Appendix 2:
Low Pay Commission Survey of Employers

In our second report we included evidence from two surveys of low-paying sectors which we conducted. The first survey, undertaken in December 1998, established a baseline for assessing how firms adapted to the National Minimum Wage. We followed this up in 1999 with a survey to examine action taken by firms which had indicated in the first survey that the minimum wage would affect them.

For this report we conducted a third survey of employers. We consider here its major findings, including the impact of the minimum wage on paybills and differentials, its benefits and its effects on businesses. We asked additional questions of the hairdressing and textiles sectors and also about contract services in the business services, and the social care and childcare sectors. We invited comments about experience of the minimum wage. The second volume of this report will include further details of this research, covering findings about young people’s pay and the Development Rate and information about the New Deal. The survey questionnaire is given at the end of this appendix.

We decided to target the third survey at sectors that were most likely to be affected by the introduction of the minimum wage. Because the sectoral composition of the sample is very different, the overall results cannot be directly compared with the previous surveys. But the third survey gives a much broader coverage than the previous two.

With the help of the trade associations shown in Table A2.1, we distributed postal questionnaires to over 20,400 employers, mainly small and medium-sized enterprises. We received 2,915 replies — a response rate of 14 per cent, which was reasonable for a postal survey. Table A2.2 shows the response by sectors. We are grateful once more for the assistance we received from the trade organisations which helped us distribute the questionnaires and encouraged their members to complete them. We are also grateful to those businesses which took the time to complete and return the questionnaires.

The response rate in the retail sector was lower than expected. We have not presented separate results for the retail sector or the ‘other’ category, which also had a very low response rate. Nor have we done this for the business services sector, because the total sample size was relatively small. But the data for these sectors are included in the overall results.

The respondents to the survey are not a random sample of businesses in the sectors. The sample did not cover those, mainly very small, businesses which are not members of trade organisations. The respondents themselves are likely to be biased towards those most affected by the minimum wage. Thus the results are not representative of the sectors as a whole and have not been weighted.

Table A2.3 shows that the respondent businesses covered almost half a million employees, the vast majority of whom came from the hospitality sector. Three-quarters of responses came from small firms, those with fewer than 50 employees, as illustrated in Table A2.4.

Table A2.5 shows that almost half of the respondents said their business had been affected. Around half of small firms and almost half of large firms said they had been affected compared with around two-fifths of medium-sized businesses. Private residential care businesses were twice as likely to have been affected as those providing private domiciliary care.

Table A2.6 shows that some 63 per cent of employers who had been affected had increased their pay bill as a result of the minimum wage, but none had done so by more than 10 per cent and almost two-fifths said there was no significant change. Two-fifths of small firms said that there had been no significant change, compared with 29 per cent of medium-sized firms and 26 per cent of large firms. In textiles, however, the results suggest that smaller firms had experienced a more significant change to their pay bill than larger firms.

Table A2.7 shows that two-thirds of respondents affected by the minimum wage had increased pay rates for higher-grade staff to restore differentials. Seventy per cent of small firms said they had done this compared with 54 per cent of medium-sized firms and 45 per cent of large firms.

The median rate increase was around the £5 mark in each sector, as shown in Table A2.8. For 43 per cent of respondents the highest rate they had to increase was below £5 but for a fifth the highest rate was £6.50 or above. These results imply that the impact of the minimum wage led to the restoration of differentials higher up the pay distribution than our 1999 survey suggested. This might be explained by the different composition of sectors in each survey.

Table A2.9 shows only 9 per cent of organisations affected saw increased productivity as a benefit, but Table A2.10 shows that almost four out of five firms affected had taken action to improve productivity and cope with the impact of the minimum wage.

Nine out of ten firms affected by the minimum wage reported a significant or slight reduction in profits as shown in Table A2.11. Increasing prices was most likely to have occurred in the hairdressing and childcare sectors and was least likely in the social care and textile sectors. Small firms were more likely to have increased prices than larger firms.

Almost half of respondents affected had introduced changes to pay and benefits structures, for example, changes to payment methods, overtime rates, consolidation of pay supplements, commission or tips or other worker benefits. Two-fifths of respondents reduced staffing levels, and just over a third of respondents reduced working hours. This was most likely to have happened in the hospitality and hairdressing sectors.

We also asked additional questions of the hairdressing sector. One concern following the introduction of the minimum wage was that salons would change their employees’ status to self-employed to avoid having to pay the minimum wage. We did not find evidence that this had happened to any significant extent, with only 5 per cent of respondents saying they had introduced ‘chair hire’ arrangements as a result of the minimum wage. Over 80 per cent of respondents had no self-employed staff. Three per cent of respondents said that the percentage of self-employed workers in the salon had increased as a result of the minimum wage. We have concluded, therefore, that changing to self-employed status is occurring on a fairly small scale and may not be as a result of the minimum wage.

Sixty-two per cent of hairdressing respondents charged VAT in their salons and 13 per cent of respondents said the introduction of the minimum wage had been a factor in making it necessary to register for VAT. Sixty per cent of hairdressers said that increasing prices as a result of the minimum wage had led to a reduction in tips.

We also sought information on the extent to which contractors were reliant on public sector contracts. The social care sector and the childcare sector had a very different mix of public and private work. Only about 30 per cent of respondents in the childcare sector did business with the public sector, whereas social care and business services were much more likely to have a mix of public and private sector work within one establishment. Small businesses were much less likely to be undertaking public sector work, and were more likely to be working only in the private sector. Private nursing homes and providers of private domiciliary care were more likely to have a majority of their work provided by the public sector. Less than one-third of day nurseries and pre-school/play groups had work in the public sector.

We asked those who contracted with the public sector about the distribution of their business between local authority, National Health Service (NHS), central government department and ‘other’. The results confirmed that in the social care and childcare sectors, public sector work is dominated by local authority contracts. The picture for the business services sector is more mixed, with the NHS being a key customer for a number of employers.

We also asked whether contractors had managed to recoup the extra cost of the minimum wage from their clients. Almost half of respondents providing social care under public sector contracts sought to renegotiate the contract as a result of the minimum wage, but over three-quarters were unable to recoup anything. Most of the others were able to recoup between 1 and 24 per cent of their increased pay bill.

A smaller percentage of respondents provided goods or services under contract to the private sector. This was most common in the business services sector but was also found among private residential and voluntary domiciliary care organisations. Just over half of respondents providing social care under private sector contracts sought to renegotiate the contract as a result of the minimum wage. About a third said that they were successful. Almost half were unable to recoup anything. Most of the others were able to recoup between 1 and 24 per cent of their increased pay bill.

Two-thirds of all respondents reported that the June 2000 uprating of the Development Rate had had no effect on their business. Hairdressing, which employs a high proportion of young people, was the sector most affected by the June uprating, with 70 per cent of respondents reporting that there had been an impact on the business. The hairdressing sector also reported a higher incidence of ‘reduced profits’ resulting from the June uprating compared with other sectors.

Just over half of respondents said that the October 2000 uprating of the main rate had had no effect on their business, although two-thirds of hairdressing employers said that it had. Seventy per cent of those in the hairdressing sector had experienced a reduction in profits after the October uprating compared with half of respondents overall.

Our survey provided much valuable information about those sectors most affected by the minimum wage. It allowed us to complement the view of the minimum wage we had obtained at an aggregate level and in other evidence.

Firms have undertaken a range of actions to improve productivity and cope with the impact of the minimum wage. The results support evidence we have received that some firms, especially in the social care sector, have found it difficult to recoup increased costs from their clients. For most firms the June and October 2000 upratings of the National Minimum Wage have had no effect on their business.