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6. Future Reviews >>Back to main report index A process for reviewing the National Minimum Wage at regular intervals will ensure that it continues to provide effective protection for low-paid workers and predictability for businesses. As the National Minimum Wage is relatively new and we are still learning about its impact, each review should take account of all relevant factors and allow scope for judgment. Formulaic uprating would not satisfy this requirement. We therefore recommend that the Low Pay Commission should continue to review the minimum wage through a comprehensive process of data gathering, consultation and analysis. Reviews also need to be frequent enough that the minimum wage does not lose its effectiveness as a wage floor. Hence we recommend biennial reviews, with the Commission reporting in February to allow sufficient notice of implementation the following October. 6.1 We received a large amount of evidence about how the National Minimum Wage should be uprated in future. This interest reflected the importance people attach to the principle that the National Minimum Wage needs to be reviewed and uprated regularly so that it retains its relevance. Our anticipation that there would be a regular uprating process influenced our deliberations and recommendations in this report. Criteria 6.2 The National Minimum Wage has to be durable. The Government made this clear when the Secretary of State for Trade and Industry said that 'the minimum wage is here to stay … we have decided to make the Low Pay Commission a permanent body' (House of Commons, 18 January 2001). The National Minimum Wage's value will not be sustained unless it is periodically uprated. There needs to be a system in place to ensure that it continues to maintain its effectiveness as a wage floor, complement other measures to reduce in-work poverty, and protect vulnerable workers. A National Minimum Wage that eroded in value would be counterproductive to the aim the Government has set for it. 6.3 In our first report we recommended that there should be a comprehensive review of the National Minimum Wage within two years of its introduction. We also emphasised that, beyond the first uprating, there should be periodic reviews. We recognised that the Government would want to see the first-ever National Minimum Wage settle in before making decisions about how this might be done. Having recommended increases in the minimum wage over the next two years, and given the Government's commitment to establishing the minimum wage as part of the social fabric, we have concluded that the time is now right to recommend an approach to future reviews. 6.4 In addressing how the National Minimum Wage should be reviewed in future, we examined the evidence we had received and sought the views of employers, workers and their representatives. We also looked at the approaches of other countries, and examined how alternative approaches performed against such key criteria as simplicity, flexibility and transparency. We were acutely aware that a rigid, inflexible system could exacerbate the challenges faced by businesses in the event of an economic downturn. A point frequently made to us by businesses was that they would prefer regular reviews, which would produce a smoother approach to increases in the minimum wage, than infrequent reviews, which might produce large hikes. They also asked that there should be adequate notice of changes. 6.5 We have established a number of criteria by which a system for future reviews should be evaluated. Such a system needs to maintain the effectiveness of, and confidence in, the minimum wage as a wage floor. It needs to provide certainty for low-paid workers that the minimum wage will be reviewed and to allow businesses to plan ahead. It should be as simple, straightforward and transparent as possible. And it should be detached from short-term political pressures. The rest of this chapter examines various options against these criteria. In particular, we consider the method and timing of reviews, and when upratings should be implemented. Method 6.6 In considering how the National Minimum Wage should be reviewed, we looked both at public sector pay review mechanisms, and public and private sector long-term deals in the UK. The pay review bodies deal with a narrow range of occupational groups, all of which are in the public sector and most of which are not low-paid. Long-term deals tend to be based on collective bargaining between management and trade unions. In contrast, the Low Pay Commission is based on social partnership, which has been an important factor in achieving acceptance of a policy that provides a wage floor to the economy as a whole. 6.7 The pay review bodies analyse a wide range of factors, consider written and oral evidence, and conduct visits. Where pay is based on indexation in the public sector, it is linked to a measure of earnings or movements in pay settlements. Long-term deals tend to use inflation as their guide but may include other factors. We believe that none of them are obvious models for the National Minimum Wage because of their focus on specific groups of workers, most of whom are not low-paid. 6.8 We also looked at other countries' minimum wage systems. They operate in very different social and economic environments, and most have been in place for many years. But they (see Appendix 6) provide a useful indication of the range of possible processes. We have grouped the range of options into four categories:
Ad Hoc 6.9 Some businesses supported ad hoc uprating. The Scottish Grocers' Federation wrote in their evidence that they 'oppose the concept of an annual review; this would … detract from the impact of effecting a change only when warranted by economic and social circumstances'. The Association of Convenience Stores argued that 'the National Minimum Wage should be reviewed on an ad hoc rather than annual basis'. 6.10 An example of ad hoc uprating in practice is the approach which exists in the United States. The approach therefore tends to be politicised and has resulted in long intervals without increases; in some decades — for example, the 1950s and 1980s — the federal minimum wage was raised only once or twice. This provides no assurances for low-paid workers and no predictability for business. We believe that a more regular approach is needed to ensure that the benefits of the minimum wage are maintained for low-paid workers and the economy, and avoids the burden that large, irregular catch-up increases would impose on businesses. Formulaic 6.11 A number of trade unions and other organisations are in favour of formulaic uprating in line with earnings to protect the relative value of the wage floor. The Low Pay Unit suggested in its evidence that 'by its introduction, the NMW has established a floor below which incomes cannot fall. But without an uprating mechanism linked to increases in average earnings, relative poverty for the lowest-paid workers will actually increase.' The Bakers Food and Allied Workers Union argued that 'the best way to deal with this issue is to uprate the NMW on an annual basis in line with earnings or prices, whichever increases the faster. That will take the whole issue out of an annual "negotiation" and ensure that the NMW will keep its value.' 6.12 A minority of employers also supported a formulaic approach, but they nearly always preferred inflation (rather than earnings) as the index to be used in the formula. The Engineering Employers' Federation (EEF) was one exception. In their evidence to us they wrote that 'the EEF considers that the formula that should in the future be used to increase the level of the NMW is a retrospective analysis of the movement of basic rates of pay across the economy … the nearest approximation to this figure is likely to be the average level of pay settlements that has been recorded within the economy over the previous twelve months'. 6.13 In those countries we examined, we did not find any examples of an approach to uprating which could be described as solely formulaic. The closest to this approach are the systems in France and the Netherlands, but they allow discretion in certain circumstances. 6.14 Nevertheless, we recognise the concerns of those who support a formulaic approach to guarantee that the value of the minimum wage relative to prices or earnings is maintained. We agree that maintaining its real value as a wage floor is important. A solely formulaic system, however, would prevent considering the wide range of economic factors that influences the impact of the National Minimum Wage. And it would not take account of employers' and workers' experience of managing the minimum wage. It would also not be sufficiently informed by the policy context in which the minimum wage operated. For example, a formula would not be able to consider other measures to help the low paid; as emphasised in Chapter 3, the minimum wage is only one of a range of measures to tackle in-work poverty. In short, a formula would not easily and adequately reflect the needs of the sectors and groups most affected by the minimum wage. 6.15 Moreover, uprating in line with one index assumes that there is a single index which is more appropriate than others for determining the level of the National Minimum Wage. But each index has its advantages and disadvantages. For example, the Retail Prices Index would maintain the purchasing power of the minimum wage but not its relative value as a wage floor, since increases in money earnings generally outstrip price movements. Linking the rate to an earnings index would maintain its relative value as a wage floor and ensure that it reflected growing prosperity within the economy as a whole. But this might not always be appropriate for what business could afford in different economic circumstances. 6.16 Many factors influence the impact of the National Minimum Wage. But even if we employed a formula that attempted to take account of more than one factor — for example, earnings together with unemployment, or inflation together with earnings — this would only be as good as the subjective weighting of these factors. Moreover, any formulaic approach would assume that the minimum wage is at a level that is an appropriate baseline for a formula. As we remain at a relatively early stage in the development of the minimum wage, we consider that more experience is needed before we can say with certainty that the minimum wage is at the correct level to be a baseline for a formula-based approach. 6.17 Hence, despite the support for a solely formulaic approach in some of the evidence we received, we did not regard it as a desirable option. Because the National Minimum Wage is relatively new, and our experience of its impact is still developing, the scope to apply judgment is most important. A solely formulaic approach would not allow such judgment. Formulaic with Discretion 6.18 A formulaic approach could be combined, as in Belgium and the Netherlands, with less frequent and more comprehensive reviews. Alternatively, a formula could be a primary influence in each review but other factors could be taken into consideration at the same time; for example, in France the Government is able to apply a discretionary increase on top of that stipulated by the uprating formula. Despite the scope for limited discretion, such approaches still assume that the National Minimum Wage is sufficiently close to the correct baseline for formula-based uprating. 6.19 We looked at the Netherlands' mechanism with particular interest. It is designed to allow a comprehensive review every four years and to take employment into account in its earnings-related uprating system. If the ratio of people claiming benefits (including pensioners) to those in work rises above 82.6 per cent, then the Government is not obliged to apply the increase that the earnings index would suggest. The ratio of 82.6 per cent struck us as being very precise. On further examination, it transpired that this was the actual ratio of people claiming benefits to those in work at the time the system was implemented. The CBI wrote in evidence that it did 'not believe that this [system] would be a practical solution for the UK because of the differences in the industrial relations climate in the UK'. 6.20 Although we believe a partially formulaic approach would be better than a solely formulaic process, because there is at least some potential to consider a range of factors, we think that many of the limitations of a solely formulaic approach still apply. These limitations are particularly significant at this relatively early stage in the development of the National Minimum Wage when we are still assessing its impact on the labour market. We doubt whether a system in which a formula is the primary consideration in uprating could take into account the dynamic nature of the labour market and the complexities of a modern economy. Comprehensive Reviews with Consultation 6.21 A comprehensive review process would ensure that the minimum wage took full account of the needs of low-paying sectors, low-paid groups and the economy as a whole. This has worked well in introducing the minimum wage. It has also resulted in our unanimous recommendation for an increase in the National Minimum Wage in October 2001, which will both make a difference to many low-paid workers and be generally manageable for business. | |
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6.22 Comprehensive reviews would allow full weight to be given to both the results of consultation and to the condition of the economy. Decisions would not be biased towards an indicator that might not be the most appropriate at certain times. They would give proper consideration to the evidence on what business could afford. And they would benefit from the experience of the minimum wage in the real world. Employers, in their evidence, tended to support reviews taking account of a comprehensive range of factors, because they believe these would ensure that increases were manageable for business. The Brewers and Licensed Retailers Association 'believe that the NMW rate should continue to be set by the LPC, with due consideration of market conditions and the economic climate'. The British Chambers of Commerce argued that 'the best approach to up-rating the NMW is the present one, to have a periodic review by the Low Pay Commission. A formula-based approach using inflation or earnings figures would not reflect the uneven impact of the NMW.' | |
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6.23 As we addressed the options, we realised that inevitably there were trade-offs between certainty and flexibility, and between simplicity and complexity. The more formulaic the system the greater the certainty, but the less the flexibility. The more comprehensive a review the less simple it would be. 6.24 In our first report, we emphasised that setting a minimum wage was more a matter of judgment than precise calculation. We still believe this, particularly at this relatively early stage in the development of the minimum wage. In order to exercise this judgment, we need the flexibility to consider a comprehensive range of factors including inflation, earnings, competitiveness and employment. We also need to continue to consider the impact of our recommendations on different sectors and on different groups of workers. We therefore recommend that future uprating should be based on recommendations by the Low Pay Commission resulting from consultation and analysis of a comprehensive range of factors. Frequency 6.25 Many unions and Low Pay Units argued in their evidence for annual uprating to ensure that the value of the National Minimum Wage was maintained. Some businesses also called for annual reviews. Other businesses were in favour of ad hoc reviews — on the grounds that economic conditions should dictate when the minimum wage ought to be uprated — rather than a fixed timetable. | |
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6.26 Our approach to an appropriate interval between reviews is linked to the review process. We have already explained in this chapter why we consider that comprehensive reviews are necessary: to allow sufficient scope to consider all relevant factors, and to enable extensive consultation to take place. Comprehensive reviews involve commissioning research, analysing data, hearing evidence, conducting visits across the UK, and meeting representatives of employers and workers in low-paying sectors. We do not consider that annual reviews would allow adequate time for this process or a proper consideration of all the relevant factors that would enable us to make recommendations that fully reflect how the minimum wage operates in practice. Moreover, an annual process is likely to impose excessive demands on all concerned: trade unions, employers and other interested parties. | |
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6.27 Intervals between reviews that were longer than a year would allow the flexibility to make recommendations with phased implementation, if we thought that appropriate in particular circumstances. But we believe that the gap between reviews should not be longer than two years. The minimum wage needs to be reviewed sufficiently frequently to maintain its effectiveness as a wage floor that protects vulnerable workers. An interval between reviews that is longer than two years might lead to the relative value of the minimum wage eroding significantly in a buoyant economy. It could also result in large increases that businesses would find difficult to manage. We therefore believe that a biennial cycle would be most appropriate for the review process we have recommended. Timing 6.28 We attach considerable importance to ensuring that the timing of reviews and their implementation allow businesses sufficient notice to make the necessary adjustments. Indeed, for this reason we reported ahead of the July 2001 deadline given in our terms of reference. By submitting our recommendation on the main rate in our first volume in March, we enabled the Government to provide six months' notice of the main rate for October 2001. 6.29 Almost all employers we spoke to said that the length of time they had to prepare for the implementation of the National Minimum Wage contributed to its successful introduction. In the words of the Restaurant Association, 'members have fed back the view that the longer the lead-in time for changes to the level of the minimum wage the better. At an absolute minimum, six months is usually a workable time frame.' Many other businesses also suggested that a period of six months' notice between the announcement of a new rate and its implementation was their preferred option. A number of businesses have also argued that both the full rate and Development Rate increases should be implemented on the same date to minimise administrative burdens on business. We accept these points. 6.30 We looked at when would be the best time of year for implementing changes to the National Minimum Wage. April is at the start of a new financial year and a busy time for pay settlements, which might increase any influence the National Minimum Wage uprating might have on pay increases throughout the economy. In contrast, October is a relatively quiet period for pay settlements and might reduce any such influence. Moreover, October is not in the midst of the holiday season — like, for example, August — when it would be difficult for businesses to implement the required changes. And October would match the implementation date of the 2000 uprating and that forthcoming in 2001. 6.31 Implementation in October would imply that business would need notice of a new rate by early Spring. In order to achieve this we consider that we would need to report to the Government by February. This would allow us to take account of the latest New Earnings Survey data published annually in October. We noted that the Chancellor of the Exchequer referred to our recommendation in the subsequent Budget when discussing the interaction of the minimum wage with the tax and benefits system. Assuming that the Budget continues to take place in March, reporting in February would also allow the minimum wage to continue to be considered as part of the package of measures to tackle in-work poverty. 6.32 We therefore recommend that there should be biennial reviews reporting in February for implementation in the following October. The next review should be completed by February 2003 for implementation in October 2003. Conclusion 6.33 We believe that the National Minimum Wage should continue to be an effective wage floor. There needs to be a defined process for reviewing the minimum wage at regular intervals. Bearing in mind the increasingly dynamic nature of the modern labour market and the relative newness of the National Minimum Wage in the UK, we think that allowing each review to take account of a comprehensive range of factors is of utmost importance. We therefore recommend that the Low Pay Commission should continue to review the minimum wage through a comprehensive process of analysis and consultation. 6.34 The frequency of reviews is important for the effectiveness of the minimum wage. Reviews should be sufficiently frequent to maintain its value as a wage floor and to minimise the cost of each increase for businesses. But we are also keen that each review takes full account of relevant data and thorough consultation. We therefore recommend biennial reviews of the National Minimum Wage. In order to allow sufficient notice for implementation of uprating, we also recommend that the Commission should report in February for implementation in the following October. 6.35 Introducing a clearly defined review process will increase the confidence of both employers and workers in the National Minimum Wage. Such a system will be a major contribution towards the further development of an economy based on investment in people, skills and productivity. We look forward to playing our part in developing this system. | |
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