Competitiveness
The National Minimum Wage was set at a cautious and prudent level so not to undermine competitiveness. The following section examines the impact of the minimum wage on a number of key competitiveness indicators: the wage bill, productivity, and prices and costs. In our second report we identified a highly varied response by business to the new legislation. We test whether this is a continued theme in our new evidence and report on other factors identified as challenging firms’ efforts towards further efficiency improvements.
The costs to business of the minimum wage are, in the main, measured by the impact on the wage bill. And the impact is likely to be greatest in those sectors where wages form the major part of a firm’s costs. In our second report we estimated that the impact of the introduction of the National Minimum Wage on the wage bill was in the region of 0.5 per cent. We have revisited this in the light of the new ONS methodology and more recent information about the impact on wage differentials.
We re-estimated the cost to the wage bill of the introduction of the minimum wage, using the grossed 1998 NES data. We assumed that everyone earning below the National Minimum Wage in 1998 saw their earnings increase to that level (as before, we used £3.50 per hour for adults and £2.90 for 18—21 year olds as the real terms estimate of the minimum wage). We estimate the increase to be around 0.25 per cent, assuming no change in differentials, or around 0.35 per cent when we include assumptions on differentials. This is lower than the estimate in our second report because the estimate of the number of beneficiaries has reduced and due to our revised assumptions on differentials.
Even though this estimate is lower than that in our second report, it may have overstated the impact on the wage bill for several reasons. First, we have assumed 100 per cent compliance with the National Minimum Wage. Second, using the RPI as the deflator could bias the estimate upwards if real earnings at the bottom of the distribution outstripped inflation over the period. Finally, the extent to which firms make dynamic adjustments, such as shedding labour, cutting hours and increasing productivity, will reduce this estimate further.
Our estimate of the wage bill effect is based only on the grossed NES data. We calculated the initial wage bill impact using the LFS, but the change of methodology meant that a different imputation method was used to produce data for 1998 and the following years. We were advised by ONS that the 1998 data were likely to be of lower quality than later years, in particular when considering the whole earnings distribution. We were therefore not confident about using the LFS again for the wage bill effect.
Our estimate is an assessment of the impact on the aggregate wage bill and does not reflect differences in sectors and particular firms. Most employees and most medium-sized and larger businesses will not have been affected by the minimum wage. Figure 3.27 shows the impact on sectoral wage bills of the introduction of the minimum wage, focusing in particular on low-paying sectors. These are estimated using the methodology outlined earlier, assuming both no restoration of differentials and some restoration. The figure shows that the hairdressing sector experienced the greatest increase in the wage bill, about 7 per cent, assuming restoration of differentials. Of the low-paying sectors, clothing and textiles experienced the smallest percentage increase in the wage bill, with an estimated increase of around 0.7 per cent (including an assumption for restoration of differentials).
Figure 3.27
Impact on the Wage Bill of the Introduction of the National Minimum Wage in Low-paying Sectors
Source: LPC Calculations Grossed NES data, April 1998
Of the firms responding to our survey about half said they had been affected in some way by the minimum wage. Of those, 42 per cent reported that their wage bill had increased by 5—10 per cent and 37 per cent reported no significant change. Consistent with our estimates from the NES, the largest reported increases were in the hairdressing sector and the lowest in the textiles sector.
The impact on wage bills was most likely to be highest in regions with low average earnings. The research we commissioned into the impact of the minimum wage in small firms in the Yorkshire and Humberside region (Heyes and Gray, 2001) found that of those firms that had increased wages, the average wage bill increase was around 13 per cent. The highest increases were reported in care homes.
This section examines whether, in coping with the minimum wage, firms have attempted to increase productivity to improve their competitiveness. Although some firms are as competitive as their overseas counterparts, the UK has consistently lagged behind its major rivals in productivity. It is therefore important to monitor the productivity challenge the minimum wage poses to firms. There are several ways in which the minimum wage can affect firms’ productivity. Some, such as changes in work practices, investment in training and skills, innovation and management attitudes, are positive and increase efficiency. Others, such as reducing hours or employment, have negative consequences for workers. In the following section we analyse aggregate data and the responses we received from our survey. We also consider the representations we received from firms and organisations in written and oral evidence and on our visits.
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Raising productivity is one of the central conditions for meeting the Government’s objective of high and stable levels of growth and employment and delivering sustained increases in living standards. Pre-Budget Report, HMT, November 2000 |
Productivity and Wage Costs
Figure 3.28 shows recent trends in productivity growth. After being slow throughout the latter part of the 1990s, productivity growth in the UK has shown recent signs of improvement. Although some firms have taken positive action to improve productivity in response to the minimum wage, these aggregate trends are unlikely to be related to the minimum wage. A recent study (Kneller and Young, 2000) found that the slow productivity growth in the latter part of the 1990s was due to structural changes in manufacturing and the labour market. The weakening of these factors, together with the positive effects of investment in information communications technology (ICT), strengthens the view that there is likely to be stronger growth in productivity in the next few years.
Figure 3.28
Labour Productivity Growth, 1992—2000
Source: ONS, 1992—2000
The minimum wage was introduced in a period of rising productivity and relatively modest earnings growth. As Figure 3.29 shows, these conditions have resulted, at aggregate level, in increases in unit wage costs (firms’ labour costs per unit of output) being small, rising by just 1.4 per cent in the third quarter of 2000 compared with 3.3 per cent a year earlier. These conditions, if matched in the low-paying sectors where the minimum wage particularly bites, should make it easier for firms to sustain the effects of increased labour costs arising from the minimum wage.
Figure 3.29
Unit Wage Costs Growth, 1992—2000
Source: ONS, 1992—2000
We found from our survey of low-paying sectors that firms made a wide range of adjustments to the National Minimum Wage. For those affected by the minimum wage, the most frequent responses reported were a reduction in profits (89 per cent), increases in prices (68 per cent) and tighter control of labour costs (61 per cent). This latter effect could include treatment of absence, paid breaks, staff meals and overtime rates.
Figure 3.30
Action taken to Improve Productivity as a Result of the National Minimum Wage
Source: Low Pay Commission Survey, September—November 2000
Note: Base, all firms affected by the National Minimum Wage in any way.
Figure 3.30 shows the range of other adjustments undertaken by firms affected by the minimum wage in our survey. Many of these were positive and likely to increase firms’ efficiency. Just over two-fifths of these firms had made some changes to the way in which work was organised, and around the same proportion had increased investment in training and development. A quarter had increased the use of technology and almost a third had made some improvements in the quality of service they provided. The analysis did not vary significantly by sector, although the textiles industry was least likely to have taken such action.
We also examined the interaction of other measures firms can take to adapt to the minimum wage with the more positive changes in productivity noted above. The results showed that firms that increased prices, reduced profits or reduced staffing were also more likely to undertake the other more positive changes to productivity. This suggested that some firms were carrying out a considerable array of measures to cope with the minimum wage.
This issue was explored in research we commissioned (Bullock et al., 2001) to examine the response of small and medium-sized enterprises to the minimum wage. Figures 3.31 and 3.32 present the range of measures undertaken by such firms, differentiated by the proportion of those they employ on the minimum wage. As might be expected in the short term, the main impact of the minimum wage was on increased prices and reduced profits. Increased prices were reported by 60 per cent of the less minimum wage intensive firms (those with less than half the workforce paid at the minimum) and three-quarters of the high-intensity firms. Reduced profits were reported by around half of the latter firms. A substantial minority of firms sought to raise efficiency by increasing control of labour and non-labour costs, and this was more prevalent among firms with more than half their workforce paid at the minimum wage. A sizeable minority, up to 14 per cent, reported substituting capital for labour. Few firms reported that they had introduced new products or processes to cope with the minimum wage; in fact, firms were more likely to reduce the introduction of these measures rather than increase them.
Figure 3.31
Measures Taken by Firms to Cope with the National Minimum Wage — Firms with Less than Half of the Workforce Paid at the National Minimum Wage
Source: Centre for Business Research, University of Cambridge, 2001. The National Minimum Wage and Small Business
Figure 3.32
Measures Taken by Firms to Cope with the National Minimum Wage — Firms with at Least Half of the Workforce Paid at the National Minimum Wage
Source: Centre for Business Research, University of Cambridge, 2001. The National Minimum Wage and Small Business
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A cleaning and security services company had found that its profits had been squeezed. The company had been able to pass on some of the increased costs but also had to absorb some. Productivity had increased but cleaning was an inexact science. In some cases, productivity gains had allowed contracts to be delivered at the same quality of service while maintaining the price. Other customers were happy to accept a lower quality of service to prevent costs rising. Low Pay Commission visit to Northern Ireland |
The research also analysed the impact of the minimum wage on a range of methods firms used to compete against their rivals. Not surprisingly, there was a notable increase in the importance of price competition. There was also greater emphasis on personal attention to clients’ needs, quality, and reliance on established reputation, with between 21 and 44 per cent of firms reporting increased importance of these factors. The least important ways of competing post-minimum wage were cost advantage, marketing and promotion, and more innovative design and creativity. There was some evidence that firms were constrained in making further efficiency gains. The most important barriers to such gains were lack of skilled labour, increased cost of labour, lack of managerial skills and increased competition. A sizeable minority of firms reported other factors such as availability and cost of finance, and availability of marketing and sales skills.
Both the written submissions we received and the evidence we gathered during our visits revealed a mixed picture of the productivity response of firms. Some firms reported positive changes, for example, the CBI noted that ‘the NMW may have led some companies to replace inefficient systems of work organisation and to introduce practices such as multi-skilling or team working practices, in order to enhance productivity.’
Others, particularly the small and medium-sized enterprises, reported difficulties. In its evidence, the Biscuit, Cake, Chocolate and Confectionery Alliance stated that ‘the effect on larger organisations on pay rates has been negligible. However, for smaller and medium sized enterprises, the effect has been more dramatic … As a result of the increase in labour cost, the overall expenditure on capital investment was reduced … hence having a negative impact on competitiveness for these smaller organisations.’
Training
A key factor driving productivity growth is investment in training and skills accumulation. The Government has identified this as one of the explanations for the UK productivity gap (HMT, November 2000). In addition, there has been much debate in academic literature about the link between minimum wages, training and productivity (see, for example, Becker, 1993; Cahuc and Michel, 1996; and Neumark and Wascher, 1998). Results from these studies have been ambiguous, with some suggesting that minimum wages reduce training and others finding the opposite.
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Low Pay Commission Research We commissioned research to examine the effects of the minimum wage on small and medium-sized businesses. Firms in cleaning and security reported a wide range of effects of the introduction of the minimum wage. But some firms reported that there may be constraints on the competence of firms to develop more competitive strategies. The research notes that ‘this should not be construed as an argument against the NMW, rather that an emphasis on improving the capabilities of firms to manage and compete effectively may be an essential complement to improving the terms and conditions of the people they employ’. Bullock et al., 2001. The National Minimum Wage and Small Business |
We considered it important to form our own view on whether employers’ use of training had been affected by the minimum wage. Heyes and Gray (2001) also looked at this. They found that the minimum wage made little difference to the extent of participation in vocational education and employment initiatives such as the New Deal and Modern Apprenticeships. We shall examine this further in the second volume of our report. Nine per cent of employers said that the National Minimum Wage had encouraged their organisation to adopt a more strategic approach towards training and development. But most employers indicated that the minimum wage had not affected their training provision in this way.
Some low-paying jobs require minimal skills, with many employers providing informal on-the-job training. Research undertaken for us in the hospitality sector in Portsmouth (Adam-Smith et al., 2001) found that this was the case among many smaller employers. There was some limited evidence, however, that larger employers viewed training as part of a wider strategy to help recruitment and retention since the minimum wage had tended to make their rates of pay uncompetitive.
There was little in the written evidence we received to suggest that training had been cut as a result of the minimum wage. Individual cases did crop up, but these were rare. The CBI argued that ‘there is little evidence so far to show that employers have increased levels of training as a direct result of the NMW’, with only 3 per cent of companies in their Employment Trends Survey 2000 reporting increased training as a result of the minimum wage. Some sectors, for example hairdressing, reported that although training and investment had not been reduced, there were worries about the cumulative impact of government regulation, such as the Working Time Regulations and the National Minimum Wage, and the effect of these on competitiveness.
On the other hand, research undertaken for us (Heyes and Gray, 2001) revealed an interesting picture in that companies which undertook higher quality production strategies in response to the minimum wage were also more likely to increase training. They found that training provision had improved in 65 per cent of those establishments which had improved product/service quality compared with 13 per cent of those establishments where no improvements in quality had been made.
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Low Pay Commission Research Research we commissioned in the hospitality sector found that
some employers view training as an attraction that offsets low pay.
One establishment reported that ‘I suppose that is one
of the things that is important in addition to the money is the
fact that they know they can get some qualifications while they
are here. Although it’s not the be all and end all for everybody
and obviously if they are interested then we will help them through
with that.’ Adam-Smith et al., 2001. The Impact of the NMW in the Hospitality
Sector |
Our programme of visits generally revealed a positive view of training. One company in the ICT sector, which had some employees earning below the minimum rates before the National Minimum Wage was introduced, told us that they greatly encouraged their staff to obtain qualifications, ranging from those in health and safety to NVQs in manufacturing and production. This was seen as a wider strategy for motivating and retaining workers and this strategy was a common theme in other sectors. One large firm in hospitality told us that since the minimum wage had levelled off wages for lower-paid jobs, training was another factor they could use to compete for labour. This view was reiterated in research we commissioned from IDS, which reported that 10 out of 22 firms in the hospitality sector introduced new training and development programmes to try to improve retention or to enable them to be more flexible when recruiting.
In other sectors, the effects on training were potentially more dramatic. The Hairdressing Employers Association and National Hairdressers’ Federation said that many micro-employers were now questioning the value and cost of training. The Association and the Federation suggested that in the longer term this could undermine training in the workplace, placing greater reliance on self-funded or state-funded training through colleges.
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Low Pay Commission Research We commissioned research to examine the effects of the minimum wage on small and medium-sized businesses. The study found that few firms responded to the introduction of the minimum wage by increasing training provision and even fewer reduced it. The effect was greater for firms with a higher proportion of employees on minimum wages, where 14 per cent increased it and 5 per cent reduced it. Bullock et al., 2001. The National Minimum Wage and Small Business |
We shall discuss in detail the evidence on young people and training in the second volume of our report. In the meantime, our preliminary view from the aggregate data is that the minimum wage has not reduced participation in full-time education and apprenticeship schemes, and that, for the most part, upward trends established before the introduction of the minimum wage have continued post-implementation. The evidence we have gathered from our research and consultation suggests that although some firms had cut training, overall the minimum wage had a modest positive effect on training.
Our survey showed that some firms responded to increased business costs, resulting from the minimum wage, by raising prices. The scope for doing this varied from industry to industry, partly determined by the degree of competition and the ability of customers to pay higher prices. At the aggregate level, we could not detect an impact on the RPI from the introduction of the minimum wage. Inflation, measured by the RPI, was on a downward trend at that time and this trend continued until Autumn 1999. The decline was primarily due to falling interest rates and the falling cost of mortgage interest payments. Underlying inflation as measured by the RPI excluding mortgage interest payments (RPIX) has been low and stable by historical standards, and is below the Bank of England’s target of 2.5 per cent. Figure 3.33 shows the trends in RPI and RPIX. Even allowing for compliance with the minimum wage to build up over time, and for time lags between higher wage bill costs being passed on in higher prices, there is no noticeable minimum wage effect in the aggregate inflation measures.
Figure 3.33
Retail Price Growth, 1997—2001
Source: Retail Prices Index, ONS, 1997—2001
We also examined retail prices for those goods and services associated with low pay, such as food, clothing and footwear, catering and personal services (including hairdressing). As can be seen from Figure 3.34, none of these indices show signs of price hikes in the period following the introduction of the minimum wage. In fact, there has been significant deflation in clothing and textiles, probably because of increased competition resulting from globalisation. Price inflation in personal services was on an upward trend until the start of 1999, but has been on a steady downward path since then. These data suggest that the effect of the minimum wage on product prices has been limited and has not resulted in sector-wide increases in prices.
Figure 3.34
Retail Price Growth, Components of RPI, 1997—2001
Source: Retail Prices Index, ONS, 1997—2001
But almost 70 per cent of the firms in our survey that were affected by the minimum wage claimed to have raised prices. Figure 3.35 shows that this was most likely in hairdressing and childcare and least likely in textiles and social care. Globalisation and the need to stay competitive in an international market will have affected the response in the textiles sector. In social care, local and central government pay for about two-thirds of residential places in independent care homes and this constrains the ability of care homes to increase prices. Although most firms in these low-paying sectors reported that the price increases had been slight, nearly 30 per cent of them said they had increased prices ‘significantly’.
Figure 3.35
Firms Raising Prices as a Result of the National Minimum Wage
Source: Low Pay Commission Survey, September-—November 2000
Note: Base, all firms affected by the National Minimum Wage in any way.
While the proportion of firms reporting increased prices appears high from these data, there are several reasons why this effect is not evident in the retail price component indices. First, the results reported above are of those who said they were affected by the minimum wage in some way, around 48 per cent of respondents. Second, our survey was aimed at the low-paying sectors, and so the targeted firms were those most likely to be affected by the minimum wage. Moreover, although the response rate was fairly high for this type of survey, it was still only 14 per cent, and those replying may have been those most affected by the minimum wage.
The view that the effect of the minimum wage on prices was limited to specific firms was reiterated in the written evidence we received and on our visits. The CBI evidence suggested that ‘there are many factors which influence the rate of inflation and if the nmw has caused any increase in inflationary pressure, this is likely to have been offset by the effects of strong domestic competition’. It reported that ‘the nmw is very sector specific in its impact and market conditions in the sectors most likely to be affected by the nmw have meant that there has been little, if any, scope to raise prices in order to reflect higher labour costs’.
Increased costs, to which the minimum wage was one contributory factor, might lead to some unanticipated longer-run consequences for certain industries. Evidence from the CBI reported that one company in the business services sector said that the National Minimum Wage had led to an increase in costs of over 25 per cent. It suggested that one result of the National Minimum Wage might be that there would be consolidation in their industry, with companies needing scale economies in order to stay productive.
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The Cleaning and Support Services Association reported that, in general terms, their membership had been able to obtain upward price adjustments to reflect increases in pay rates brought about by the implementation of the NMW. But this often entailed changes in specifications and frequency of service delivery, thus reducing numbers employed in those instances, often by natural wastage. Overall, prices still remained exceptionally competitive, with lowest price still dominating the decision making process. Cleaning and Support Services Association evidence |
In summary, we found that firms continued to undertake a range of measures to ease the introduction of the minimum wage. The three most common measures were tightening control of labour costs, increasing prices and squeezing profits. A sizeable minority of firms displayed a more dynamic approach, including improving product quality, increasing use of technology and increasing investment in training. We recognise that enhancing productivity is a continuing challenge to firms. The minimum wage, among other factors, has forced companies to improve efficiency. As time goes on, short-term adjustment policies such as increasing prices or squeezing profit margins are less likely to be sustainable. We heard mixed views on this in our oral evidence with some saying that slack still remained in the system and others saying it was difficult to see where further productivity gains could be made. We hope the rationale for investment in training, research and development, and innovative work practices will change in the longer term from easing the introduction of the minimum wage to sustaining and developing more productive and efficient ways of working in the longer term.
Public Sector Finances
This chapter has so far assessed the impact of the minimum wage on individuals and on firms. We also need to have regard to the impact of the minimum wage on public sector finances.
The Government reported that no detailed estimates of the out-turn of the introduction of the National Minimum Wage were available for the public sector. Our own estimate of the increase to the public sector wage bill as a result of the introduction of the minimum wage suggests that it is small. Assuming no increase in differentials and using the methodology described earlier in the chapter, we estimate that the increase to the public sector wage bill of introducing the minimum wage was 0.08 per cent compared with an increase of around 0.33 per cent in the private sector. If we assume that there was an impact on differentials, the estimated increase would be around 0.12 per cent in the public sector and 0.45 per cent in the private sector.
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The minimum wage had minimal impact on the pay of UNISON members. Successful efforts to negotiate a £4.00 pay floor in the period leading up to the introduction of the minimum wage meant that few of our pay rates, outside of higher education and private contracting were below £3.60 in April 1999. The minimum wage had some upward effect on the pay of contract staff, for example those working in private nursing homes, and NHS Ancillary staff benefited by being given rises to bring them just above the rate for staff on private contracts. UNISON evidence |
Local and central government and the National Health Service (NHS) between them cover around 80 per cent of the public sector wage bill. By the time the National Minimum Wage was introduced most minimum rates in the public sector were at least £4.00 per hour. Evidence from the Local Government Association (LGA) suggested that the minimum wage had little or no effect on pay in Local Authorities. In its written evidence the LGA reported that ‘the experience of the last year has reinforced our earlier impression that there have been minimal extra costs from … the NMW’.
The LGA confirmed that employers used the provisions in the National Minimum Wage Regulations which allow those paid by equal instalments throughout the year to spread their hours equally throughout the year. This was particularly useful for term-time workers such as teachers and school dinner assistants.
IDS (2000c) report that many government departments implemented pay reviews that favoured the lowest paid prior to the introduction of the National Minimum Wage. It gives the example of the 1998 pay increase in the Benefits Agency which resulted in total increases of over 10 per cent for some of the lowest-paid staff.
Government evidence reported no impact on the NHS pay bill as a result of the introduction of the National Minimum Wage because there had been no national rates for adult NHS workers at or below the minimum wage. This finding was confirmed from information received from the NHS Executive, which was based on a Department of Health survey of 400,000 staff employed by around 180 NHS Trusts in England. The data suggest that at August 1998 fewer than 1,500 staff were paid less than the minimum wage. Even this figure is likely to overestimate the numbers affected since some of them may have had their pay raised by the time the National Minimum Wage was introduced.
Previous evidence received from the Government about the effect of the National Minimum Wage on procurement from the private sector was limited. The Government’s evidence for our second report stated that ‘it is difficult to identify even approximately the impact of the minimum wage on procurement costs’. The Government’s latest evidence made no explicit reference to procurement costs.
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County Council officers told us that in-house pay levels were traditionally higher than outside since the Council paid above the National Minimum Wage, £4 to £5 per hour. A greater impact on the Council’s in-house operations had come from the Best Value policy. Low Pay Commission visit to the North West |
In August 2000, we wrote to individual government departments and agencies seeking details of the effects of the minimum wage on contracted-out goods and services. The main issues we raised were the effect of the minimum wage on the price of goods and services procured; whether contracts needed to be re-negotiated; if so, what were the main issues involved; and whether there was any evidence on the indirect effect of the minimum wage. Of the responses we received, eight reported no or minimal effect on prices of goods and services, six reported some increased costs, and three were unable to provide any information. The sectors most likely to be affected were cleaning (including window cleaning), security and catering. Price increases were predominantly in the 1—10 per cent range; two reported increases of between 20 and 50 per cent. One of these said that it was unable to distinguish between minimum wage effects and other factors, so this is likely to be an overestimate of the minimum wage effect.
Questions on contracting to the public sector were included in our survey questionnaire for the business services sector (including cleaning and security services), the social care sector and the childcare sector. The results showed that around 20 per cent of firms provided goods or services to the public sector as part of a competitive tendering process. This was much more likely in the business services sector and less likely in the childcare sector. In the social care sector, providers of domiciliary care were more likely to be involved in competitive tendering in the public sector, whether they were private or voluntary providers.
The social care sector was the only group with sample sizes big enough to analyse separately. Of respondents in the social care sector that indicated they were involved in tendering, 46 per cent said they had tried to renegotiate their contract as a result of the minimum wage. Of these, 8 per cent were successful and 14 per cent were partly successful. Over three-quarters of those who sought to renegotiate were unable to recoup anything. Most of the others recouped between 1 and 24 per cent of their increased pay bill.
The LGA evidence suggested that some local authorities reported extra costs, for example in relation to security staff or agency staff or contracted-out services such as residential care. But it concluded that ‘while this assessment is almost certainly valid, it is difficult to isolate the precise effect of the NMW from a range of other cost pressures and possible savings’.
The minimum wage, by increasing earnings, will reduce expenditure on in-work benefits and tax credits. We received estimates of reduced social security expenditure and tax credit savings from the Government. These are shown in Table 3.6. These indicate the likely scale of the first-round effects on the Exchequer. The precise impact will depend on a number of factors, including the level of compliance and the impact on differentials, employment and profits.
| Table 3.6 | ||
| Benefit and Tax Credit Savings from the Introduction of the National Minimum Wage | ||
| Benefit/Tax Credit | Savings in 2000/01 £m | |
| Income Support/Jobseeker’s Allowance | 30 | |
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Housing Benefit |
55 | |
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Council Tax Benefit |
20 | |
|
Family Credit/Working Families’ Tax Credit |
75 | |
| Total | 180 | |
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Source: Department of Social Security
and Government evidence |
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These estimates are lower than those reported in our second report (£280 million in 1999/2000). This was primarily due to downward revisions in the number of Working Families’ Tax Credit (WFTC) claimants which reduced savings for this credit.
The National Minimum Wage will increase the receipts from income tax and National Insurance. In addition, as the low paid spend their increased earnings, there will be revenue from VAT receipts. On corporation tax, the impact is more complicated since it depends on how the minimum wage affects profits. This, in turn, depends on effects on productivity, staff turnover, labour costs and product prices. Government estimates cannot model these dynamic effects, and are therefore likely to overstate the effect on corporation tax.
The Government‘s evidence estimates that the net impact of the minimum wage on income tax, corporation tax and National Insurance will be a yield of £100—200 million in 2000/01. It has not been possible to disaggregate this estimate because it is subject to a wide margin of error. These estimates are much larger than the £5—10 million reported in our second report. The Government advised us that this is largely due to the revision in corporation tax estimates, which are very uncertain.
In summary our analysis showed that although there were no direct government estimates of the impact of the minimum wage on the public sector wage bill, evidence from IDS, LGA, NHS and our own estimates suggest that the effect was modest. Evidence we have on public sector procurement, our survey and the special exercise we carried out, confirmed our earlier impression that the effect on government procurement is small, with the main affected sectors being cleaning, security and catering. On Exchequer revenues and expenditure, estimated savings from the introduction of the minimum wage on benefits and tax credits were around £180 million, and extra direct tax receipts were in the range £100—200 million.
Conclusion
We have assessed the impact of the minimum wage almost two years after its introduction and after it was increased in 2000. In general, there has been widespread acceptance of the minimum wage and employers and employees have welcomed it. By far the greatest beneficiaries have been women. In narrowing the gender pay gap the minimum wage has had the greatest effect on women’s pay since the Equal Pay Act 1970. The impact on differentials has been contained to the bottom of the earnings distribution. We were interested to learn of the positive benefits that the minimum wage had brought to business, such as increased staff morale, and the action firms have taken to improve productivity. But some businesses have experienced difficulties. The employment effects of the minimum wage have been broadly neutral and employment among vulnerable groups has grown. More time is needed before a full assessment can be made, but all the evidence suggests that the introduction of the minimum wage has helped low-paid workers, businesses have coped and there has been no discernible adverse effect on employment.
