5 Conclusion

We are pleased to be able to say that the implementation of the National Minimum Wage has been a success. Against the background of a strong economy, businesses have generally coped well with the introduction and the subsequent upratings in 2000. Workers have benefited from higher wages without any discernible negative impact on their employment prospects. Both the gender and regional pay gaps have narrowed.

The impact on wage costs has been significant in a number of low-paying sectors and some firms have faced a major challenge to adapt. But businesses told us that in most cases the impact of the minimum wage was manageable; it was often less than that of other regulatory and economic developments. The vast majority of firms affected have been able to cope through improving productivity, raising prices, accepting reductions in profits and tightening control of labour costs. The impact on differentials has generally been limited and has usually been confined to the lower end of the earnings distribution.

The amount of notice businesses had to prepare for the introduction of the National Minimum Wage helped them to manage the initial impact. Businesses told us repeatedly that six months’ notice of a new rate was necessary. Because the Government intends to implement any changes arising from our recommendations in October 2001, we decided that we should report as early as we could, while completing our research and analysis in a thorough manner. Hence we have produced this volume in March, with the second volume to follow in May.

There remains scope for further improvements to the statistical data collected by the Office for National Statistics, but the recent developments in its methodology are an important step forward. The improvements in the available data have led us to revise downwards the estimate of those who could have expected to benefit from the introduction of the minimum wage to workers in 1.3 million jobs. This is still a large number of potential beneficiaries.

Statistical evidence, the work of the Inland Revenue, our research and our consultation have convinced us that the large majority of workers have received their entitlement. But we are aware that some workers are still not receiving the minimum wage to which they are entitled. We will report on compliance and enforcement in more detail in the second volume of this report.

Our consultation, research and analysis provided a very good picture of the impact of the minimum wage so far. In our deliberations on a new rate, we did not take a formulaic approach, nor did we have any particular target for coverage in mind. The labour market and the economy are dynamic and we decided that a balanced judgment was needed. We took account of the relevant economic indicators such as earnings, inflation and employment. We looked at the potential direct impact of the new rate on the wage bill, and the indirect effect from differentials. We balanced our assessment of aggregate data by analysing data on the low-paying sectors most likely to be affected. We also listened carefully to stakeholders. A wide range of research also informed our deliberations and we looked at developments in other countries. As well as considering what firms in the private sector could afford, we addressed the impact on the public sector.

As in our first report, we had to form a judgment about recommending a level of the minimum wage which would not pose a significant risk to jobs. Our initial recommendations were cautious, because they were, in a sense, a journey into the unknown. We could not know what would be the precise impact of introducing a minimum wage for the first time. Our analysis of recent evidence convinced us that there was now scope for a substantial increase in the main rate. We have also recommended that the minimum wage should be increased further by a small amount in 2002 before it is reviewed fully again. This will help retain its value as a wage floor and enable business to plan ahead. We have seen no evidence to change our view that the adult rate should apply to those aged 21 and above. We shall report on that more fully in the second volume of our report.

We believe that our recommendation is prudent enough not to have a significant negative impact on the economy and business, but is bold enough to make a real difference to low-paid workers. We estimate that the new rate in October 2001 will cover between 1.3 and 1.5 million jobs or around 5.5 to 6.6 per cent of jobs for those aged 21 and over. Of these, around 70 per cent will be women. The new rate in October 2001 and the increase in October 2002 will ensure that the National Minimum Wage continues to be an effective wage floor while increasing the benefit it provides to the lowest-paid employees. We are convinced that our recommendation is manageable for the vast majority of businesses. But we recognise that some businesses might need help to manage the change. We were impressed with the efforts that some firms had made to cope with the introduction of the minimum wage. We consider that trade associations, business support organisations, the trade unions and the Small Business Service should all have a role to play in spreading best practice.

An important benefit of the minimum wage is the protection it provides to the most vulnerable workers. In the second volume of this report we will cover in more detail the impact of the minimum wage on such groups, including people from ethnic minority backgrounds, homeworkers and disabled people. We shall also cover compliance and enforcement. And we will discuss the need to conduct research over a longer term.

All of these issues are closely inter-related. For example, certain vulnerable groups in the economy may be more likely to be victims of non-compliance. Although we have focused in our first volume on the level of the main rate, in our deliberations we have considered the implications of other components of the National Minimum Wage for the level of the main rate. We recognise that many important issues remain to be covered. We will present our conclusions and recommendations on these in the second volume.

Looking further ahead, we consider that there needs to be a defined system of regular reviews to ensure that the minimum wage continues to be an effective labour market floor, that low-paid workers continue to benefit from the prosperity of the nation, and that employers can plan ahead in a measured manner. The second volume will include our recommendations on a process for future reviews.