Britains first ever National Minimum Wage (NMW) comes into force this April at a rate of 3.60 an hour for those aged 22 plus and 3.00 an hour for 18-21 year olds. According to Professor David Metcalf, writing in the February Economic Journal, the NMW will boost the pay of nearly two million employees by 30% on average. Half the people who will benefit are female, part-time workers.
Metcalf estimates that the NMW will have the following impact on the distribution of income, employment and exchequer finances:
o Concentrating on working households, almost two-thirds of the gains from the NMW will accrue to households in the bottom fifth of the income distribution
o The trade associations representing retailing and hospitality – which employ almost a half of those affected by the NMW – have welcomed the level of the NMW, so we can be reasonably confident that the 3.60 an hour rate will not have an adverse effect on jobs.
o The NMW will have a broadly neutral effect on exchequer finances. On the spending side, any savings on means-tested benefits will probably be offset by a small rise in the public pay bill and higher charges for things like security and cleaning. On the revenue side, income tax and VAT will rise, but it is possible that this will be partially offset by a fall in corporation tax.
Metcalf, who is a member of the nine-strong Low Pay Commission (LPC) that unanimously recommended the rate to the government, describes the operation of the LPC, the major debates and the probable impact of the NMW on inflation, employment and household income distribution.
He notes that from its establishment in July 1997 to its Report a year later, the LPC engaged in an open consultation process. Written evidence was received from around 500 organisations and formal oral evidence was taken from 47 representative groups of employers, unions and pressure groups. The LPC visited 61 cities, towns and villages across the UK and held over 200 frank, open meetings during such visits. Margaret Beckett, then Secretary of State for Trade and Industry, described the LPC as a model form of social partnership.
In addition to the evidence gained during these visits around the country, three main factors influenced the choice of the NMW:
o The old piecemeal system of minimum wage protection – the Wage Councils – abolished in 1993 provided a benchmark for the NMW because there was no evidence that the minimum rates they set led to job losses.
o International evidence on rates and coverage – high in France and lower in the United States, for example – provided helpful comparators.
o The cost and coverage were crucial. The Bank of England and the Treasury certainly wanted the cost to be under 1% of the national wage bill (in the event, it is 0.6%) and international evidence pointed to an upper limit on coverage of around 10% (the out-turn is 9%).
A lower youth rate was the most controversial matter discussed and recommended by the LPC. It was felt that youngsters lower productivity and higher unemployment justified a lower NMW. From April, this applies to those aged 18-21 (16 and 17 year olds are completely exempt) but the LPC have been asked to decide whether, from 2000, those aged 21 should be paid the adult or youth rate.
At the beginning of this century, Harold Spender argued for a plimsoll line for labour as well as ships – a line to limit the extent of peril and suffering to which a worker is to be liable. As the century ends, Metcalf notes, British employees have at last achieved that plimsoll line.
Note for Editors: The Low Pay Commission and the National Minimum Wage by David Metcalf is published in the February 1999 issue of the Economic Journal. Professor Metcalf is Deputy Director of the Centre for Economic Performance (CEP) at the London School of Economics; and a member of the Low Pay Commission, a statutory body charged with recommending and evaluating the NMW. Its first Report was The National Minimum Wage, CM3976, June 1998.
arguments in favour of the national minimum wage
The main aim is to reduce poverty and to reduce pay differentials between men and women.
Other aims include reducing the exploitation of low paid workers and improving incentives for people to actively look for paid work in the labour market. This should cause an expansion in the size of the economically active labour force.
The introduction of the National Minimum Wage should be seen in conjunction with other components of Labour’s New Deal strategy for increasing employment opportunities within the economy and reducing dependency on the welfare state.
POTENTIAL ECONOMIC AND SOCIAL BENEFITS
1. Higher tax revenues from increased earnings of those in low paid jobs. As earnings rise, people pay more in income tax and national insurance contributions.
2. State benefits would cost less – less need for benefit “top-ups” such as income support and council tax benefit- because those in work who are directly affected will see their gross weekly earnings rise
3. A fairer distribution of income across the population – low pay is a major cause of poverty and social injustice and can contribute to rising levels of crime and social deprivation. The argument is that employers should be capable of providing their workers with a fair days pay.
4. The experience of other countries show that minimum wages can work with minimum effects of employment and competitiveness of domestic firms
5. Undesirable consequences of a minimum wage are exaggerated – particularly the effect on total employment. The research data on this topic is not conclusive. See the summary of the CBI report (October 1999) mentioned below
6. Firms will have an incentive to raise the productivity of employees if they must pay the minimum wage. This may lead to increased investment in the human capital of the workforce
7. Higher pay may reduce labour turnover and worker absenteeism and increase the motivation of those workers affected – leading to an increase in efficiency. In low paid jobs, rapid labour turnover can be expensive for employers.
Showing the potential earnings from the NMW
The NMW in the diagram above is set above the normal free market wage rate for a given occupation. Total employment contracts from E1 to E2 (representing a loss of earnings for those who lose their jobs). At E2, there is a rise in the earnings of those who remain in work.
If labour demand is inelastic and the scale of job losses arising from the NMW is small, then total earnings to low paid workers should increase.
Industries most affected by the national Minimum Wage
In October 1999, a report from the Confederation of British Industry (CBI) gave qualified support to the National Minimum Wage. Some of the key points in the report were as follows:
“Not much evidence of a significant impact on employment or unemployment”.
“No noticeable blip upwards in average earnings”. The impact on inflation “unlikely to be significant”.
The minimum wage has made some impact on wage differentials leading to higher rates for other workers and not just the low paid. But this only applies to 13 per cent of companies.
The introduction of a lower 3 an hour development rate for 18-21 year olds has proved effective for small companies. The exemption of under-18 year olds from any minimum wage has proved “useful and valuable” to employers.
Some companies have modernised work practices by making staff more multi-skilled. They rotate them more between jobs to offset the cost of the minimum wage
Monday, 5 March, 2001, 16:25 GMTwww.bbc.co.uk
Minimum wage up 10%
Opulent surroundings, but often hospitality staff are poorly paid
The minimum wage for UK workers is set to rise by 10%, following a recommendation by the Low Pay Commission.
The changes were announced to Parliament by Trade and Industry Secretary Stephen Byers.
“The minimum wage has been a success, with 1.5m benefiting without any negative consequences for business,” Mr Byers said, quoting from the report.
“The best form of welfare is having a job..the national minimum wage is a key part of making work pay,” he added.
UK hourly wages
Minimum wage: 4.10 (from Oct)
Average men: 10.89
Average women: 8.38
Average part-time: 6.83
Average manual: 7.19
source: New Earnings Survey, April 2000
The move would boost the minimum wage to 4.10 from 3.70 an hour from 1 October – and to 4.20 from October 2002, economic conditions permitting.
That compares to an average wage of 10.28 in the UK for people in full-time employment.
The Low Pay Commission will make recommendations on the youth rate of 3.20 later in the year.
Mr Byers said that the minimum wage has had “the greatest beneficial effect” on women’s pay since the Equal Pay Act 30 years ago and had also helped close the gap in regional pay differences.
The Low Pay Commission advises the government on the national minimum wage and has been weighing evidence from both industry and unions.
Warning on jobs
The Confederation of British Industry (CBI) had warned that “a figure in excess of 4 an hour could be extremely damaging to business with some pain below this”.
But CBI spokesman John Cridland, a spokesman said that “the advantages will outweigh any downside” at the level agreed.
Trade Union leaders had called for the minimum wage to be set as high as 5 an hour.
For the Conservatives, Shadow spokesman David Heathcoat-Amory accepted the principle of the increase, but expressed concern that the private care sector would be hard-hit by the decision. He also said that the government had increased the burden of taxation on the poorest households.
For the Liberal Democrats, Trade and Industry spokesman Vincent Cable welcomed the changes, especially for those in the South-west.
But he asked whether 100m that would be saved by the Treasury in reduced payments under the Working Families Tax Credit would be recycled to poor families in the Budget.
Small businesses fear that inflation will kick in if there are significant rises in the minimum wage.
And they have also warned that such rises could lead to job losses or bankruptcies.
Trade Unions had been calling for “well over 4 and in the range of 4.50 to 5.00,” a spokeswoman for the TUC told BBC News Online.
However, John Monks, the TUC General Secretary, said that
IDS report no. 783, 1999. 36 pq
Research shows little evidence of any negative employment effect from the introduction of the National Minimum Wage (NMW). In fact a number of fast food companies affected by NMW are currently engaged in expansion plans. This confirms evidence from official statistics which show significant employment growth in the service sector, for example by 100,000 in the distribtuion, hotels and catering industry, during 1998. During this period many firms in the sector increased pay in anticipation of the minimum wage as jobs were expanding.
Guardian, Oct. 15th 1999, p. 21
Contrary to earlier fears, the impact of the national minimum wage has been benign. It has been effective in narrowing the pay gap between men and women, while neither triggering an inflationary pay spiral nor causing job losses.
Policy Studies, vol. 22, 2001, p. 83-98
Paper focuses on the West Yorkshire region and draws on a mixture of questionnaire survey and interview data. Study describes employers’ responses to the minimum wage and examines the implications for wages, work organization, and training and development activity. Particular attention is paid to the consequences of employers’ responses for younger workers. Findings suggest that the minimum wage has raised textile and clothing workers pay. In the majority of cases employers have not responded to increased wages by shedding labour, but rising pay bills have stimulated adjustments to the organisation of production in a number of cases. The changes most in evidence have been a reduction in overtime and increases in the number of tasks undertaken by workers.
Financial Times, Oct. 1st 2001, p. 12
Research by the TUC has shown that up to 170,000 workers in Britain’s “grey” economy are being exploited by unscrupulous employers who deliberately flout the law by not paying the national minimum wage. Young workers and women are most at risk. Including pickers and general labourers as well as illegal immigrants