We recommend that the main National Minimum Wage for adults aged 21 and over should be increased to £4.10 per hour in October 2001 and to £4.20 per hour in October 2002.
Chapter 3: Assessing the Impact
We remain at a relatively early stage in the development of the National Minimum Wage but now have sufficient data to make an assessment of its initial impact. A large number of people have benefited. We mentioned in our first two reports that there was uncertainty with the ONS data. These have been revised again. The latest estimate based on these data suggests a lower number of beneficiaries than we originally anticipated, but the basic messages from our second report hold good.
Based on the revised ONS data the latest estimate suggests that 1.3 million people were entitled to higher wages as a result of the introduction of the minimum wage. Around 70 per cent of beneficiaries were women, and around two-thirds of jobs affected were part-time. In a tight labour market wages have risen ahead of the minimum wage, so the number of those set to benefit from the upratings in 2000 was significantly lower than for the introduction of the minimum wage in April 1999.
It appears that the substantial majority of workers have been receiving their entitlement, but we will make a fuller assessment of compliance in the second volume. As a result of the minimum wage, the overall earnings distribution and the gender pay gap have narrowed. Although some low-paying sectors have been more affected than others, the overall evidence suggested that the impact on differentials has been largely contained and there does not appear to be a major continuing effect. Our latest estimate of the initial impact of the minimum wage on the national wage bill is 0.35 per cent. This is lower than the estimate in our second report, largely because of the reduction in the estimated number of beneficiaries.
The large majority of firms affected by the minimum wage have managed to adapt, even if that has sometimes been a significant challenge. The buoyant labour market has undoubtedly helped, as has the prudent approach we took in recommending an initial rate. We considered whether, in coping with the minimum wage, firms had attempted to increase productivity of labour or improve their competitiveness. We found a wide range of responses by firms. Some businesses reported positive changes that increased efficiency; others reported difficulties. Some firms responded to increased business costs arising from the minimum wage by raising prices, although the scope for doing this varied from industry to industry depending on, among other things, the degree of competition and flexibility of contracts. At the aggregate level we could not detect an impact on the Retail Prices Index (RPI) from the introduction of the minimum wage.
We were encouraged by many firms’ use of training. Although we found some instances of reducing training to ease the cost of the minimum wage, these were rare. Some firms viewed training as part of a wider strategy to improve skills and to compete for workers in a tight labour market.
We were especially concerned about possible negative employment effects of the minimum wage. Employment has continued to grow strongly since the introduction of the minimum wage, and there were no discernible adverse effects at the aggregate level. In particular, employment among those groups that were particularly vulnerable — women, young people, part-time workers, most ethnic minority groups and disabled people — continued to increase. We realised that this did not, of course, tell us what employment would have been in the absence of a minimum wage; but our research showed that even after controlling for this and other factors the impact of the minimum wage was broadly neutral.
Chapter 4: Choosing a New Rate
In making our recommendation we have taken account of the impact of the National Minimum Wage so far, and looked to the future to assess the impact of an increased rate. We needed to choose a rate that would have a real impact on low-paid workers but at the same time would be manageable for business and the economy. A rate that was not manageable would hurt the prospects of the very people it was meant to protect, by damaging employment, profitability and competitiveness.
Although we did not have any target for coverage in mind, our assessment on making a real difference to the low paid was influenced by the revised data that we received from the ONS on the numbers in low pay. Our consideration about what businesses, particularly those directly affected, and the economy could afford was based on a range of factors. We looked at the effect on wage bill costs at both the aggregate and sectoral levels, likely employment effects, and the impact on prices and on the public sector. We considered carefully the evidence from businesses, unions and other interested parties. Almost all evidence received from representatives of employers and workers accepted the principle that the minimum wage should be uprated, although some businesses expressed concern about increases that would affect their costs and competitiveness.
We looked at the evidence in the context of the current economic situation, but recognised that a new rate needed to be sustainable in less favourable conditions. We therefore considered prospects for the near-term future and analysed recent trends in prices, earnings and pay settlements.
Prospects for growth and stable inflation, revisions to the numbers in low pay and evidence from consultation suggested that there was now scope for a significant increase in the National Minimum Wage. We believed that such an increase would not adversely affect the economy or reduce aggregate employment. But we were aware that low-paying businesses, many operating on narrow margins, including smaller firms, would need to absorb and adapt to the increased costs. We considered it prudent therefore to recommend a small further increase for October 2002 before the minimum wage is reviewed in full again.
We recommend that the main National Minimum Wage for adults aged 21 and over should be increased to £4.10 per hour in October 2001 and to £4.20 per hour in October 2002.
This increase will ensure that the minimum wage maintains its value as a wage floor, and will provide a significant boost to earnings of workers in low-paid jobs. Between 1.3 and 1.5 million jobs, around 5.5 to 6.6 per cent of jobs for those aged 21 and over, will be covered by the increase in 2001. We believe that the impact on the total wage bill should be no more than 0.3 per cent, although this will be greater in some low-paying sectors and geographical regions. The impact on sectors affected overall and on the economy as a whole will be significantly less than that resulting from the introduction of the National Minimum Wage. We recognise that this impact will vary across, and within, sectors but believe it can generally be managed. We hope that business organisations, trade associations, trade unions and supporting bodies such as the Small Business Service will assist businesses in adapting to the new rate through, for example, the sharing of best practice and in developing strategies to adjust. We estimate that any impact on inflation will be small, as is the likely impact on public sector finances.
The implementation of the National Minimum Wage to date has been a success. Our recommendation on a new rate remains prudent enough not to have any adverse effect on employment, but bold enough to make a significant difference to low-paid workers. We have recommended a small increase in 2002 before the rate is fully reviewed again. The second volume of our third report, in May, will describe in detail the impact of the minimum wage on individual low-paying sectors, on young people and training, and on vulnerable groups, as well as its interaction with the tax and benefits system. This volume will include our conclusions and recommendations on the level and coverage of the Development Rate, the maximum accommodation offset, compliance and enforcement, and the future uprating of the minimum wage. Together the two volumes will present a comprehensive analysis of the impact of the minimum wage and its continuing development, some three years after we made our first recommendations.
