of bonuses, is likely to lead to faster average earnings growth in 2010 than in 2009. In the light of all the evidence before us, we recommend that the adult minimum wage should increase from £5.80 to £5.93 from October 2010.

27 Recognising the vulnerability of young people in the labour market, we 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.

28 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.

29 In the absence of more detailed information on the operation of the accommodation offset, we 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.

30 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.