The Low Pay Commission and
Implications of the National
Living Wage
Low Pay Commission Presentation to OECD
15 December 2015
Richard Dickens (Commissioner) and
Tim Butcher (Chief Economist)
Overview
1. Low Pay Commission •
and National Minimum •
Wage
2. Impact of the NMW •
•
The LPC: What is it? What does it do?
The NMW: What is it? How is it set?
What it says?
What it means for the LPC?
3. The New Remit in
the Summer Budget
2015
•
•
•
The National Living Wage
What it says?
What it means for the LPC?
4. Impacts
•
•
•
•
Bite
Coverage
International comparisons
Summary
5. Conclusion
2
The Low Pay Commission and the
National Minimum Wage
Low Pay Commission
• Set up in 1997 to define the National Minimum
Wage and recommend its introductory level.
• Independent advisory Non-Departmental Public
Body (National Minimum Wage Act in 1998).
• No specific aim/objective under the NMW Act
1998, but given specific remit by Government
each year.
• Independent of Government
• Social Partnership
– 9 Commissioners
– Balance - 3 independents, 3 with employer experience
and 3 with union experience
– Appointed as individuals (NOT MANDATED) through
advertised public appointments process
– All Commissioners have equal vote
– To date, always unanimously agreed recommendations
• Small secretariat (Analysis, Policy and Admin)
4
Independents
David Norgrove, Chair
Professor Richard Dickens,
University of Sussex
Professor Sarah Brown,
University of Sheffield
Kay Carberry, Assistant
General Secretary, TUC
John Hannett, General
Secretary, Usdaw
Brian Strutton, GMB
National Secretary
Employee
representative
background
Employer
representative
background
Neil Carberry, Director of
Employment and Skills, CBI
Peter Donaldson, Managing
Director, D5 Consulting Ltd
Clare Chapman, non-executive
director and Remuneration 5
Committee Chair at Kingfisher PLC
What is the National Minimum Wage?
• It is a WAGE FLOOR NOT A ‘LIVING WAGE’
• It is NATIONAL (the same across England, Scotland,
Wales and Northern Ireland)
• No differences by industry, occupation or firm size
• It is HOURLY (with special arrangements for piece
rates)
• It is CASH (benefits-in-kind except accommodation
offset do not count)
• It is SIMPLE (just four rates)
• It does vary by AGE (and apprenticeship)
• It is COMPREHENSIVE – it covers nearly all workers and
types of contract, with few exemptions
6
Recommending the Rate
The National Minimum Wage (NMW) was
intended to raise pay and tackle exploitation
• No formal aim in the NMW Act
but:
intended both to raise pay and
to prevent exploitation.
Take the NMW out of politics
and build consensus
• The level is determined by
affordability, not need.
To help as
many low
paid workers
as possible…
…without any
significant
adverse impact
on
employment
8
Finding the right level
• When the NMW was introduced the two most major
concerns were that it would lead to:
– Job loss
– Wage inflation (which would fuel price inflation)
• “…coming up with a minimum wage that will not
seriously harm the economy, and destroy jobs, will
require the wisdom of Solomon – or extraordinary luck.”
The Economist (5 June 1997)
• The NMW should:
– support a competitive economy
– be set at a prudent level
– Be simple and straightforward
– Make a difference
Low Pay Commission First Report (1998)
9
Evidence-based
• Evidence-based judgement not a formula
–
–
–
–
–
The impact so far
State of the economy
Prospects for the economy
Stakeholder views
Impact of other Government legislation
• Evidence gathering
–
–
–
–
–
–
In-house analysis
Commissioned and independent research
Formal consultation (Written and Oral evidence)
Visits around the UK
Secretariat meetings with stakeholders
International developments
10
The NMW has been characterised by a
flexible approach
Phases of the NMW
Initial
caution,
1999-2000
Above average
earnings
growth
increases,
2001-6
“We have taken a prudent approach in
choosing the initial rate, to find the
balance between improving low pay and
avoiding damage to efficient businesses
and employment opportunities” George
Bain, the Chair of the LPC (1998)
“…we believe that there is a case for
increasing the effective rate of the
minimum wage, implying a series of
increases for a number of years above
average earnings…” Fourth Report (2003)
Caution again
in uncertain
times, 200713
“we have no presumption that further
increases above average earnings are
required” LPC 2006 Report
again little evidence of employment effects
up to 2013 but awaiting further evidence of
the impact of recession
A new
phase?
2014 - 16
“a move towards restoring the real
value of the NMW” LPC 2014 Report
11
Between 1999 and 2015, the adult NMW has grown
faster than average earnings and price inflation
7.25
98.4%
£7.14
7.00
7.00
6.75
6.75
£6.70
6.50
6.50
86.1%
6.25
66.3%
6.00
6.25
6.00
£5.99
5.75
5.75
£5.65
57.1%
5.50
5.50
5.25
5.25
£5.00
5.00
5.00
39.0%
4.75
4.75
2015 October
2015 April
2014 October
2014 April
2013 October
2013 April
2012 October
2012 April
2011 October
2011 April
2010 October
2010 April
2009 October
2009 April
2008 October
2008 April
2007 October
2007 April
2006 October
2006 April
2005 October
2005 April
2004 October
2004 April
3.50
2003 October
3.50
2003 April
3.75
2002 October
3.75
2002 April
4.00
2001 October
4.00
2001 April
4.25
2000 October
4.25
2000 April
4.50
1999 October
4.50
1999 April
Uprated value of National Minimum Wage (£ per hour)
7.25
Month
Total AWE
CPI
RPI
GDP
Adult NMW
Source: LPC estimates based on ONS data, AEI including bonuses (LNMQ), 1999, AWE total pay (KAB9), 2000-2015, RPI (CHAW),
1999-2015, and CPI (D7BT), 1999-2015, monthly; and GDP (YBHA), 1999-2015, quarterly, seasonally adjusted (AWE, AEI and GDP
only), UK (GB for AWE and AEI).
12
Thus, the bite at 54.5% is its highest ever
Bite of applicable minimum wage at median earnings (per cent)
90
90
80
70
18-20
78.9
21-24
76.9
80
70
68.5
62.1
60
60
54.5
21+
50
52.5
50
25+
46.2
44.7
40
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
40
2015
April of each year
21-24
18-20
25+
21+
Source: LPC estimates based on ASHE without supplementary information, April 1999-2004; ASHE with supplementary information, April 20042006; ASHE 2007 methodology, April 2006-2011; and ASHE 2010 methodology, April 2011-2015, standard weights, UK.
Note: 21 year olds became entitled to the adult rate in October 2010.
13
… and across all sizes of firm
and the economy
70
Low-paying Sector
67.2
65
65
60.1
60
60
54.9
55
55
53.2
50
50
1999
2008
2010
2012
2013
2014
Cleaning
81.9
90.1
89.3
93.5
92.5
92.7
Hospitality
78.6
85.3
85.4
86.9
88.1
88.1
Hairdressing
83.5
80.4
83.2
85.8
84.4
85.3
69.6
80.9
82.8
84.2
83.5
Childcare
Retail
69.5
76.7
76.6
79.5
78.1
79.4
Social care
60.8
72.2
73.8
76.8
78.4
78.7
Agriculture
67.5
71.7
71.5
75.1
71.8
72.9
Textiles
62.1
69.9
71.3
71.7
71.0
71.0
Leisure
59.3
66.8
67.4
69.5
70.8
71.0
67.7
68.4
68.0
68.1
70.9
49.8
Employment agencies
45
45
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
40
2000
40
1999
NMW as a proportion of median earnings for those aged 22 and
over (per cent)
70
Food processing
55.6
65.2
68.0
70.4
68.4
70.0
Low-paying sectors
67.5
75.5
76.6
79.4
78.9
79.7
Non low-paying sectors
42.2
45.6
45.2
46.0
45.9
46.2
Total
47.1
51.2
51.4
52.8
52.5
53.2
April of each year
Micro
Other small
Medium
Large
All
Source: LPC estimates based on ASHE without supplementary information, April 1999-2004; ASHE with supplementary information, April 2004-2006;
14
ASHE 2007 methodology, April 2006-2011; and ASHE 2010 methodology, April 2011-2014, standard weights, UK.
Note: 22 year olds +, adult rates, in April of each year.
Indeed, the low paid have fared much better
than in previous recessions and recoveries
Annual hourly
wage growth
(%)
Percentile
Mean
5
th
th
th
10
25
Median
th
(50 )
70
th
90
th
1975-79
13.5
14.3
12.9
13.3
13.4
13.6
13.9
1979-82
15.5
13.6
13.7
14.3
15.2
16.3
17.1
1982-89
7.7
6.8
6.8
7.1
7.7
8.1
8.7
1989-92
8.5
7.5
8
8.2
8.3
9
9.5
1992-97
3.2
2.4
2.7
2.8
3.3
3.6
3.7
1997-04
4.1
4.9
4.2
3.5
3.5
3.6
4.2
2004-08
3.7
4.4
3.9
3.9
3.6
3.4
3.4
2008-11
2.2
2.4
2.0
1.9
1.9
2.0
2.0
2011-14
1.0
1.9
1.9
1.4
1.5
1.2
0.6
1970s Incomes policy
Source: LPC estimates based on NES and ASHE, UK, 1975-2014.
NMW
15
Little impact on employment to date
• In general, the lowest paid (on the minimum wage) have
had higher wage increases than those at the median
• The minimum wage has covered about 1 million workers (45%) every year
• The bite, its value relative to the median is about 54%
• Little evidence of any adverse impact on employment of
individuals or on employment levels in the lowest-paid
areas, although there is some weak evidence of slower
growth rates in those areas
• Evidence suggests that some of the additional wage costs
may have been absorbed with a small reduction in hours
worked, a small increase in prices to consumers and a
squeeze on profits, however, this has not led to an increase
in business failure.
• Non-wage costs may also have been cut and pay structures
adjusted.
16
Business had adapted reasonably well
Nine ways businesses can respond
to a higher minimum wage
• Fewer jobs: make redundancies
or forego hiring
• Fewer hours, less secure
contracts
• Squeeze benefits
• Squeeze differentials (and career
ladders)
• Increase prices
• Evidence shows modest
negative responses by business,
outweighed by benefits
• Some evidence NMW has
spurred increases in
productivity.
• Reduce profit
• Substitute younger staff on the
age-related NMW rates
• Raise productivity by training,
investment or reorganisation
• Non-compliance
17
Even The Economist appeared
comfortable with minimum wages
“Evidence is mounting that moderate minimum wages
can do more good than harm.”
“Bastions of orthodoxy, such as the OECD, a richcountry think tank, and the International Monetary Fund
now assert that a moderate minimum wage does not do
much harm and may do some good. Their definition of
moderate is 30-40% of the median wage. Britain's
experience suggests it might even be a bit higher. The
success of the Low Pay Commission points to the
importance of technocrats rather than politicians setting
wage floors.”
The Economist (24 November 2012)
18
BUT since October 2007, the real value of the NMW has
fallen. However, its relative value has increased
6.90
£6.81
23.4%
6.80
6.80
£6.74
6.70
6.70
22.0% £6.63
6.60
6.60
20.1%
6.50
6.40
6.50
6.40
17.8%
6.30
6.30
£6.21
6.20
6.20
6.10
6.10
12.6%
2014 October
2014 July
2014 April
2014 January
2013 October
2013 July
2013 April
2013 January
2012 October
2012 July
2012 April
2012 January
2011 October
5.30
2011 July
5.30
2011 April
5.40
2011 January
5.40
2010 October
5.50
2010 July
5.50
2010 April
5.60
2010 January
5.60
2009 October
5.70
2009 July
5.70
2009 April
5.80
2009 January
5.80
2008 October
5.90
2008 July
5.90
2008 April
6.00
2008 January
6.00
2007 October
Uprated value of National Minimum Wage (£ per hour)
6.90
Month
Total AWE
CPI
RPI
GDP
Adult NMW
Source: LPC estimates based on ONS data, AEI including bonuses (LNMQ), 1999, AWE total pay (KAB9), 2000-2013, RPI
(CHAW), 1999-2013, and CPI (D7BT), 1999-2013, monthly; and GDP (YBHA), 1999-2013, quarterly, seasonally adjusted19
(AWE, AEI and GDP only), UK (GB for AWE and AEI).
The National Living Wage
Summer Budget 2015
• The Government introduced a National Living Wage
(NLW), a higher minimum wage, for workers aged 25 and
over.
• The Government set the NLW at 50p above the NMW,
effective from April 2016, making the NLW £7.20 an hour
for those aged 25 and over
• From April 2017, in addition to setting the main NMW, the
LPC was tasked with recommending a yearly profile that
takes the hourly NLW applying to those aged 25 and over
to 60 per cent of the median hourly earnings of that
group by April 2020.
• The NMW of £6.70 an hour will continue to apply to 21-24
year olds
• The main NMW will continue to be set for those aged 21
and over
21
Implications
• A surprise (the LPC was not consulted)
• Political decision to accept trade-off against jobs
• Faster gains for the low paid – aimed to tackle longstanding UK problem: low wage and low productivity
• Political risks – the NMW process was widely accepted
• Businesses will adjust but adjustment will differ by
sector, geography and size of firm
• Success will depend on growth and productivity and
response in pressured sectors
• New role of Low Pay Commission (LPC)
22
A New Role for the LPC
Four main sorts of evidence:
1. Analysis of pay, labour
market, competitiveness
2. Evidence from stakeholders
and experts;
3. Visits programme across
UK;
4. Academic research on the
impact of past NMW
increases.
1. To calculate rate
of NLW & advise
on path “subject
to sustained
economic growth”
2. To recommend
youth, adult and
apprentice NMW
rates
23
Future structure
From April 2016
National Living
Wage (25+)
£7.20 – 55% ‘bite’
(2020 target of
60% bite - >£9)
Adult rate (21-24s)
18-20 Year Old
Rate
16-17 Year Old
Rate
Apprentice Rate
•
A bite (not cash)
target, and tolerance
of employment risk
•
60,000 job losses
(20,000-110,000)
versus 1.1 million
created by 2020 (OBR).
•
In effect a formula,
calculated by LPC, and
‘subject to sustained
economic growth’.
£6.70
£5.30
£3.87
£3.30
So what will it mean?
24
Impact of the National Living Wage
National Living Wage
• Set initially at £7.20 in 2016
• This is an increase of 7.5% on the NMW but it
is an increase of 10.8% on September 2015
• Chancellor has tasked the LPC to make
recommendations on the path to a target of
60% of median earnings by 2020. When
announced in July, that implied a NLW of
£9.35 (a further increase of nearly 30% over 4
years – a period when average wages are only
expected to rise by around 21%)
26
Increase in bite to 2020 as big as increase since 1999
62.0
62.0
60.0
60.0
58.0
58.0
56.0
56.0
54.0
54.0
52.0
52.0
50.0
50.0
48.0
48.0
46.0
46.0
44.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
April
2009
2010
October
2011
2012
2013
2014
2015
2016
2017
2018
2019
44.0
2020
Mid-year
Source: ASHE 2014 Final and 2015 Provisional. OBR Supplementary Economic Tables, July 2015 and November 2015.
Significant Increase in Bite
• Bite increases from 52.5% in 2015 to 55.1% in
2016 and 60.0% in 2020
• By 2020, bite expected to be much higher in:
– Small and micro firms (up to 76%)
– Low-paying sectors (reaching 100% in cleaning,
hospitality and retail)
– Some regions (over 67 per cent in N. Ireland,
Wales, Yorkshire & Humberside, and Eat Midlands)
28
Large increase in coverage
Number of workers paid at or below their applicable
NMW/NLW rate (5p band)
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
April each year
29
Significant Increases in Coverage
• Coverage increases from 1 million in 2015 to
1.8 million in 2016 and 3.7 million in 2020
• That is an increase from around 5% to around
15% of all UK employees aged 25 and over
• By 2020, coverage expected to be much
higher in:
– Small and micro firms (up to around 25%)
– Private sector (up from 7% to 19%)
– Public sector (up from <1% to 5%)
30
Difficulties making international
comparisons
• Definition of wage
– Hourly, daily, monthly, annual
– Assumptions required about hours to get hourly
comparisons
•
•
•
•
•
Different age coverage
Availability and reliability of earnings data
Exchange rates and purchasing power parity
Take-home pay or gross pay
It is difficult to account for age structure, hours
and data source differences
31
NLW doesn’t raise the UK position by
much for full-time employees
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Turkey
Chile
France
Slovenia
New Zealand
Portugal
Luxembourg
Israel
UK 2020 21 and over
Hungary
Australia
Romania
UK 2020 25 and over
UK 2016 21 and over
Latvia
Belgium
Poland
UK 2016 25 and over
Lithuania
United Kingdom 2014
Netherlands
Slovak Republic
Greece
Korea
Canada
Ireland
Estonia
Spain
Japan
Mexico
Czech Republic
United States
32
Source: OECD. MW as percentage of full-time earnings, averaged over 2014. LPC estimates of UK 2016 and 2020 using OBR forecasts and OECD methodology.
However, if we use the real hourly minimum wage
in £PPP, then NLW will take UK to near the top
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Luxembourg
United Kingdom 2020
France
Australia
Belgium
Netherlands
Ireland
United Kingdom 2016
New Zealand
United Kingdom
Canada
Slovenia
United States
Japan
Korea
Israel
Spain
Turkey
Poland
Greece
Portugal
Hungary
Czech Republic
Slovak Republic
Estonia
Chile
Mexico
Source: OECD. Real Hourly MW in £UK, Purchasing Power Parity, averaged over 2014.
33
Note: OECD used $US. Low Pay Commission calculations using £UK. Forecasts to 2020 use OBR forecasts of CPI.
Making allowances for age and hours
structures, the UK’s bite increases but will
may remain below France and New Zealand
Bite
New Zealand 2014
France 2012
Australia 2014
UK 2014
UK 2014 - OECD
UK 2016
UK 2016 - OECD
UK 2020
UK 2020 - OECD
21-24
15+
82.6
61.3
64.8
63.5
78.9
79.5
85.3
83.9
91.5
89.6
56.0
56.5
60.6
59.6
65.0
63.7
21+
62.0
63.0
59.2
53.9
54.3
58.3
57.3
62.5
61.2
Source: LPC estimates using hourly wages for all employees from country data sets.
Notes: UK: using ASHE 2014 and OBR forecasts; France: using DADS 2012; Australia using HLDA 2014; and New Zealand using NZIS 2014.
25+
59.7
61.3
57.4
51.8
52.2
56.0
55.1
60.0
58.8
34
AND minimum wage coverage in UK (already relatively
high) is set to become the highest (under OECD definition)
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
United Kingdom 2020
Korea*
Latvia
United Kingdom 2016
Luxembourg
United Kingdom 2014
United Kingdom 2010
France
Poland
Canada*
Netherlands*
Estonia
Hungary
United States*
Australia
Czech Republic
Portugal
Slovak Republic
New Zealand*
Japan*
Greece
Belgium
Spain
Source: OECD and various country surveys.
Notes: The number of minimum-wage earners cannot usually be established with certainty and can vary between data sources and studies. Counts of minimum-wage earners are commonly
based on survey data, which are affected by measurement error, both in earnings and in working hours. It is therefore common to include those with wages below the minimum and slightly
above it. Data sources and approaches differ however. Results reported are from the EU Structure of Earnings Survey (SES) and refer to those earning less than 105% of the legal minimum
applicable to each worker’s age group. Importantly, SES data exclude workers in small firms with fewer than 10 employees. As minimum-wage workers tend to be overrepresented in small
firms, shares can often be higher than reported when small firms are included.
35
* “Country-specific” results are from a range of sources as specified below and generally include employees in smaller firms, but may not include workers paid less than the minimum. Results
for Colombia refer to the formal sector only. UK for 2014, 2016 and 2020 uses ASHE and OBR forecasts.
Overall: the LPC and NMW a success story?
• In general, the lowest paid (on the minimum wage) have had
higher wage increases than those at the median
• The minimum wage has covered about 1 million workers every
year (4-5% of all workers)
• The bite, its value relative to the median is now about 53%
• Since its introduction, the adult rate of the NMW has increased
faster than average earnings growth or price inflation
• Little evidence of any adverse impact on employment of
individuals or on employment levels in the lowest-paid areas
• Evidence suggests that some of the additional wage costs may
have been absorbed with a small reduction in hours worked, a
small increase in prices to consumers and a squeeze on profits,
however, this has not led to an increase in business failure.
• Non-wage costs may also have been cut and pay structures
adjusted.
• Weathered recession and change of government
• But now has to cope with National Living Wage
36