1 Our Task

This is the third report of the Low Pay Commission. Our first report, in May 1998, made a number of recommendations covering the rates of the National Minimum Wage, its definition, its implementation and enforcement, and its treatment of young people and training. The Government accepted all our recommendations in principle. But a few — for example on the age coverage of the Development Rate for young people — were not implemented exactly as recommended. The Government introduced the National Minimum Wage in April 1999. The Government subsequently uprated the minimum wage in 2000 broadly in line with the recommendations we made in our first report.

In our second report to the Government in December 1999, we made an initial review of the impact of the National Minimum Wage and were able to report that its introduction had been a success. Large numbers of low-paid workers had benefited from it, particularly women, and low-paying sectors had adapted well. This success was partly the result of the prudent nature of our initial recommendations and the length of time businesses had to prepare for the introduction of the minimum wage.

We argued in our first report that, in order to maintain the benefits of the National Minimum Wage for low-paid workers, it needed to be periodically reassessed. In particular, we recommended that there should be a review of the National Minimum Wage, within two years of its introduction, to examine its initial impact and to assess its future level, definition and possible exceptions.

In May 2000 the Government set our terms of reference for a third report. We were asked to continue to monitor and evaluate the impact of the National Minimum Wage, with particular reference to:

• the effect on pay, employment and competitiveness in low-paying sectors and small firms;
• the effect on particular groups of workers, such as young people, women, ethnic minorities, homeworkers, people with disabilities and voluntary-sector workers;
• the effect on pay structures, including the effect on differentials and different pay systems, and the impact of the special rules for output work, unmeasured hours work and salaried hours work;
• the interaction between the National Minimum Wage and the tax and benefits system; and
• the interaction between the National Minimum Wage and the New Deal 18—24 and New Deal 25 plus

1.5

In making recommendations, we were asked to take into account movements in earnings and the actual and likely future impact on the economy, employment and training, paying particular attention to the youth labour market. Specifically, we were asked if there was a case for:

• increasing the main National Minimum Wage rate and the Development Rate and, if so, by how much;
• making any change to the maximum accommodation offset; and
• changing the age at which workers become entitled to the adult rate.

As with previous terms of reference, we were asked to consider the wider economic and social implications, the likely effect on employment and inflation, the impact on the costs and competitiveness of business, particularly the small firms sector, and the potential costs to industry and the Exchequer.

Our Second Report

In our second report we noted that several years would be needed to assess the full effects of the National Minimum Wage. Our initial assessment confirmed that, as expected, the impact varied across the country and across business sectors. But employment continued to grow in low-paying sectors in the first quarter following implementation of the minimum wage, and there were no signs of a significant minimum wage effect in the unemployment figures.

Most, but not all, businesses had prepared well for the minimum wage. We observed that employers and workers in individual businesses had generally succeeded in adapting pay and working practices to ensure that workers received at least the minimum wage. The initial evidence suggested that the vast majority of employers were complying with the National Minimum Wage. The minimum wage had brought benefits to considerable numbers of workers, two-thirds of whom were women and, of these, two-thirds were part-time workers. In the year to April 1999, the gap in the average hourly pay of women relative to men narrowed by a full percentage point, the largest amount for almost a decade. These benefits were achieved without any discernible negative impact on employment.

The Government accepted most of our recommendations and suggestions. The exceptions were those which related to Government funding (the Government’s response was that these were outwith our terms of reference) and, to our disappointment, our recommendation on 21 year olds. The Government published new Regulations to address our recommendations on definitional issues, and these were approved by Parliament. We will report on progress on other recommendations, for example those on compliance and enforcement, in the second volume of this report.

In our first report we had recommended that an appropriate level for the adult rate in June 2000 would be £3.70 per hour and we reaffirmed this in the second report. The Government subsequently decided to increase the Development Rate for young people from £3.00 to £3.20 per hour with effect from June 2000, and the adult rate from £3.60 to £3.70 per hour from October 2000. And the Government published revised detailed guidance in October 2000 to reflect the changes since the initial Regulations.

We are pleased that the Government has now made clear that the National Minimum Wage should be uprated and that the Low Pay Commission has a continuing role. In the words of the Secretary of State for Trade and Industry, ‘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).

Taking Forward the National Minimum Wage

The interval between the introduction of the National Minimum Wage and this report has allowed us to make a thorough assessment of its initial impact on business and on groups of workers. We have had access to improved data on the initial coverage of the rate (and we have made an assessment of the new data in Chapter 3 and Appendix 1). We have also been able to make an initial assessment of the impact of the June and October 2000 upratings. Although the National Minimum Wage has worked well so far, we were acutely aware of the need to ensure that in recommending a new rate we maintained its benefits for low-paid workers but without damaging the economy. Based on our analysis and consultation we have been able to agree unanimously a recommendation for the National Minimum Wage in October 2001 and in October 2002.

Conclusion

Our second report was an initial assessment of how businesses had coped with the implementation of the National Minimum Wage and of the people who had benefited from it. Nearly two years after the introduction of the minimum wage, we are now in a position to consider the re-setting of the rate, and to make other recommendations.

We have remained mindful of the principles that guided us in previous reports. We have endeavoured to produce recommendations that are simple and straightforward. We have needed to be bold enough to make a difference, but prudent enough to minimise any risk to employment. Our recommendations are designed to ensure that the National Minimum Wage remains supportive of a modern, knowledge-driven economy. The minimum wage should continue to promote competitiveness through increased productivity while protecting the most vulnerable workers.

In this first volume of our third report we look in depth at the impact of the introduction of the National Minimum Wage and that of the June and October 2000 upratings. We consider how those businesses affected managed the impact. We also look to the future, considering what would be an appropriate level of the minimum wage for October 2001 and October 2002. Our recommendations in this volume focus on the main rate of the National Minimum Wage. The second volume will report in more detail on our analysis of the impact on different groups and sectors. It will also consider all the other issues we have been addressing, including the treatment of young people and training, the interaction of the minimum wage with the tax and benefits system, compliance and enforcement, and future uprating of the National Minimum Wage.