The National Minimum Wage.
Retrospect and Prospect
David Coats
Contents
Executive summary
4
Chapter 1. Introduction 9
Chapter 2. A brief history of minimum wages in the UK
12
Chapter 3. The ‘new’ economics of minimum wages26
Chapter 4. Implementation and impact
42
Chapter 5. What next? A positive prospectus for
tackling low pay
67
Chapter 6. Some final reflections
90
Bibliography
93
About the author
David Coats has been Associate Director - Policy at The Work Foundation since February
2004. His publications include: An Agenda for Work: The Work Foundation’s Challenge to Policy
Makers, Speaking Up! Voice Industrial Democracy and Organisational Performance, Healthy Work,
Productive Workplaces, Why the UK needs more good jobs; Who’s Afraid of Labour Market Flexibility,
and Raising Lazarus: The Future of Organised Labour (Fabian Society).
From 1999-2004 he was Head of the TUC’s Economic and Social Affairs Department managing
work on economic and industrial policy, the welfare state, public services and the development
of partnership at work.
David was a member of the Low Pay Commission from 2000-2004 and was appointed to the
Central Arbitration Committee in 2005. He also serves on the Executive Committee of the
Involvement and Participation Association, a number of academic advisory panels and the
steering committee of Unions 21
The National Minimum Wage. Retrospect and Prospect
List of Figures, Tables and Boxes
Figure 1. Low paid workers in the UK 1975-2005
18
Figure 2. NMW increases, earnings growth and inflation
49
Figure 3. The ‘bite ‘ of the NMW 1999-2006 – The level as a percentage of median earnings
51
Figure 4. Adult low-pay distribution, April 2006
52
Figure 5. Comparison of minimum wages across countries, measured by purchasing
power parities, 2000-04 (£)
53
Figure 6. Adult minimum wages as a % of median earnings – the ‘bite’ of the minimum
wage across countries, 2000-06
54
Figure 7. Household characteristics of minimum wage recipients
56
Figure 8. Income inequality 1980-2005 (gini coefficient)
57
Figure 9. Beneficiaries of the NMW
62
Figure 10. Women’s hourly pay as a percentage of men’s hourly pay 1998-2005
64
Figure 11. Migration and the natural increase in the UK population, 1991-2004
78
Table 1. NMW rates 1999-2006
48
Table 2. Weekly minimum income guarantees
71
Box 1. Calculating half male median earnings23
Box 2. The government’s manifesto commitments
The National Minimum Wage. Retrospect and Prospect
75
Executive summary
•
The national minimum wage (NMW) has been one of the most successful labour
market interventions of the last decade. It was introduced with a minimum of fuss,
has improved the incomes of the lowest paid and has had no adverse impact on
employment. The purpose of this paper is to assess the progress made so far (recalling
some of the history of minimum wage fixing in the UK), consider the impact of the
NMW and outline a prospectus for the future. There is a danger that the coalition that
supported the adoption of the NMW is beginning to crumble. Those concerned about
low pay must coalesce around a new agenda that moves beyond a concern with the
level of the NMW if the battle against low pay is to continue successfully.
•
The UK has a long history of state intervention of different kinds to establish a floor in
the labour market. Indeed, the period from 1993-99 is anomalous in that there were
no instruments in place to protect the most vulnerable workers from exploitation.
However, the minimum wage provisions in place from the late nineteenth to the late
twentieth centuries assumed that the conclusion of collective wage agreements by
trade unions and employers provided the most effective protection against low pay.
For much of this period many trade unions had been hostile to a statutory NMW,
believing that this would put a ceiling on wage increases.
•
However, this situation began to change as first public sector and then private sector
unions reached the conclusion that collective bargaining needed to be underpinned
by a statutory floor. This led to the formal adoption by the Labour Party and the TUC
of commitments to the NMW, initially fixed at half male median earnings. This was
the policy on which Labour fought the 1992 general election and the consequence
of defeat was that the Party sought to abandon the formula and have the minimum
wage fixed by a Low Pay Commission on which the social partners (trade unions and
employers’ organisations) were represented. It was this policy that was implemented
after Labour’s election victory in 1997.
•
Before looking at the implementation of the NMW it is worth spending a moment
reviewing the course of the discussion over the 1990s, particularly the growing
literature on the relationship between the NMW and employment. For a prolonged
period it was generally believed that whatever their beneficial impact on pay,
minimum wages had an adverse impact on jobs. Research from the USA suggested
that so far as adults were concerned this conventional wisdom was simply wrong. A
The National Minimum Wage. Retrospect and Prospect
Executive summary
sensibly and flexibly fixed NMW need have no detrimental effect on the employment
of those aged 24-65. However, the same was not necessarily true of younger workers,
whose employment could be adversely affected by a high minimum wage. There
were strong grounds for believing that the NMW was a useful policy for protecting
the wages of the lowest paid adults, and youths could benefit too if they were subject
to a lower minimum wage rate. These broad findings were confirmed by research
across developed countries. Those commentators and political parties that sought to
associate minimum wages with unemployment had been proved wrong.
•
The Low Pay Commission (LPC) has played a central role in making the NMW a
permanent feature of the UK’s labour market. It has proved to be indispensable in
legitimising difficult decisions about the level that have left both trade unions and
employers moderately disappointed with the outcome. On the other hand, there can
be little doubt that the LPC has made a difference to both the process of fixing the
NMW and the level itself. The Commission proceeded cautiously at first, testing the
impact of their recommendations, before moving to a more ambitious programme
of increases which ran ahead of the increase in average earnings. This process was
open, transparent and gave all stakeholders a sense that they had helped to shape the
outcome – even if they were left somewhat dissatisfied.
•
Relationships between the Commissioners were important too, both in building
consensus and presenting a united face to the outside world. There was no doubt
that Commissioners were willing to accept collective responsibility for their reports
and were happy defending the recommendations to their respective trade union
and employer constituencies. This process, which depoliticised the NMW, should be
contrasted with the position in the USA, where the level of the federal minimum wage
is fixed by Congress and where any proposal for an increase is politically contested.
•
The NMW has been on a consistent upward trajectory since introduction in 1999, with
particularly significant increases since 2003. Most of the beneficiaries are women and
the largest single group are women working part-time. Not surprisingly the NMW
has had some impact on the gender pay gap. Because of weaknesses in the official
statistics and because of a degree of anticipation by employers, the LPC has found
it hard to calculate the coverage of the NMW (the number of workers benefiting)
with absolute precision. However, there can be no doubt that the ‘bite’ of the NMW,
The National Minimum Wage. Retrospect and Prospect
Executive summary
measured as the percentage of median earnings has got harder over time – and the
bite for young workers is much harder than the bite for adults.
•
The UK’s NMW compares favourably with minimum wages in other developed
countries, whether measured as a percentage of the median or in terms of real
spending power. Indeed, the NMW has been moving upwards at a time when
minimum wages elsewhere were either holding steady or falling in real terms.
•
Contrary to the views of some commentators, the NMW has had a broadly
redistributive effect. Most of the households benefiting are to be found in the bottom
third of the income distribution. Contrary to conventional wisdom, the level of income
inequality has fallen in the UK over the last six years to levels last seen in the mid-late
1980s. Some of this effect is attributable to increases in the NMW.
•
There is no strong evidence of a negative effect on employment following the
introduction and subsequent uprating of the NMW. The only sector where any
significant negative effect can be detected is residential care, where the prices are
fixed by the customers rather than the suppliers, making it much more difficult for
employers to adjust prices to reflect higher labour costs. On balance, however, the
evidence is clear. there is no contradiction between a rising NMW and the retention of
a high level of labour market flexibility.
•
The NMW is reaching its limits as an instrument to eliminate low pay from the UK
economy. While the LPC have managed to implement sustained increases in recent
years, it is reasonably clear that this process is about to come to an end. This is not to
suggest that the NMW is ‘high enough’ but that when coverage, bite and impact are
evaluated it is difficult to see how the NMW can be pushed significantly higher. This
suggests that the limits for the LPC’s consideration of the level are between £5.50 and
£5.80 for October 2007. The author’s best guess is that a figure of around £5.60 would
consolidate the NMW at its current level in real terms, allow some continued testing
of this level and permit the LPC to toughen the bite further in the future - noting
that other countries have secured a harder bite with no adverse employment effects.
However, caution is advisable and an over-ambitious recommendation now could
damage the prospects of the NMW in the future.
The National Minimum Wage. Retrospect and Prospect
Executive summary
•
Some campaigners have suggested that the NMW should be converted into a ‘living
wage’ of £7.00 an hour or more. This is misconceived for two reasons. First, what
constitutes a ‘living wage’ will vary by household type; single people, childless couples,
single parents and families with two parents, one earner and more than one child all
have different needs. Second, to move to a £7.00 NMW would give the UK the highest
minimum wage in the world by a considerable margin – measured either by bite or in
purchasing power comparisons. All economic theories predict that minimum wages at
a high level can have an adverse effect on employment – and the UK would be beyond
the safety margin here. So far the UK’s judicious mix of minimum wages and tax credits
has had a significant redistributive effect. Of course the NMW has to retain its value if
it is to prevent employers exploiting the tax credits system, but that is an argument for
modifying the status quo, not an argument for the institution of a ‘living wage’.
•
It has also been suggested that the NMW youth rates should be abandoned. This is a
false promise to young people. The evidence is very strong. Young people are most at
risk of unemployment and early unemployment has a scarring effect that increases the
likelihood of later unemployment; if the NMW adult rate were to be paid at the age of
18 it is certain that the real value of the NMW will fall. For all these reasons the youth
rates should be a permanent feature of the UK’s minimum wage regime.
•
This is not an argument for complacency or for the maintenance of the status quo.
Instead it is a plea for policymakers and low pay campaigners to turn their attention to
a wider range of instruments that, in parallel with the NMW could have a huge impact
on the incidence of low pay. Many of these measures are formally government policy,
but rapid implementation must be a high priority. Similarly, trade unions and other
stakeholders should abandon ritualistic positions and engage with a practical agenda
that can reduce the UK’s reliance on low pay. Amongst the measures that ought to be
considered are.
•
The conclusion of a compact on public service employment standards, to be
observed by contracts when public services are outsourced.
•
A renewed emphasis on the enforcement of the NMW, with a particular focus
on the most vulnerable sectors, especially those employing a large number of
migrant workers.
•
More joined up enforcement across a range of agencies responsible for
employment standards, including HMRC, ACAS and the HSE.
The National Minimum Wage. Retrospect and Prospect
Executive summary
•
A new standard of good employment practice, which can be used as a tool to
wean employers off the payment of low wages and refocus their business models
on the recruitment and retention of a well-paid and highly motivated workforce.
•
Helping low paid workers to ‘get on’ at work by offering them tailored support and
advice about employment and skills development opportunities.
•
The establishment of sector forums, bringing together the social partners in a low
wage sector to identify and apply best practice to boost productivity and improve
organisational performance.
•
Making further progress in narrowing the gender pay gap by implementing the
recommendations of the Women and Work Commission.
•
Making more use of the supply chain in the private sector by encouraging clients
to adopt responsible procurement practices. Large multi-national companies that
make large profits should recognise that they can afford to pay more for basic
services like cleaning and catering and that these increases in price should be
passed on to workers as higher wages.
•
Extending the role of the Low Pay Commission so that it has broad terms of
reference to investigate the causes consequences and cures of low pay, offering
advice to sector forums and shaping government policy on business support
interventions to improve productivity and performance.
•
These policy proposals may not be glamorous, but their cumulative effect could
be significant. It is essential for those concerned about low pay to unite around a
shared diagnosis of the problem and a shared prescription for the future. As the NMW
matures it will inevitably reduce in relative importance as a weapon in the battle
against low pay. The focus must now be on a wider array of policy instruments if
further progress is to be made.
The National Minimum Wage. Retrospect and Prospect
Chapter 1. Introduction
The national minimum wage (NMW) is generally seen as one of the most successful labour
market interventions of the last ten years. Contrary to the pessimistic predictions, the policy
was introduced with a minimum of fuss, the impact on employment has been benign – with
no compelling evidence of any job losses related to the NMW – workers at the bottom of the
earnings distribution have undoubtedly seen their relative position improve and all political
parties now seem to accept the principle that the UK needs a minimum wage as a floor in the
labour market.
Whether we really have a robust consensus remains an open question, which can only be
tested following a change of government. So far the Conservative Party has been largely silent
on the future of the NMW, whereas the Liberal Democrats are more publicly sceptical about the
impact on the economy and have continued to call for a regionalisation of minimum wages.
One might also observe that the consensus between the social partners is rather fragile. Of
course, the CBI seem to have abandoned any principled opposition to the NMW and have
accommodated themselves to the implementation of the government’s clear manifesto
commitments. But the CBI continue to make the case for lower rather than higher increases,
most recently suggesting that there should be a ‘pause’ although they have also advanced the
apparently contradictory argument that the NMW should not be allowed to ‘wither on the vine’.
A casual observer of the minimum wage scene might say that this is entirely predictable; after
all, when have employers ever argued for more rapid rises in wages? On the other hand, these
recent policy changes probably reflect an increasingly widespread view amongst employers
that the NMW is already ‘high enough’ in relation to median earnings (the mid-point in the
earnings distribution with half of employees earning more and half earning less). Although we
might reasonably ask why the NMW should not rise in line with average earnings if it is to retain
its real value in the labour market? No doubt such matters will be high on the agenda of the
Low Pay Commission as they consider their recommendation for the NMW uprating scheduled
for October 2007.
On the trade union side one can detect a degree of impatience and a strong desire for further
sustained increases in the level. Unison, for example, have suggested that the NMW should
become a ‘living wage’, guaranteeing an income that enables individuals to lead a civilised
life as full participants in the economy and society. Whether this is a realistic proposal will be
considered further in this paper, but it might be viewed as a rather significant shift in union
See Cable, The Economy. Future Assets, Future Liabilities in Astle et al (ed) Britain After Blair. A Liberal Agenda (2006)
The National Minimum Wage. Retrospect and Prospect
Introduction
attitudes to the NMW. Similarly, some trade unions (principally the GMB general union) have
continued to press for the abolition of the lower rates for young workers, suggesting that the
full adult rate should be paid from the age of eighteen for no other reason than it is unfair to
discriminate on the grounds of age; their case is that workers should receive the same pay for
the same work (the ‘rate for the job’) no matter how old they may be. On the other hand, some
trade unions are concerned that the recent significant increases in the NMW are beginning to
reach the level of negotiated wage rates, potentially undermining the value of the union card.
Whereas the minimum wage debate in the mid-1990s was fairly clear – were you in favour
or against? – the discussion has now become increasingly confused. The broad coalition that
backed the introduction of the minimum wage is beginning to look a little threadbare and
its various members are offering rather different policy prescriptions for the future. Viewed
alongside the rise in employer scepticism, it is reasonable to predict that the NMW could be
subject to a little more turbulence over the next two to four years. This is not to suggest that
we are about to witness a crisis of confidence; after all, there is a ‘lowest common denominator’
consensus on the principle of a floor under wages. But there can be little doubt that more
precision is needed in articulating the objectives of the NMW, identifying its limitations as an
instrument to eliminate low pay and devising new policy interventions that might, alongside
the NMW, enhance the effectiveness of current policies. Most importantly perhaps, there is
a compelling case for the government to make clear the distinction between the NMW as
a labour market floor and the notion of the ‘living wage’ as an adequate income to support
individuals (or a family).
This paper should be read as a contribution to the continuing debate about the NMW. It
evaluates the process of implementation since 1999, considers some of the current proposals
for change and offers a positive prospectus for further reducing the reliance on low pay. At
the core of the argument is the belief that the government should make rapid progress in
implementing their 2005 manifesto commitments. These very useful policy proposals have
virtually disappeared from the public conversation in the recent past but are nonetheless of
great importance as we look to the future.
Furthermore, we will examine the effects of the NMW on employment and inequality, reviewing
the experience in other countries to inform our discussion of youth rates and the overall
economic impact. A considerable body of research sponsored by the Low Pay Commission will
10
The National Minimum Wage. Retrospect and Prospect
Introduction
assist us in this endeavour. Much of this work is now recognised as ground breaking and has
both supplemented and broadly confirmed the US research on the impact of minimum wages.
But before embarking an analysis of policy over the last seven years we need to spend a
moment recalling the development of minimum wage policy in the UK over the course of more
than a century. While it is right to say of course that the UK’s first national minimum wage was
introduced in 1999, governments of all political hues evinced some concern for the situation
of the low paid over a long period. Indeed, the years from 1993-97 were an anomaly because
for the first time since the 1890s the UK had no provisions of any kind to fix a wage floor and
protect the most vulnerable against exploitation. As we shall see, this had a large impact on
the earnings of the lowest paid, with effective wage cuts being implemented for much of this
period.
Perhaps I can offer a final word at this point on the importance of my own experience as a
member of the Low Pay Commission from 2000-2004. It is somewhat unusual for a Work
Foundation paper to draw directly on the author’s personal experience and while this is
certainly not a nostalgic look at the course of policy development, the author’s voice is perhaps
a little more noticeable than one would normally expect in paper of this kind.
The National Minimum Wage. Retrospect and Prospect
11
Chapter 2. A brief history of minimum wages in the UK
Reference has already been made to the UK’s long history of minimum wage fixing and this
chapter sets out in brief the course of policy development from the 1890s to the present day. It
is important to understand that until the late twentieth century the intervention of the state in
the process of wage formation was in practice a permanent feature of the UK’s labour market
even though, somewhat paradoxically, policy assumed that such intervention was a temporary
phenomenon. It was only during the period 1993-99 that the UK had no arrangements in place
to establish a floor in the labour market.
Consistent with the generally voluntarist approach to industrial relations the state only took
action when it was clear that trade unions and employers were either unwilling or unable to
reach agreements that improved the position of the most vulnerable employees. However,
even where the state did intervene the expectation was that collective bargaining would
eventually develop a level of maturity – or in the worst cases would come into existence – so
that explicit intervention was no longer required. As the labour lawyer Otto Kahn-Freund put it.
All statutory methods of wage fixing and other conditions of employment are by the law itself
considered as a second best. All British labour legislation is, in a sense a gloss or footnote to
collective bargaining.
In other words the purpose of these ‘auxiliary laws’, in Kahn-Freund’s well-chosen expression,
was to support and promote the application of collective agreements between trade unions
and employers. Certainly there were major differences between the principal political parties
in their attitudes to and relationships with the trade unions as institutions. But the consensus
was that collective bargaining was a collective good for employers, workers and government,
minimising disputes in the workplace and allowing for an albeit imperfect form of economic
democracy. Further support for this view could be found in the terms of reference of the
Advisory, Conciliation and Arbitration Service (ACAS), which contained an explicit obligation to
promote orderly collective bargaining – subsequently removed by the 1979-97 Conservative
governments.
This general orientation of policy was clear from the late nineteenth century through to the
middle 1970s. It helps to explain why the UK never introduced a national minimum wage over
the period and why some trade unions were rather resistant to the notion. Simply expressed,
many trade unions (most notoriously the Amalgamated Union of Engineering Workers - AUEW)
saw the NMW as placing a cap on wage developments. Far from being a floor, it was believed
12
Kahn-Freund, Labour Law, Old Traditions and New Developments (1968), p.32
The National Minimum Wage. Retrospect and Prospect
A brief history of minimum wages in the UK
that increases in the NMW would become either a ceiling on wage increases or an informal
indicator of the ‘going rate’ or, less pejoratively, the sustainable rate that union negotiators
would be compelled to accept by force of circumstance.
The fair
Having established the context (which differs significantly from the experience of continental
wages
European countries) we begin our minimum wage story in 1891 when the House of Commons
resolutions
adopted the first Fair Wages Resolution (FWR). This was not a law strictly so called, but was
rather a statement by Parliament that central government should observe certain principles
in the procurement of goods and services. It responded to the concern that, in the absence
of an instrument of this kind, the government might otherwise find itself doing business with
suppliers that failed to offer decent conditions of employment.
The Resolution required that any potential supplier to government had to observe the
prevailing rates of pay in the relevant trade and industry. If a supplier failed to do so then they
would run the risk of being denied the opportunity to compete for government contacts.
Various changes were made to the FWR over time to close loopholes and remedy perceived
weaknesses. The most recent resolution was adopted in 1946 and was reflected in the drafting
of Convention No.94 of the International Labour Organisation (ILO) on labour clauses in public
contracts.
The FWR had two standards for determining the appropriate level of wages. The first assumed
that there was a relevant multi-employer collective agreement setting wages in that industry
or sector; the negotiated rate for that particular group of workers (the ‘recognised level’) had
to be observed by any contractor undertaking work for the government. And the second was a
benchmark to be used when there was no relevant collective agreement; in that case reference
had to be made to the ‘general level’ of conditions observed by employers whose general
circumstances were similar in that trade or industry. Latterly, disputes about the application of
the Resolution were determined by the Central Arbitration Committee (CAC) (previously the
Industrial Court), although ACAS would be invited to conciliate before an adjudication by the
panel.
The first Thatcher government denounced the ILO Convention in 1981 and rescinded the
1946 resolution in 1983, ending a ninety-year consensus that public procurement had a role
in promoting decent employment standards. This was a policy change of huge practical and
symbolic significance.
For a more developed account of the full range of ‘auxiliary laws’ see Wedderburn, The Worker and the Law (1986)
pp343-350. The argument presented here draws heavily on his approach. Perhaps the best comprehensive account of
fair wages policies can be found in Bercusson, Fair Wages Resolutions (1978)
The National Minimum Wage. Retrospect and Prospect
13
A brief history of minimum wages in the UK
As Kahn-Freund noted in the 1970s.
The fact is that by what seemed to be general consent no governmental measure had over
the last three quarters of a century done more to spread the habit of observing collective
agreements than did these Fair Wages resolutions, covering as they did a very wide sector of
the economy, especially through the inclusion of sub-contractors.
The signal to employers could not have been clearer. Promoting collective bargaining was
no longer an object of public policy; the government was not particularly concerned about
wage developments at the bottom of the labour market, price was the principal determinant
in contract allocation and quality of employment had become an ‘irrelevant’ consideration.
Denunciation of the 1946 resolution was one of the earliest steps on the path of labour
market deregulation, the eventual consequence of which was an irresistible demand for the
introduction of the NMW.
Statutory
An informed observer would have been unsurprised by this turn of events, not just because
extension
the government’s ideological orientation had been clear from the outset, but also because
of collective
the first Thatcher government had already repealed (in the Employment Act 1980), provisions
agreements
analogous to the FWR that extended the application of collective agreements as minimum
standards across the private sector. These instruments had their origins in measures adopted
during the two world wars (in 1915 and again in 1940), which effectively made industrial action
unlawful and provided for the compulsory arbitration of disputes.
In the period after 1945 the prohibitions on industrial action were removed but some
provisions on unilateral arbitration were retained and, with the exception of a brief period
in 1958, remained in place until 1980. Initially, the regime operated by making use of a
standard analogous to the ‘recognised level’ benchmark in the FWR. In other words, collective
agreements could be extended to employers who were not party to the agreements if those
employers were failing to observe the ‘recognised’ terms and conditions established by
organisations of workers and employers in that industry representing ‘a substantial proportion
of the employers and workers involved’. Lord Wedderburn captured the intention of the
legislation with great clarity.
14
Kahn-Freund, Labour and the Law, 3rd Edition (1983)
Wedderburn, op cit, p.344
The National Minimum Wage. Retrospect and Prospect
A brief history of minimum wages in the UK
By this means a less than prodigal son could be called back into the collective fold. The days of
undercutting could be numbered; for an employers’ association could report a claim against a
black-sheep employer, as well as a trade union.
Schedule 11 of the Employment Protection Act expanded the ‘recognised level’ jurisdiction in
1975, by allowing the CAC to make an award even where there were no ‘recognised’ terms to
enforce. These new provisions were very similar to the ‘general level’ formulation of the FWR,
referring to terms ‘not less favourable’ than the level observed by employers for similar workers
in the trade or industry in question.
Even though these arrangements were used relatively sparingly, they were effective and had
the intended ‘supportive’ or ‘auxiliary’ effect. In 1979, the last full year the provisions were
in operation, there were 228 awards on the general level (covering 117,000 workers) and
47 awards (covering just over 21,000 workers) for the recognised level. Nevertheless, it was
still suggested by the new Conservative government that these measures were responsible
for creating inflationary pressure by allowing unions to bid up ‘market’ rates. According to
the government, the terms and conditions on offer before an award was made had proved
sufficient to enable employers to recruit and retain an appropriately skilled workforce. This
being the case, in the government’s mind there was no compelling argument for any further
intervention by the state, the CAC or any other body.
While it was true that some trade unions had used the ‘general level’ provisions to avoid the
limitations of the Labour government’s incomes policy, there was no strong evidence that
these provisions had an important inflationary effect. Viewed alongside the FWR, there can be
little doubt that these instruments significantly widened the coverage of collective bargaining;
of course, it was this effect that the Conservative government wanted to restrain, given their
ideological conviction that trade unions were the root cause of the ‘British disease’.
Wages
councils
We have already noted that the introduction of the FWR was a major departure in policy in
the late nineteenth century, which represented a significant intervention in the labour market.
However, it was an inadequate instrument to prevent ‘the evils of sweating’ in those parts of the
private sector beyond the reach of government procurement where collective bargaining
Ibid, p.345
Ibid
Recent research by the OECD has explored the impact of ‘extension’ mechanisms in developed countries and can
find no clear pattern to support the case that they have a negative impact on employment or overall economic
performance. See OECD Employment Outlook (2006)
The National Minimum Wage. Retrospect and Prospect
15
A brief history of minimum wages in the UK
was weak. This led the Liberal government to introduce a system of wages boards (later wages
councils) in 1909. Once again, the primacy of collective bargaining as the preferred form of
regulation was inherent in the design of the policy. The councils consisted of representatives of
employers and unions in an industry along with ‘independent’ representatives. Essentially, the
councils were intended to reflect the standard process of negotiation with unions presenting
claims and employers responding. Deadlock was resolved when the independent members
decided to support one side or the other. In most cases if agreement could not be reached then
the independent members would side with the employers.
The clear intention of the policy was that wages councils would be abolished at the point when
unions were strong enough to undertake normal collective bargaining. As Wedderburn pointed
out.
In one sense, the first objective of any wages council should be to commit suicide.
Nevertheless, despite this objective the councils became a permanent feature of industrial
relations, largely because trade union organisation remained persistently weak in the ‘sweated
trades’. This reinforced the view of unions like the Transport and General Workers (TGWU)
and the AUEW that statutory wage fixing machinery could impose a ceiling on what might
be achieved though collective bargaining and limited the scope for union organisation in
the sectors covered – why would workers want to join a union if they already enjoyed the
protection of a wages council? Concern about the role of wages councils was manifested in an
antipathy to the introduction of a national minimum wage where, as we have already observed,
the concerns about the ceiling and the potential impact on union organisation were even more
acute.
The 1974-79 Labour government introduced legislation that allowed for wages councils to be
converted into ‘statutory joint industrial councils’ in a process of transition to free collective
bargaining. An SJIC was a wages council without the independent members and in essence
these institutions were designed to provide a transitional stage between a wages council
and full collective bargaining. Negotiations would take place in a statutory framework and
agreements would have legal force across a sector. The SJIC would be abolished once the
process was well established and the parties could operate without the shadow of the law. In
practice these provisions were rarely used and were repealed by the Thatcher government.
Nevertheless, they represented a powerful demonstration of Labour’s commitment to
16
Wedderburn, op cit, p.352
The National Minimum Wage. Retrospect and Prospect
A brief history of minimum wages in the UK
voluntarism and a clear public policy preference for collective bargaining as the best
mechanism for determining wages.
Consistent with their free market ideology, the Thatcher and Major governments were hostile to
wages councils. They adopted the orthodox view that wages councils raised the price of labour
beyond its marginal product and were therefore a cause of unemployment – in other words, as
a result of minimum wages, the price of labour was raised above the value of the output that
those workers produced (minus the cost of wages), so employers had no choice but to reduce
the number of workers they employed.
However, while this view may seem to rest on a fundamental principle of neo-classical
economics, it is based on the contested assumption that all markets are perfectly competitive
and, in the absence of any inflexibilities like minimum wages, that markets will clear so that
all those who want to work can find work. In other words, unemployment occurs when wages
are too high. And for employment to recover wages must fall to the level required by the
new economic equilibrium. In other words, workers must price themselves back into jobs by
accepting reductions in real wages. We will explore this argument in a little more detail below,
but for the time being we need do no more than note that there was no evidence to support
this analysis in the UK, quite the contrary in fact.10 Nevertheless, these governments were
notorious for not letting troublesome facts get in the way of ideological commitments. In their
view the wages councils had to go.
The attack on the system began in 1986 when workers aged under 21 were removed from the
scope of wages councils orders. Furthermore, the terms of reference of wages councils were
restricted to fixing a single adult rate of pay, whereas before it was possible to specify overtime
rates and other conditions of employment. Wages councils were finally abolished by the Major
government in 1993, ending more than a century of state intervention to protect the lowest
paid workers.
The effect of wages councils abolition was significantly to increase the number of low paid
workers in the UK. Figure 1 plots the number of very low paid workers in the economy (defined
as those earning less than 40 per cent or 50 per cent of the median) over the period from 19752005. There was a gentle upward movement in the number of low paid throughout the 1980s,
but a really significant increase appeared after the abolition of the wages councils in 1993.
See for example Manning et al, Wages Councils. Was There a Case for Abolition? BJIR (1993) 31, 515-530 and Dickens et
al The Effect of Minimum Wages on UK Agriculture, Journal of Agricultural Economics (1995), 49, 1-19
10
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17
A brief history of minimum wages in the UK
Similarly we can see a huge reduction in the number of low paid workers since the introduction
of the NMW in 1999. The evidence is very clear – policy decisions can have a profound effect on
the labour market experiences of the most disadvantaged.11
Figure 1. Low paid workers in the UK 1975-2005
6%
6%
5%
5%
Less than 50%
of median
4%
4%
3%
3%
2%
2%
Less than 40%
of median
1%
1%
0%
0%
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
Source. NES, ONS
Even though trade unions resisted the abolition of the councils they recognised that there were
serious flaws in the regime. Workers were often unaware of the sector in which they worked
and, despite the obligation on employers to post rates of pay in the workplace, were often
ignorant of the relevant rate. Similarly, the Wages Inspectorate was weak and under resourced.
There was widespread non-compliance with wages councils’ orders. By 1993 the TUC was also
formally committed to the introduction of a NMW – of which more is said below.
The net effect of all these reforms was to dismantle a system that had been patiently
constructed – to some extent by trial and error - since the 1890s. No doubt critics were
at least partly right to say that the system was more appropriate to an earlier social order
where the labour market was predominantly male, where women stayed at home and where
manufacturing trade unions concluded collective agreements covering the vast majority of
workers. But this did not demand the demolition of all the institutions that established a floor
in the labour market. Indeed, an appropriate policy response would have been to extend
The fall in the number of low paid in the 1975-77 period was a consequence of the Labour government’s incomes
policy, which had a generally egalitarian effect, contrary to the views of some supporters of a minimum wage discussed
later in this chapter
11
18
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A brief history of minimum wages in the UK
extend the coverage of wages councils to growing low wage sectors and press ahead with the
establishment of SJICs. However, the trade union response to the growth of low pay by the mid1980s was not to energise (or resurrect) institutions that had already proved their effectiveness
but to look for another remedy entirely, the national minimum wage.
The growth
of support
for a
national
minimum
wage
Trade union support for a NMW began to emerge in the early 1970s. The earliest proponents
were Bernard Dix and Alan Fisher, two leading officials of the National Union of Public
Employees (NUPE) and the authors of Low Pay and How to End It, published in 1974.12 At that
time low paid public sector employees were amongst the lowest paid workers in the UK.
Fisher and Dix argued that, far from being a ceiling on negotiators’ expectations, the national
minimum wage would establish a strong foundation for collective bargaining and would
improve the position of the lowest paid public sector workers.
In part this was an admission of weakness by public service unions. They had simply been
unable to reach agreements that, in their view, allowed public servants to benefit from rising
national prosperity. However, as we shall see, the case as it was initially presented had little
impact on the thinking of many of the large general unions organising in the private sector
– beyond confirming their opposition to the policy of course.
A central element of Dix and Fisher’s argument was that the Labour governments of 196470 had missed the opportunity to tackle low pay, poverty and inequality. Simply expressed,
the government had capitulated to ‘economic orthodoxy’ and had failed to use a large
parliamentary majority to ‘relate its social policies to economic needs and use them as a
spearhead to attack the real problems confronting the country’. Thirty-three years on we may
view much of this as mostly wishful thinking. Those governments confronted profoundly
difficult economic problems – balance of payments crises, speculative pressure on sterling,
devaluation, and inflation – and it was hardly surprising that what would otherwise have
been high social priorities were given less attention. But even if we accept that the Dix and
Fisher critique was a little over-ripe, there was still something to be said for the argument that
collective bargaining was failing to protect the low paid and that existing low pay institutions
(like wages councils) were increasingly ineffective.
A supplementary argument advanced by Fisher and Dix was that both the Wilson government
and its Conservative successor were far too willing to use in-work benefits as a supplement to
low pay. In their view this policy undermined collective bargaining, by enabling employers to
12
See Fisher and Dix, Low Pay and How to End It. A Union View (1974)
The National Minimum Wage. Retrospect and Prospect
19
A brief history of minimum wages in the UK
say. ‘your members don’t need higher wages because they can live on means tested benefits’,
and created a complex system that failed to support the poor families that it was designed to
help. As we shall see later, this relationship between benefits and the NMW remains a concern.
Indeed, advocates of a ‘living wage’ sometimes seem to take the view that all in-work benefits
ought to be abolished so that employers bear the full burden of providing all families, no
matter what their household circumstances, with a wage on which that family can live. For the
time being, however, government policy is very clear. The minimum wage and tax credits are
interlocking policies, with the NMW ensuring that tax credits do not become an over-generous
subsidy for low wages and poor employment practice.
Even though Dix and Fisher published their book in 1974, NUPE’s position had been clear from
the middle of the 1960s; indeed, there had been regular debates on the low pay issue at both
the TUC and the Labour Party conference. For example, at the 1966 TUC Congress Alan Fisher
argued that an incomes policy was only acceptable if it included a national minimum wage
as part of the overall settlement. While some other unions were willing to embrace the NMW
policy, albeit with varying degrees of enthusiasm, most of the TUC’s affiliates were happier with
the idea that a ‘minimum wage’ should be achieved through collective bargaining13. Arguments
for a statutory national minimum wage fell on stony ground even though, at the same time, the
TUC was adopting progressively higher collective bargaining targets for minimum earnings.
In the words of a TUC discussion document from 1970.
The majority of unions were not in favour of the government introducing a statutory minimum
before negotiators had had the chance of proving that they could do the job themselves within
the context of union guidelines and the TUC’s declaration.14
Moreover, the document noted that governments had failed to give wages councils ‘positive
terms of reference’ suggesting that ‘the state would take a restrictive view of its role in tackling
the problem of low pay’. On balance then, collective bargaining was a superior solution to the
low pay problem.
A similar view was taken by the Labour Party Conference when the issue was debated in 1973.
USDAW, the shop workers’ union and the GMWU general union had both adopted positions that were moderately
supportive of the minimum wage
14
Quoted in Fisher and Dix, op cit 103. The intention was that the TUC would determine a target for negotiators to
achieve through collective bargaining
13
20
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The National Executive Committee secured an overwhelming rejection of the policy for a
statutory national minimum wage on the grounds that.
There are some difficulties in very rightly opposing government intervention in wages on
the one hand [the Conservative government’s incomes policy] and appealing for their [sic]
assistance on the other [NUPE’s demand for a national minimum wage].15
The trade union voice of opposition was expressed most articulately by Sir John Boyd of the
AUEW, although he confessed that he was ‘embarrassed’ by what he had to say.
To support this resolution many unions in the TUC, including my own, would be required to
commit a somersault…it seems ludicrous if, on the one hand we are going to conduct such a
strong militant campaign [against the Conservative government’s incomes policy]…and then
say ‘yes’ to the next Labour government, ‘We want you to interfere with collective bargaining
and we want you to lay down a legal minimum’.16
Meanwhile, other developments were taking place outside the unions and the Labour Party
that would put low pay close to the top of the political agenda by the middle 1980s. For
example, a particularly important development was the establishment of the Low Pay Unit
(LPU), a non-governmental organisation funded by some trade unions, local authorities and
members’ subscriptions. It had an explicit mission to campaign for the minimum wage as an
instrument to eliminate in-work poverty and promote greater income equality. In particular, the
LPU argued that wages councils offered only limited protection (not all low paid sectors were
covered) and the complexity of the orders made them hard to enforce.
While backing for the NMW may have been growing throughout the 1970s, broad based union
support only crystallised when it became clear that Thatcherism was widening the distribution
of earnings in the UK and eroding the effectiveness of collective bargaining.17 Formal TUC
endorsement for the NMW was only secured in 1986 when the TGWU and other major unions
modified their stance. This led to a change in the Labour Party’s position and the adoption of
a commitment to a NMW fixed at ‘half male median earnings’ – the policy on which Labour
fought the 1992 election.
Tom Bradley MP in a speech to the 1973 Labour Party Conference, quoted in Fisher and Dix, op cit 46
Ibid
17
For an account of growing income inequality in the 1980s and more recent trends see Jones, The effects of taxes and
benefits on household income, 2004/05, ONS (2006)
15
16
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21
A brief history of minimum wages in the UK
It was not clear at the time that the trade union supporters of the NMW knew just how radical a
step they were taking. Most importantly perhaps, the adoption of the NMW represented a clear
break with voluntarism and those policies that had worked relatively well in the past. We might
give two reasons for the rather limited debate about the consequences of this policy change.
There could be little doubt, for example, that public sector trade unions (particularly NUPE) had
never believed that the old system worked to their advantage. In the early 1970s low pay was
as much of a problem in the public sector as the private sector – this was a period before the
burgeoning of low wage employment in private services – and subjection to a relentless policy
of public sector pay restraint meant trade union bargaining power was weak.18 Similarly, the
experience of the 1980s meant that unions like the TGWU began to realise that their position
was weak too and that in the absence of an effective wage floor there would be downward
pressure on negotiated rates, particularly at a time of high unemployment.
Nevertheless, the argument still stands that unions were a little unclear whether they were
making a significant move away from voluntarism; and this apparent confusion can help to
explain how policies adopted at the same time sometimes seemed to be pulling in different
directions. For example, by the early 1990s trade unions and the Labour Party were committed
to the reintroduction of a statutory procedure for trade union recognition, learning from the
weaknesses of the regime that existed between 1975-80. The justification for the recognition
law was apparently founded on the orthodox notion that collective bargaining was a collective
good that ought to be promoted by public policy. On the other hand, both Labour and the
unions were silent on the question of ‘auxiliary laws’ and both were committed to the NMW,
which superseded any earlier belief that collective agreements offered the most robust
protection against low pay. This stance was hardly consistent with Kahn-Freund’s suggestion
that in the UK the law was seen as ‘second best’.
Practical politics may be the best explanation for this fumbling towards a new settlement.
Polling evidence suggested that the ‘trade union question’ remained a big electoral negative
for Labour. Even though by this time the unions and the Labour Party had apparently
accommodated themselves to the Thatcher trade union reforms, there was still great
nervousness about any ‘return to the 1970s’, an obsession that assumed even greater
salience after Tony Blair’s election as leader of the Labour Party in 1994. A degree of caution
was therefore understandable, but it did lead to some policy tension and accusations of
inconsistency. Twenty years on from the adoption of the NMW as a policy objective it is not
wholly inaccurate to say that the tension remains unresolved.
Although public sector unions finally deployed their power, often rather unwisely, during the 1978-79 ‘Winter of
Discontent’ paving the way for almost twenty years of Conservative government
18
22
The National Minimum Wage. Retrospect and Prospect
A brief history of minimum wages in the UK
Two further observations need to be made at this point. First, even though the minimum wage
policy was popular with the electorate, the Conservative Party managed to turn opposition to
the NMW into an advantage in the 1992 general election campaign. Predictions of large job
losses following implementation of the NMW (and widespread employer opposition) damaged
Labour’s case. Tony Blair, who was Labour’s employment spokesperson at the time, found it
difficult to rebut the charge that this was a well intentioned but irresponsible policy that would
adversely affect precisely those people it was designed to help.
Second, the ‘half male median’ formula was not calculated in a straightforward or robust way
and could be easily attacked for fuzziness and ambiguity. It had been constructed by the LPU
to generate the highest possible minimum wage figure and was based on rather dubious
arithmetic (see Box 1 below)
Box 1. Calculating half male median earnings
The formula was constructed as follows and used the data from the official New Earnings Survey (NES).
At that time the NES underestimated the number of low paid workers in the economy because it only
recorded the earnings of those workers above the income tax threshold. It was not then (and is not
now) the best data to use in assessing the level of low pay in the UK economy.
Take male median weekly earnings including overtime.
Divide by the average number of weekly hours worked by men and women excluding overtime.
Divide by two = Half male median earnings.
The inconsistency is obvious. Overtime is included on the earnings side of the equation but not the
hours side. The hours worked by both men and women (including part time workers) are used as the
denominator but only male earnings are used as the numerator. Advocates for the formula found it
hard to explain these inconsistencies
As commentators sympathetic to the case for a NMW pointed out, advocates of the formula
could not answer the question why half, why male, why median? The most serious charge
levelled against the policy was that overnight it would take the UK from having no national
minimum wage at all to having the highest minimum wage in the developed world. Whatever
one might think of the case for minimum wages in principle, this would inevitably create a
major labour market shock, which carried with it the risk of negative employment effects.
The National Minimum Wage. Retrospect and Prospect
23
A brief history of minimum wages in the UK
Preparing
Following his bruising experience in the 1992 campaign, Tony Blair was determined to
the ground.
neutralise the NMW as a hallmark of Labour’s economic irresponsibility and turn the policy
1994-97
to the Party’s advantage. The initial step (in 1995) was to commit the Party to a NMW fixed
following a recommendation from a Low Pay Commission (LPC) on which the social partners
would be represented. To begin with this appeared to be nothing more than a short-term
tactical manoeuvre and a device to abandon the rather unhelpful ‘half male median’ formula.
There was a widespread view that no further work would be done on the detail of the policy
because ‘safety first’ dictated woolly rather than precise commitments. As the experience of the
1992 campaign proved, detailed policies could be hostages to political fortune.
Nonetheless, the TUC was persuaded to support the establishment of the LPC on the grounds
that the proposal was consistent with the trade union commitment to national social
partnership. Yet at the same time the TUC retained the commitment to the half male median
formula, which contributed to strained relations with the Party both before and after the
1997 election. One might interpret this as a classic TUC fudge; those unions committed to the
formula were placated, but some support was also given to the Labour Party’s effort to develop
a more flexible policy. The settlement was, as ever, only short-term, although it allowed the
Labour Party and the trade unions to unite around the principle of the NMW during the 1997
election campaign. But it also meant that trade union expectations remained high, with many
prominent leaders taking the view that the LPC should aim at a figure close to the formula
(approaching £4.50 in 1999). Managing such expectations was a hugely challenging task for
the TUC office and helps to explain why trade unions consistently complained about the ‘low’
introductory level of the NMW (£3.60 in April 1999)
Ian McCartney MP (now the Minister for Trade) was given responsibility for developing the
policy in the 1994-97 period. He took the brief seriously and gave detailed consideration to the
membership of the LPC, the terms of reference and possible working methods. Furthermore, he
devoted real energy to developing a comprehensive programme for practical implementation
of the NMW. This meant that once Labour was in government (and McCartney was the minister
responsible at the Department of Trade and Industry) it was relatively straightforward to design
the minimum wage legislation.
At the same time, the Labour Party took the battle to employers and developed a ‘business
case’ for the NMW. Essentially this amounted to an argument for fair competition and followed
Winston Churchill’s case for Wages Board in 1909 that, in the absence of minimum wage
24
The National Minimum Wage. Retrospect and Prospect
A brief history of minimum wages in the UK
protection ‘the good employer will be undercut by the bad and the bad employer will be
undercut by the worst’. It would be wrong to suggest that this led to an upsurge in employer
support for the NMW; majority opinion was at best suspicious and a small minority continued
to be atavistically hostile. Nevertheless, the commitment to the LPC did moderate explicit
opposition during the 1997 election campaign by making it clear that employers had a
stake in the process and could influence the outcome. Of course, employers also had a keen
appreciation of the electoral realities and were much more circumspect in their opposition
to the NMW than had been the case in 1992. While the CBI remained somewhat hostile ‘in
principle’, Adair Turner, their Director-General, was very skilful in ensuring that employers
were well positioned to engage with policy implementation should there be a change of
government.
Far from being a negative for Labour during the 1997 election campaign the NMW was a source
of growing support for the party. The Conservatives tried to make the arguments that had
worked so well in 1992, but it became increasingly difficult to ‘predict’ specific job loss figures, if
only because the Labour Party had worked so hard to avoid any commitment to a precise level.
This advantage was reinforced by the weakening of the Conservative government’s reputation
for economic competence following sterling’s unceremonious ejection from the ERM.
If the NMW had any effect on the outcome of the 1997 election it was to energise Labour’s core
vote and appeal to more affluent electors who believed that the trend towards growing income
inequality had to be halted and reversed. The political case was advanced on the grounds of
both fairness and economic efficiency and, while the argument for the NMW remained highly
contested, it was much less of an issue than in the Spring of 1992 when the economy was in
recession and unemployment was higher.
In the immediate post-election period the new government therefore had a very clear
programme for the implementation of the NMW. Different interest groups were advancing clear
positions about the level with a view to establishing some limits on the political possibilities
before the Low Pay Commission began its work in earnest. What this meant for the process
of implementation is considered further in Chapter 4. However, we will have a much better
appreciation of these dynamics if we also understand ‘the new economics of the minimum
wage’ that began to emerge in the middle 1990s. It is to this analysis that we now turn.
The National Minimum Wage. Retrospect and Prospect
25
Chapter 3. The ‘new’ economics of minimum wages
The conventional wisdom about minimum wages was that they were at best a necessary evil
and at worst a job-destroying intervention in the labour market. For a considerable period
orthodox economists dominated the argument with their view that markets accurately
determine the price of labour, that unfettered markets clear and that any interventions in
markets will inevitably produce damaging consequences – unemployment and inflation.
As we noted earlier, conventional economic models assume that minimum wages raise the
cost of labour above the marginal product of labour, leading all rational employers to dismiss
workers and reduce costs. This view exercised great influence over the Thatcher and Major
administrations and was warmly embraced by the Republican Party in the USA.
Of course the belief that minimum wages constituted a labour market ‘rigidity’, which made
wages ‘sticky downwards’ and prevented necessary real wage reductions to return the
economy to equilibrium, proved most popular when conventional demand management
policies seemed unable to deal with ‘stagflation’ – that politically lethal cocktail of rising
unemployment and high inflation that challenged governments of both left and right in the
1970s. The resurgence of neo-liberal economics filled the vacuum left by the crumbling of the
post-war consensus. New Right thinkers had little difficulty in embracing the zeitgeist that most
of the institutions built so patiently (if inadequately) over the previous forty years were either
completely dysfunctional or damaging to the UK’s prosperity.
A common-sense response is to say that growth rates were generally higher (in the 1950s
and 60s) and unemployment lower at a time when labour markets were more rigid. But
this observation enjoys the benefit of hindsight and those defending the importance of a
floor under wages found at the time that their ammunition was running low. Of course the
arguments against minimum wages were nothing new. Opposition had emerged on each
occasion that the state sought to establish a floor in the labour market. Yet in many of these
cases the opponents of regulation were on the defensive and supporters of minimum wages
more confident.
For example, Franklin Roosevelt railed against ‘economic royalists’ at a time when markets were
seen to have failed, when business was blamed for the economic problems confronted by the
developed economies and when action by the state was seen as the appropriate remedy for
economic stagnation. In 1937 he set out his argument for a federal minimum wage in the USA
by making both an ethical and an economic case.
26
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
I am a firm believer in fully adequate pay for all labour. But right now I am most greatly
concerned in increasing the pay of the lowest-paid labour – those who are our most numerous
consuming group but who today do not make enough to maintain a decent standard of living
or to buy the food, and the clothes and the other articles necessary to keep our factories and
farms fully running…I think that farsighted businessmen already understand and agree with
this policy. They agree also that no one section of the country can permanently benefit itself,
or the rest of the country, by maintaining standards of wages and hours that are far inferior to
other sections of the country.19
What is most striking about the statement is the belief that economic recovery can be
reinforced by improvements in the purchasing power of the lowest paid, which is self-evidently
an appeal to business, combined with a deep commitment to limiting the worst excesses
of income inequality, ‘no one section of the country can permanently benefit itself’, which is
self-evidently designed to appeal to low paid workers by offering a process of ‘levelling up’.
Even so, introducing the US federal minimum wage in 1938 was not without controversy and
the president had to make a serious investment of political capital to secure support for the
policy. Despite the success of the UK’s minimum wage since 1999, it is difficult to imagine any
mainstream British politician making the same case today with quite as much enthusiasm or
commitment.
Winston Churchill advanced very similar arguments when he established the wages boards.
In his view the moral case for action was compelling, business could afford to pay, and the
government was confident that its social liberalism, with a more active role for the state,
represented the future. It was the advocates of laissez-faire who represented the past.
In both these cases the progressive forces were responsible for making the political weather.
No one could accuse either Churchill or Roosevelt of a lack of intellectual self-confidence. The
contrast with the 1970s and 80s could not be greater. The centre-left was in retreat and those
who we might now describe as market fundamentalists were able to establish a hegemonic
position.
It is important to bear this in mind as we consider the trajectory of the minimum wage
discussion over the last twenty years. Indeed, as we saw in the previous chapter, proponents of
the NMW in the UK began to believe in the early 1990s that they were winning more than
Roosevelt, On legislation to be recommended to the extraordinary session of Congress, Radio Address, 12 October 1937
at http.//www.fdrlibrary.marist.edu/101237.html
19
The National Minimum Wage. Retrospect and Prospect
27
The ‘new’ economics of minimum wages
just the moral argument. Just why and how did this happen? What was it that changed the
public conversation? To answer these questions we will need to explore some rather complex
ideas in labour economics, not necessarily to offer any startlingly new insights, but to explain
how a growing body of empirical research, initially in the USA and then in France and the UK,
reshaped the terms of the minimum wage debate. This is, more than anything else, a story
about how the tools of economic analysis can be used to produce startling and unorthodox
conclusions. Supporters of the minimum wage began to find, contrary to their expectations
perhaps, that for once the economics was on their side.
Minimum
Viewed from a rather parochial UK perspective, it was very clear that the Conservative Party
wages cause
enjoyed considerable success in convincing the public that minimum wages caused job losses.
unemployment
And we have already encountered the orthodox argument that in a competitive labour market
don’t they?
(ie where competition is perfect and information is perfect) employers have to pay the market
wage (because otherwise nobody will work for them) and employees receive a wage equal to
their ‘marginal product’.
What this means in theory is that employers have to determine how many employees they
need to generate the right level of output and the highest level of profits. The ‘marginal
product’ is defined as the additional value created by one additional employee minus the cost
of recruiting that employee (in other words the wage that is paid). An employer will recruit
that worker if the extra output that is produced balances with the wages to be paid and also
generates profits for the employer. At the heart of this model too is the idea that the employer
does not determine the level of wages. How much workers get paid is instead a natural
consequence of the laws of supply and demand operating in an unconstrained market. If an
employer pays less than the ‘market rate’ then all the employees will leave for more attractive
employment elsewhere.
On this view the introduction of a minimum wage inevitably increases the cost of labour but,
other things being equal, leaves output at the same level. If the cost of labour is such that
profits can no longer be made then employers will reduce the number of employees to the
level necessary where employees are paid their marginal product. Once this has been achieved
then the business will return to profitability. As we shall see, this may sound persuasive in
theory, but markets rarely achieve the platonic status of perfect competition and, for this reason
alone the theory may not necessarily explain with any accuracy what is happening in the real
economy.
28
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
For example, it is generally the case that employment contracts are characterised by an
asymmetry of information – as well as an imbalance of power. It is much easier for an employer
to find a replacement worker than it is for a worker to find another job. The employer will have a
fair idea of where to look for recruits and will be able to carry the costs of training. An employee,
however, may not be aware of all the appropriate job opportunities available even after
extensive job search and, as a practical matter, may find it impossible to move to the location
where new jobs are to be found. This means that the employer has rather more influence over
the level of wages than the conventional view will admit – and if an employee is unaware of
a better opportunity somewhere else then on what basis can they make the decision to leave
their current employment?
The orthodox competitive market model purports to explain why workers paid at the level of
the minimum wage may be at risk of unemployment. But the Conservative argument of the
early 1990s went further (and beyond the limits of the ‘competitive labour market’ analysis)
by assuming that a minimum wage would have a much bigger impact on the whole wage
structure. In other words, if a minimum wage was increased (or introduced) then potentially
all other workers, from those earning just above the minimum to the most highly paid chief
executives, would seek to restore their differentials in relation to minimum wage workers;
there could be a domino effect across the whole earnings distribution. It was this somewhat
dubious assumption that allowed the Conservative Party to claim that a NMW of ‘half male
median earnings’ could lead to between half a million and two million jobs being placed at risk.
Even the least attentive reader will have noticed that this is a rather wide range and these very
different numbers were generated by different assumptions about the impact of the NMW on
the remainder of the wage structure. If almost everybody restored their differentials then the
number was close to two million, if fewer people restored their differentials then the number
would be closer to 500,000. However, no evidence was adduced to support the plausibility of
these projections.
Certainly, there was a general consensus that the employment effects of minimum wages were
negative, but most studies suggested that the effects were small even if they were ‘significant’
in statistical terms. For example, in a review of the literature, which is often seen as a summary
of the conventional position, Brown et al reached the following conclusions, drawing principally
on studies of minimum wages in the USA.
The National Minimum Wage. Retrospect and Prospect
29
The ‘new’ economics of minimum wages
•
Research looking at the impact of minimum wages over time typically found that a
ten per cent increase in the minimum wage reduced teenage employment by one to
three per cent. However, the seriousness of the effect was rather undermined by the
observation that the lower half of the range ‘is to be preferred’. Similar results were
found (in the range of 0-0.75%) in studies looking at the impact of a minimum wage
increase at a point in time.
•
The effect of minimum wages on the employment of young adults (aged 20-24) was
negative but smaller than that for teenagers – although the conclusion was supported
by ‘much less evidence than that for teenagers’.
•
So far as adults (those aged 24-65) were concerned the direction of the employment
effect was ‘uncertain in the empirical work as it is in theory’. While some adults were
‘undoubtedly displaced’ (ie made unemployed) by the minimum wage, others might
have kept their jobs because the minimum wage protected them from teenage
competition.
•
Negative employment effects were ‘a consistent feature of studies of low-wage
manufacturing and agriculture’ but findings were ‘quite mixed elsewhere’.20
Simply put, the evidence did point to negative effects – moderate for teenagers, significant but
more limited for young adults and ambiguous for those over the age of 24 – but these effects
were relatively small. Nevertheless, it was findings of this kind that were used to justify the
Reagan administration’s freeze of the US federal minimum wage throughout the 1980s and
the Thatcher/Major governments’ decisions to dismantle the UK’s minimum wage regime. Of
course, one might equally have concluded that the adverse effects on young workers could
have been dealt with through minimum wage exemptions and/or lower rates. Similarly, an
‘ambiguous’ effect on adult unemployment might have seemed like a price worth paying if the
position of those at the bottom of the labour market was significantly improved as a result.
The implications of this orthodox view were given specific policy content in the 1994 OECD
Jobs Study, which called for an indexation of minimum wages to prices rather than earnings
and for variations by region and age.21 A natural conclusion was that those countries without
a minimum wage would be foolish to introduce such a measure and those countries with
established minimum wages should be doing their utmost to minimise the negative effects. In
sum, minimum wages were seen as well intentioned but often mistaken policies, which
Brown, et al, The Effect of the Minimum Wage on Employment and Unemployment. A Survey, NBER Working Paper 846
(1982)
21
The OECD Jobs Study. Facts, Analysis, Strategy, OECD (1994)
20
30
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
were badly targeted on the poorest families (most minimum wage workers were teenagers or
women working part-time from households with ‘middling’ incomes), reduced employment
opportunities for the most vulnerable and should, where possible, be replaced by changes to
the tax and benefits system, through the introduction of tax credits for example.
Of course, the effect of either abolishing minimum wages or allowing the level to fall (by
refusing to uprate, as was the case in the USA during the 1980s) meant that the state was
subsidising low wage employment through the in-work benefits system – precisely the
argument advanced by Fisher and Dix that we encountered earlier. In the absence of an
effective floor under wages, employers had little incentive to abandon business models that
depended for their success on low pay and transfer payments from government. Worse,
employers may have exploited the system by offering less than a ‘market’ rate because the
availability of in-work benefits ‘made work pay’. In other words, in the absence of a minimum
wage it was the state, and therefore taxpayers, who were shouldering the burden of an
employer’s unwillingness (or inability) to pay a decent wage.
….and
minimum
wages can’t
increase
employment
can they?
The ‘cosy consensus’ amongst economists that minimum wages had negative employment
effects began to be challenged in the 1990s following a ground-breaking empirical study in the
USA. David Card and Alan Krueger published their Myth and Measurement. The New Economics
of the Minimum Wage in 1995 having previously outlined their main findings in a series of
academic papers.22 In essence their argument amounted to no more than this. The ‘competitive
labour market model’ used in the conventional analyses was a flawed description of reality.
Most low wage labour markets were less than perfectly competitive and it was quite wrong to
believe that the only possibility was that minimum wages would reduce employment. Indeed,
in some circumstances an increase in the minimum wage could actually increase employment.
Card and Krueger used a series of natural experiments to test their hypothesis. First, they
compared employment in fast food restaurants in Pennsylvania (where there was no increase
in the state minimum wage) and New Jersey (where an increase was implemented so that the
minimum wage was significantly higher than in neighbouring Pennsylvania). Employment in
the New Jersey restaurants increased while employment in the Pennsylvania restaurants fell
somewhat. They also examined the evidence of the increase in California’s state minimum wage
in 1988, concluding as follows.
See Card and Krueger, Myth and Measurement. The New Economics of the Minimum Wage (1995), Card and Krueger
Minimum Wages and Employment. A Case Study of the Fast Food Industry in New Jersey and Pennsylvania, American
Economic Review (1994)
22
The National Minimum Wage. Retrospect and Prospect
31
The ‘new’ economics of minimum wages
On balance, we believe that the evidence from California shows that the increase in the state
minimum wage had a significant impact on wages, but no large or systematic effect on
unemployment.23
Moreover, Card and Krueger applied a similar methodology to the increase in the US federal
minimum wage in 1990 and 1991 and produced very similar findings. If the orthodox view were
correct then one would have expected significant adverse effects for teenage employment in
‘low wage’ states where the minimum wage had the biggest impact. But these results revealed
no evidence that ‘the minimum wage significantly lowered teenage employment rates in more
highly affected states’. Nor was there any evidence to show an adverse effect for those adult
workers most likely to be affected by the minimum wage increase.24 On the conventional view
these findings were inexplicable, but they were facts nonetheless. So if the competitive market
model offers a flawed account of how low wage labour markets work, where might we look for
a more persuasive story?
To understand these phenomena we need to spend a moment exploring another useful idea
in labour economics, the notion of monopsony. Expressed in non-technical language, what
we are discussing here is a situation where the employer has power to determine the level of
wages, contrary to the view that wages are determined exclusively by the market. The textbook
example is a ‘company town’ where there is effectively only one employer in the labour market.
In this case the employer can choose what wage to pay because workers have nowhere else
to go. It may sound a slightly implausible assumption, but the textbook model does give an
accurate picture of how a labour market without competition might operate.
The monopsony account also tells us that the employer will continue to make profits even
after the introduction of a minimum wage if the two following conditions are met. First, that
the marginal cost of recruiting an extra worker is higher than the existing level of wages and
therefore necessitates a wage increase for all the workers, since it is unlikely that the employer
will want to offer different wages to workers doing identical jobs. Second, that even after the
increase in wages the marginal product of the workers is equal to the (increased) marginal
cost. A common-sense way of expressing the same argument is to say that the current
employees are being paid less than they would be in a competitive labour market – or, in
even cruder language, that those employees are exploited. In a monopsonistic labour market
a minimum wage can be used to bring the level of pay up to what would otherwise be the
‘market rate’. However, we must understand that the model still allows room for the view that
23
24
32
Card and Krueger, op cit, 110
Ibid, 149
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
an inappropriately fixed minimum wage can cause job losses if, for example, the level is fixed
above what would otherwise be the competitive ‘market rate’.
As Card and Krueger point out, in the real world (rather than the company town example)
the practical consequence of monopsony is that a business will be operating with continual
vacancies and high turnover. They also note that firms have a high degree of discretion over the
wages that they pay generating ‘a persistent range of indeterminacy for wages’. In other words
an employer may decide to pay the lower wage and live with the high vacancy rates because
they do not believe that it would be worthwhile increasing the pay of the current workforce to
recruit more employees. But other firms might make a different choice and operate with fewer
vacancies and lower turnover. And it is this ‘range of indeterminacy’ that helps to explain why
an increase in the minimum wage can increase employment, because a higher minimum wage
enables formerly low-wage firms to fill their vacancies more rapidly.
The minimum wage forces these firms to behave more like the high-wage firms, which
experienced lower vacancies and lower turnover rates. Of course, if the minimum wage is
increased too much, firms will choose to cut employment, just as in the conventional
model.25 [my emphasis]
Another useful account of the theory can be found in a paper by Dolado et al.26 They make
the point that while monopsony may sound like an unusual phenomenon it is found more
frequently in reality than most textbooks will admit. Indeed, they argue that there are features
of monopsony to be found in any situation where employers have a degree of discretion over
the wages that they pay (because in a competitive market wages are determined by the market
itself, not by employer discretion). Moreover, they point out that if this view is right then it is
perfect competition rather than monopsony that is ‘extreme’ and ‘implausible’.
…with its assumption that an employer which cuts wages by even a fraction of a euro will
find that all its workers immediately leave. Nobody would support such an extreme view;
and anything else is monopsony. The important question is the extent of monopsony power.
is perfect competition a tolerable approximation to reality? The key point is that economic
theory has no unambiguous prediction about the employment effects of minimum wages.
Empirical research is required.27
Ibid, 13
Dolado, et al Minimum Wages. The European Experience, Economic Policy (1996), 318
27
Ibid, 330
25
26
The National Minimum Wage. Retrospect and Prospect
33
The ‘new’ economics of minimum wages
‘Efficiency wage theory’ offers a slightly different explanation of why minimum wages can
have a neutral or mildly positive effect on employment. In this case employers are willing to
pay more than the market rate to elicit greater effort from their workers. Any increase in wage
costs is compensated by increases in productivity and, under monopsony conditions may lead
to an increase in employment, because these employers will have fewer unfilled vacancies,
lower labour turnover and can pay higher wages because they are more efficient in their use
of employees.28 Since the efficiency wage model assumes that employers have a degree of
discretion in fixing pay levels, the theory is perhaps best seen as a sub-species of the wider
monopsony argument.
Both the monopsony model and its efficiency wage variant are useful theoretical alternatives to
the standard competitive market approach. However, we would be unwise to think that a more
persuasive theory is all that we need. After all, as Dolado et al point out, the most reasonable
view that one might take is that evidence is needed against which these hypotheses can be
tested.
The conclusion should be that a perfectly literate economic argument can be made for or
against a minimum wage. Theory alone will not resolve the debate. evidence is what is needed.
Where and how should one look?29
Card and Krueger’s work helps us begin to answer that question. But there are other studies
too, mostly pre-dating the introduction of the UK’s NMW, which can assist us in our search for
understanding. The purpose of the next section is to review these results and give the best
account possible of the impact of minimum wages in several developed countries.
What does
the evidence
tell us?
At this point we might note that Card and Krueger’s approach did not go unchallenged in the
USA. For example, Neumark and Wascher suggested that a more appropriate specification of
the data revealed a negative employment effect for teenagers following the increase in the
federal minimum wage.30 This caused considerable controversy at the time, with the Card/
Krueger, Neumark/Wascher teams doing battle in journal articles and at academic conferences
– and the controversy still rages. However, despite the intensity of the exchanges the argument
was really about rather small effects. Indeed, the argument was really about how close the
effect, whether positive or negative, was to zero.
Manning, How do we know when real wages are too high?, Quarterly Journal of Economics (1995)
Dolado et al, op cit 330
30
Neumark and Wascher, The Effect of New Jersey’s Minimum Wage Increase on Fast Food Employment. A Revaluation Using
Payroll Records, NBER Working Paper No 5224 (1995)
28
29
34
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
More recently Bazen and Marimoutou, reviewing the impact of the US federal minimum wage
over time found that a 10% increase in real terms, with average wages held constant, led to
a reduction in teenage employment of between 2-3%.31 This is consistent with the findings
from the review by Brown et al reported earlier and with Neumark and Wascher’s results.
However, we should note that the authors enter three important caveats when considering
the implications for minimum wage policy. First, these results only apply to teenagers;
second, the effects are small and third, in considering the implications for UK policy, ‘the
existence of a lower rate for teenagers will have mitigated the likelihood of a large impact on
teenage employment in the UK’.32 That these findings only apply to teenage workers cannot
be emphasised too strongly. The accumulating evidence from these studies is that, handled
sensitively, a minimum wage need have no adverse effect on adult unemployment.
Further support for this view can be found in the work of Stephen Machin and Alan Manning.
Reviewing the evidence from the UK (exploring the impact of wages councils and the
Agricultural Wages Board) before the implementation of the NMW, they concluded that
a clear pattern of results emerged, showing that no negative impact of these minimum
wage instruments could be identified – despite the views taken by successive Conservative
governments.33 Similarly, their analysis of the experience of four European countries (France,
Netherlands, Spain and the UK) found little evidence that minimum wages had an adverse
impact on employment.34
It is worth spending a moment exploring these results in detail, not least because they offer a
useful corrective to the view that minimum wages can explain why ‘Europe’s’ unemployment is
higher than the UK’s.35
However, before we do this, we should note that in 1991 Bazen and Martin published an
assessment of the impact of the minimum wage on earnings and employment in France.36
Legally binding minimum wages were first introduced in 1950 and in broad terms the current
arrangements were in put in place in 1970, although there have been some modifications since
then. The full rate of the minimum wage (the SMIC) applies from the age of eighteen,
Bazen and Marimoutou, Looking for a Needle in a Haystack? A re-examination of the time series relationship between
teenage employment and minimum wages in the United States, Oxford Bulletin of Economics and Statistics 64,
Supplement (2002) 699
32
Ibid, 724
33
Machin and Manning, Employment and the Introduction of a National Minimum Wage in Britain, Economic Journal 106
(1996) 667
34
Machin and Manning, Minimum Wages and Economic Outcomes in Europe, European Economic Review 41 (1997) 733
35
The same findings are reported in Dolado et al, op cit
36
Bazen and Martin, The Impact of the Minimum Wage on Earnings and Employment in France, OECD Economic Studies
No 16, Spring 1991, 199
31
The National Minimum Wage. Retrospect and Prospect
35
The ‘new’ economics of minimum wages
with certain limited exemptions for trainees. Consistent with the work of Brown et al referred
to above Bazen and Martin found that increases in the real value of the SMIC had ‘exerted
significant upward pressure on youth earnings’, however they also noted that.
We have not been able to establish satisfactorily…that real increases in youth labour costs
have had a negative impact on youth unemployment – even though we believe this to have
been the case.37
Again, consistent with Brown’s findings, they estimated that the negative impact on youth
unemployment was in the range of 0.1-0.2%, although these figures are at the lower end of
the numbers identified in the earlier American literature. Far from finding an ‘ambiguous’ effect
on adult unemployment, Bazen and Martin concluded that the effect ‘appears to be zero’. They
offered two policy options to mitigate the negative impact on young workers. First, the SMIC
could be allowed to rise more slowly than average earnings. Second, a youth sub-minimum
could be introduced, taking account of the more exposed position of young workers. There
was no suggestion that the SMIC might be abandoned completely and no view expressed
that the negative effects detected outweighed the usefulness of having some minimum wage
protection. This in itself was a useful conclusion that enabled supporters of minimum wages
elsewhere to take the first tentative steps towards a recovery of confidence.
As Dolado et al point out, Bazen and Martin used a standard competitive market model to
assess employment effects, which may undermine the robustness of the results. Applying the
Card and Krueger methodology to increases in the SMIC from the mid-1960s to the mid-1980s,
by looking at employment in low wage regions where the effect on wages was largest, found
no adverse impact on employment.38 Indeed, there was more rapid growth in employment in
these ‘low wage’ regions throughout the period, suggesting that there might be something to
be said for the monopsony model after all.
Of course, it is important to offer a balanced account and, as Dolado et al admit, it is possible
to make a case that by the mid-1980s the SMIC had reached levels that were having an
adverse impact on employment. Nevertheless, they also point out that ‘other explanations
can be offered for the deterioration in the labour market position of the low paid in France’
– principally the impact of recessions, structural change and the reduction in the number of low
skilled manual jobs. There is little in the data to suggest that an inappropriately fixed minimum
wage is exclusively responsible for higher French unemployment.
37
38
36
Ibid, 215
Dolado et al, op cit
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
So far as the Netherlands is concerned the evidence is more limited and it is hard to apply the
Card and Krueger model (looking at the impact on the most vulnerable regions), because the
dispersion of wages across a rather small country is much narrower than in the US or France.
However, the Netherlands offers a slightly different natural experiment in that the minimum
wages of young workers were cut in the 1980s in response to a very severe recession. We
have already noted that teenagers seem more vulnerable to minimum wage increases than
other workers and a minimum wage reduction might, on the conventional view, be predicted
to generate a positive employment response. This study failed to find a generalised effect
across the economy as a whole, but there was a small increase in youth employment in the
occupations most likely to be affected. Once again, however, this effect was ‘on the margins of
statistical significance’.39
Rather different results were found for Spain, where a significant rise in the youth minimum
wage in 1990 did have a significant negative impact on teenage employment. However,
as predicted by the monopsony model, the employment of adults increased following the
minimum wage rise by more than the number of teenage jobs that were lost.40
How can we explain these results, which are apparently inconsistent with Card and Krueger’s
findings? First, the larger effects on youth employment emerged at a time when 40% of Spanish
teenagers were in receipt of the minimum wage (as opposed to 25% in the USA). Second, there
is some evidence to suggest that the increase in the Spanish minimum wage had a ripple effect
further up the wage distribution, increasing the pay of teenagers employed at rates above the
minimum wage. In line with the competitive labour market model, this led to a reduction in
teenage employment and the substitution of older workers for younger workers. Expressed
in the language of monopsony, the Spanish minimum wage for teenagers was fixed above
the ‘range of indeterminacy’, and the job loss predictions of the competitive market model
therefore became an accurate description of reality.
The Spanish case is the best evidence we have that an inappropriately fixed youth minimum
wage can have a big impact on youth employment. However, as Dolado et al point out, one
should not therefore draw the conclusion that minimum wages are bad for employment
overall, because the Spanish experience also showed that total employment rose at the same
time as youth employment declined. Caution may be needed in fixing minimum wages, but
it would be quite wrong to conclude that the best policy is to abolish minimum wages at the
earliest possible opportunity.
39
40
Ibid, 346
Ibid, 348
The National Minimum Wage. Retrospect and Prospect
37
The ‘new’ economics of minimum wages
Who pays
for the
So far our discussion has focused on employment effects, but we also need to answer the
question ‘who pays for the minimum wage?’. On the conventional competitive labour market
minimum
view there is only one answer. ‘it’s employees, who pay with their jobs’. But we have already
wage?
seen that is not necessarily the case in theory and (having taken careful note of our caveats
about the impact on youth) it is certainly not the case in practice. On the other hand, there
can be little doubt that costs do rise for affected employers and that the increase in costs
must be accommodated somewhere. Simply put, either prices must rise, or profits must fall or
productivity must increase, with the latter effect leading to reduced unit labour costs allowing
the employer to pay the minimum without difficulty.
When viewed alongside the wealth of research on employment effects, there is only a limited
literature examining the ‘who pays?’ question. In Myth and Measurement, Card and Krueger
spent some time developing a model that predicted a large fall in profits of around fifteen per
cent following a minimum wage increase. But their empirical analysis found no systematic
relationship between minimum wages and profits, although they did suggest that shareholder
wealth fell by between one and two per cent when the increase in the US federal minimum
wage was announced in 1989. However, this was a rather weak effect and was based on
investor expectations of what might happen, rather than what had happened to profit margins.
It might also attribute too much influence to the minimum wage at a time when markets were
experiencing a degree of turbulence.
Draca et al took a slightly different approach in examining the natural experiment that followed
the introduction of the UK’s minimum wage in 1999.41 Despite the limitations of the data,
they found compelling evidence that the implementation of the NMW led to a redistribution
of assets from capital (a reduction in profits) to labour (an increase in wages). Furthermore,
they could find no evidence to show that low wage firms had been forced out of business
as a result of the NMW, suggesting that the consequences of policy were benign. Of course,
one possibility is that they were simply reviewing too short a time period to observe the firm
‘deaths’ attributable to the NMW. But a better explanation is that.
…firms were making profits from paying low wages prior to the minimum wage introduction
and that one consequence of the introduction of the minimum wage to the UK labour market
was to moderate these ‘excess’ profits by channelling them back to the wages of low paid
workers.42
41
42
38
Draca et al, Minimum Wages and Firm Profitability, CEP Discussion Paper No 715 (2006)
Ibid, p.29
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
An attentive reader will have noticed that this too is another consequence of the presence of
monopsony in the labour market – which is not entirely surprising because the authors of the
study are committed to the view that monopsony explains much that happens in low wage
labour markets.
In the medium term this redistribution from capital to labour should not be a cause for concern
as long as the firms affected are able to retain some profits for investment. It is also possible
that business strategy may change as the NMW matures. For example, it is not sustainable
to absorb all minimum wage increases through reductions in profits and there must also be
some limits to the elasticity of prices – in other words there comes a point when consumers
will not buy some good or service because it is too expensive. If this argument is right then
employers will eventually have no alternative but to look to productivity improvements to
accommodate further increases in the NMW. The fact that no such productivity response has
yet been detected in the UK does not mean that it will not materialise at some point in the
future.43 Indeed, the progressive prospectus for the elimination of low pay that we discuss
below depends on strategies to reduce the gender pay gap (and most low pay is gendered) and
boost productivity by encouraging firms to improve their use of technology, their management
standards and the skills of their employees.
A new
consensus?
So what might we say about the implications of all the studies reviewed so far? An obvious
conclusion is that there is little or no evidence supporting the contention that minimum wages
have an adverse effect on adult unemployment (where adults are defined as those aged 24-65).
The implications for youths are slightly more ambiguous and, with the exception of Card and
Krueger’s work in the USA, the negative effects for teenagers seem to be well founded in the
research. Nonetheless, Machin and Manning are right to observe that
the emphasis has shifted from ‘how negative are the employment effects’ to ‘is there an
employment effect?44
Paul Gregg, in a review of the evidence for the OECD reached a very similar conclusion.
My best bet is that a moderate minimum wage combined with lower rates for youths (if utilised)
will have no discernible impact on employment levels.45
Forth and O’Mahony, The Impact of the National Minimum Wage on Labour Productivity and Unit Labour Costs (2003)
Machin and Manning, op cit, 667
45
Gregg, The Use of Wage Floors as Policy Tools, OECD Economic Studies 31 (2000), 133
43
44
The National Minimum Wage. Retrospect and Prospect
39
The ‘new’ economics of minimum wages
Of course, this assessment begs several difficult questions, the most important of which is just
how does one determine the level of a ‘moderate’ minimum wage? Gregg’s analysis is helpful
because it allows us to assess the potential objectives of minimum wage policy including.
•
•
•
•
Fairness
The reduction of poverty
Ending exploitation
Promoting incentives to work.
We have already explored the importance of exploitation in our discussion of monopsony and
there is no need to add more here. However, it is important to understand that of the other
possible objectives the most important, based on the data, is that minimum wages can help to
make work pay. Of course, minimum wages can contribute to the pursuit of a fairer distribution
of incomes too, but it is not entirely useful to say that a minimum wage should itself be fixed
at a ‘fair’ level, not least because there is no generally understood social norm of ‘fairness’ that
can, consistent with economic theory and evidence, tell us what the level of the minimum
wage should be. Similarly, while the minimum wage can have some impact as part of a poverty
reduction strategy, the poorest are not in work at all (they are either unemployed or retired), so
other policy instruments might be more effective.
As we have already noted, the impact on incentives to work will be shaped by the relationship
between the minimum wage and the benefits system. Most importantly perhaps, the effect of
a minimum wage is to limit the use of an employer’s monopsony power to pay wages below
the market rate and benefit from a top-up from the state in the form of in-work benefits or tax
credits for the affected employees.
The message for policy makers from all this is reasonably clear. Minimum wages applied
sensibly and flexibly can limit exploitation, reduce poverty (to some extent) and increase
incentives to work. However, caution should be exercised when minimum wages are applied
to young people, not least because youth unemployment has a scarring effect, which increases
an individual’s exposure to the risk of unemployment throughout their working life. Perhaps
the most important conclusion is that the evidence does not point unambiguously to the
‘right’ level of the minimum wage - in other words, the level that has a significant impact on
exploitation but no negative impact on employment. To some extent fixing the rate is a matter
of trial and error, or more precisely a matter of fixing the minimum wage and evaluating the
40
The National Minimum Wage. Retrospect and Prospect
The ‘new’ economics of minimum wages
impact before any judgment is made about a further increase. Policy makers must therefore
decide where to pitch the minimum wage within Card and Krueger’s ‘range of indeterminacy’.
What this suggests in turn is that a purely formulaic approach, where the NMW is fixed as a
percentage of median earnings for example, is unlikely to be sophisticated enough to make
complex and subtle decisions about the appropriate rate. Of course, a ‘trial and error’ or
‘learning from experience’ model is consistent with the research findings that we explored
in the preceding discussion. Theory cannot tell us what to do and there is no substitute for
adapting policy in the light of practice. As we shall see in the next section, much of the success
of the UK’s Low Pay Commission can be explained by the pragmatic approach that flows from
applying this principle.
The National Minimum Wage. Retrospect and Prospect
41
Chapter 4. Implementation and impact
In this chapter we will examine the process of implementing the NMW, with specific reference
to the role of the Low Pay Commission (LPC), and evaluate the impact on wages, employment
and the employment opportunities of disadvantaged workers. Much of what is said here
draws on the author’s experience as a member of the LPC, although care has been taken not
to break any confidences or offer too much information about the private deliberations of
the Commission. Even so, it is important that the work of the LPC is better understood, if only
because the success of the NMW owes a great deal to the consensus created by a series of
unanimous reports.
Critics of the LPC argue that it only makes recommendations that will prove acceptable to the
government. In other words, the LPC is nothing more than the DTI’s or the Prime Minister’s
poodle. Whether this argument has any validity is explored in more detail below, but for the
time being we may simply record that determining the level of the NMW through a purely
political process, with parallel lobbying by employers and trade unions as is the case in the USA,
would almost certainly lead to more intense disagreements about the future of the NMW. It is
often said that the UK is poor at building institutions that sustain a consensus on labour market
policy. The LPC is a practical refutation of that criticism. It is an institution that we would miss if
it did not exist.
So far as the impact of the NMW is concerned we would be wise to remember Paul Gregg’s
observation that minimum wages can only have a limited impact on poverty because the
poorest are not in work at all. Similarly, it is difficult to be precise about the redistributive effect
of the NMW if only because there are many other government policies designed to increase
the incomes of the working poor – tax credits, in work benefits and the increases in child
support. However, we can be a little more certain about the impact on the wage distribution
and reference is made to research commissioned by the LPC and others, which shows that the
NMW has had a positive effect. Finally, it would be a mistake to ignore the gender dimension,
simply because the largest group of low paid workers happens to be women working parttime. As we shall see, the NMW has had some impact on the gender pay gap, which is much
narrower at the bottom end of the distribution than it is at the top. Indeed, there has been
considerable convergence between the earnings of low paid men and low paid women.
Amongst the highest paid on the other hand, the gap between men and women in investment
banking or City law firms remains stubbornly wide. A straightforward policy conclusion
therefore is that a determined effort to close the gap further amongst the lowest paid depends
in part on sustaining the real value of the NMW. But substantial progress also depends on the
42
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
implementation of the recommendations of the Women and Work Commission and some
consideration of the relationship between skills, productivity and pay.46
Membership
of the LPC
We turn now to a review of the membership and working methods of the LPC. Of course, one
might say that these features are so well understood that it seems rather unnecessary to discuss
them. But despite the fact that the LPC was established in 1998 and has nine years of activity
behind it, there is still some evidence to suggest a degree of misunderstanding about the
approach to the NMW and working methods.
It is worth recalling that the shape of the LPC was not a ‘given’ in advance of the 1997 election
and there was considerable traffic between the DTI and the social partners about the size of
the LPC and its constitution. At the time it was established some critics saw the LPC as a rather
underpowered institution because no prominent trade union general secretaries or business
leaders were appointed as members. With hindsight, however, this looks like a prescient
decision, simply because those with well known public views about the appropriate level of
the NMW might have found it hard to broker the necessary compromises and, on the trade
union side, reach an agreement that was inconsistent with the policies of individual trade
unions Indeed, the LPC proved very successful in both exemplifying the principle of collective
responsibility and encouraging stakeholders like the TUC and the CBI to accept the outcome
because their representatives had been intimately involved in the process.
Of course, there is no ‘ideal’ shape for an institution of this kind. But a commission of nine
members, with three trade unionists, three representatives of business, two independent
experts and an independent chair has proved its effectiveness by producing seven unanimous
reports. It would have been possible to establish a larger and more ‘representative’ body, but
that could quite easily have led to gridlock – with no member willing to make the first move
on the road to a compromise – and ultimately the level of the NMW could, by default, have
become a purely ministerial decision.
Personal relationships between members of the LPC have been enormously important
in developing trust. Working together throughout the process has also made the difficult
negotiations about the level a more manageable enterprise than might otherwise have been
the case. This is not to suggest of course that the conversations have always been friendly. On
occasion there can be intense and not entirely surprising disagreements, with the employer
representatives arguing for a somewhat lower figure than their trade union colleagues. Perhaps
46
Shaping a Fairer Future, final report of the Women and Work Commission (2006)
The National Minimum Wage. Retrospect and Prospect
43
Implementation and impact
the important factor is that all members understand that they have more to lose than to gain
by forcing through a decision by a simple majority. This would almost certainly have broken
the LPC and brought social partnership to an unceremonious end. However, it is not simply a
concern about the demise of a valuable institution that motivates the parties. the trade unions
are worried that without the LPC the level of the NMW will be lower, whereas the employers
are worried that without the LPC the NMW will be higher. Expressed in the language of game
theory, both parties have strong incentives not to defect from the arrangement because each
fears, for different reasons, that they will be worse off as result.
We might say then that each party has a credible threat (breaking the LPC), which encourages
responsible behaviour on the part of the other. In one sense this is true, but it also suggests
that members of the LPC view each other with wariness or suspicion, which was certainly not
the author’s experience. Perhaps we ought to see the process more in terms of confidence
building; both parties have a subtle understanding of the power dynamics, and through a
process of give and take they develop a profound sense that each is acting in good faith. High
trust negotiations can therefore take place despite the fact that each side is in possession of a
doomsday weapon.
As we shall see, the consequence of this experience has placed the NMW on a consistent
upward trajectory – with particularly significant rises since 2004. Those critics who accuse the
LPC of making ‘lowest common denominator’ recommendations should pay closer attention to
the relationship between the rising NMW and increases in average earnings.
Working
The working method of the LPC, devised principally by Sir George Bain, who served as chair
methods
from 1998-2002, helps to reinforce the high trust relationships described above. Expressed
simply, the LPC comes to an agreement through a process of triangulation. This involves
taking oral and written submissions from employers, trade unions and government and then
matching this material with a comprehensive assessment of the labour market data. The
intention is to ensure that all the available relevant evidence informs the final deliberations of
the LPC.
In other words, the LPC is engaged in a process of rational policy making, listening to
stakeholders and evaluating the consequences of previous recommendations. But before
the reader is driven to the conclusion that this is a bloodless process, we should emphasise
once again that the final part of the exercise resembles nothing more than a straightforward
44
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
negotiation between trade unions and employers. It is entirely appropriate to say that the
process of fixing the NMW leads to the conclusion of the most significant collective agreement
in the country. On the other hand, it is collective bargaining with a difference in that the
independent members of the LPC (and to some extent the chair) set the boundaries within
which the parties must work.
The usual practice at the final series of meetings is for the independent members to give their
assessment of the impact of the previous recommendations and the overall labour market
situation. Essentially, the parties are then compelled to negotiate within the limits of the
possible as defined by these introductory comments. One might say that the involvement of
the independent members is essential in that it reduces the difference between the parties
at an early stage. Both sides are required to scale back their expectations and both sides are
required to engage with reality as seen by the other party.
The views expressed by those who have given evidence are also important to the process, not
just because they can influence the LPC’s report, but because these stakeholders get a sense
of the limits of the possible too. A guarantee of transparency and a willingness to listen to all
views has enhanced the credibility of the LPC and has helped to establish the principle that a
floor under wages is a permanent feature of the labour market and beyond political challenge.
Another important feature of the LPC’s working method is the programme of regional visits.
This is an invaluable opportunity to observe the impact of the NMW in sectors that are most
affected and amongst employers who are most likely to complain about their ability to pay.
Moreover, it is a chance to meet low paid workers too and hear their experiences about life on a
low income. For commissioners, the regional programme helps to bring the work of the LPC to
life and, although much will depend on the analysis of the data, meeting those living with low
pay (both employers and employees) adds some colour, texture and practical experience to the
LPC’s deliberations.
Finally, the regional visits programme is an opportunity for commissioners to get to know each
other and take collective responsibility for their work. Some of the meetings, particularly with
small employers or with employers from sectors under pressure, can be characterised by sharp
exchanges. These conversations are a useful corrective to what might otherwise be a rather
dull and technocratic exercise. Most importantly, perhaps, it is through these processes that
commissioners learn to trust each other, to ‘find the range’ of their colleagues and be rather
more open about their own views.
The National Minimum Wage. Retrospect and Prospect
45
Implementation and impact
A sceptic may say that this is all very interesting, but there is no reason to think that the LPC is
a superior method for fixing the NMW than a simple ministerial decision. This is the essence of
the criticism that we discussed in outline above. In straightforward terms, these sceptics are
saying that the LPC has made no real difference, beyond giving some trade union and employer
bureaucrats a sense of job satisfaction. How might we respond to this criticism? Is there any
evidence to suggest that the outcome would have been different without the LPC?
Has the
Our initial reaction might be to say that unanimous recommendations from a social
Low Pay
partner body simply cannot be ignored by the government. If employer and trade union
Commission
representatives are comfortable with the recommendations then what possible grounds
made a
can the government have for taking a different view? But this may fail to persuade critics
difference?
who believe that the LPC has consistently recommended a low minimum wage, which the
government has always been minded to endorse. Moreover, they may argue that LPC has an
acute appreciation of the political realities and is therefore unlikely in the future to make any
recommendations that the government finds unpalatable.
There are three responses that might be given to this series of observations. The first is that the
LPC has established a consensus that the NMW should be a permanent feature of the labour
market. Those employers who were atavistically hostile to the policy in 1997 now argue for a
lower rather than a higher minimum wage but have abandoned their outright opposition to
the principle. This is a major achievement that largely redounds to the credit of the LPC. The US
example shows what can happen when politicians set the level. Social partners have no stake
at all in the process and simply lobby members of Congress either to support or oppose an
increase in the federal minimum wage. Any effort to increase the level is met with a barrage of
employer hostility. Excessive partisanship helps to explain why the federal minimum has been
increased on only four occasions since 1980.47
Second, there is no guarantee whatsoever that the NMW would have been higher if the LPC
had not existed. Indeed, there is ample evidence to suggest that the level could have been
lower given the willingness of the present government to try and accommodate employer
opinion. Trade unions would, no doubt, have advanced powerful arguments for a ‘decent’ NMW,
but employer advocates would have advanced equally powerful arguments to the contrary.
Given the current balance of forces and experience in other fields of labour market policy, there
is no certainty that the trade unions would have prevailed.
It is now more than ten years since the last increase in the federal minimum wage. A further uprating (from $5.15 to
$7.25 in 2008) is imminent following the Democrats’ victory in the mid-term elections in November 2006, although at
the time of writing senate Republicans are trying to block the measure
47
46
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
Third, experience suggests that the LPC has occasionally made recommendations that the
government, without further persuasion, was disinclined to accept. The introduction of a
minimum wage for 16 and 17 year olds is a good example, where the LPC were very clear in
saying that they had been convinced of the case for some protection, albeit at a low level, but
the government was equally concerned that an incentive might be created for young people
to leave school and enter the labour market prematurely. It was only after members of the LPC
had produced evidence of appalling employment practice (with 16 year olds being paid less
than £1 per hour) that the government relented and agreed that a lower minimum for this
group of young people had some merit.
On balance then, it would be rash for anyone to say that the situation would be better without
the LPC. Recalling the controversy before the introduction of the NMW shows just how much
ground has been covered. Despite the predictions of colossal job losses made by Michael
Howard and other prominent Conservatives, David Cameron seems to have accommodated
himself to the realities of the NMW and recognises that it would be politically damaging to
campaign for the repeal of the legislation.48 Once again this is a major achievement.
We might conclude with the observation that the LPC has been very successful at managing
expectations on both sides. Leaving employers and trade unions moderately disappointed
with each uprating could be interpreted as a hallmark of success. So far no credible voices have
emerged to argue that the NMW is either damagingly high or unacceptably low. The same
certainly cannot be said for the USA and, on balance, the argument that the LPC has made a
difference is more compelling than the views of the sceptics.
For ease of reference, Table 1 below sets out the progress made since 1999 in raising the level of
the NMW.
The impact
on wages
This brings us neatly to our next topic. Just how much difference has the NMW made to the
lives of the low paid? Certainly there is a view that the government has been unambitious in
– who
tackling widening income inequality. It is said that the income distribution is continuing to pull
benefits?
apart, that the super-rich are becoming significantly richer and that the lowest paid have failed
to benefit from rising prosperity. Equally, it is argued that life on a low income continues to be a
dispiriting experience. Poor families struggle to make ends meet. Low paid women in particular
find it hard to balance the demands of work and their caring responsibilities. Too many people
Although the Conservative Party’s attitude to the NMW remains unclear. One might entertain the suspicion that
upratings would be more intermittent and that the composition of the LPC would be modified to reduce trade union
influence. A further possibility is that the LPC could be abolished and ministers left to decide the level of the NMW
48
The National Minimum Wage. Retrospect and Prospect
47
Implementation and impact
Table 1. NMW rates 1999-2006
Date of Report
June 1998
March 2001
March 2003
March 2005
Date of Increase
Adult Rate
Youth Rate (18-22)
16/17 rate
April 1999
£3.60
£3.00
N/A
October 2000
£3.70
£3.20
N/A
October 2001
£4.10
£3.50
N/A
October 2002
£4.20
£3.60
N/A
October 2003
£4.50
£3.80
N/A
October 2004
£4.85
£4.10
£3.00
October 2005
£5.05
£4.25
£3.00
October 2006
£5.35
£4.45
£3.30
are stuck in a revolving door between low pay and unemployment. Social mobility is falling and
the number of workless households has scarcely changed since 1997.
Of course, some (but not all) of this is true. And it is quite wrong to say that the NMW has been
fixed at a consistently disappointing level. Indeed, as we can see, since 2003 increases in the
NMW have consistently outstripped increases in average earnings (see Figure 2).
The chart shows that the trajectory of the NMW from April 1999 to October 2000 (rising from
£3.60 to £3.70) was below both the rate of inflation (RPI) and increases in average earnings (AEI).
Subsequent increases through to 2002 tracked the increase in average earnings, but since that
time the increases in the NMW have exceeded both earnings and inflation. In other words, the
NMW has got tougher over time and has, slowly, begun to exercise more influence in the labour
market.
Critics of the ‘low’ minimum wage seem not to have noticed that the position has changed
quite dramatically since 2003, and the increases from £4.20 to £5.35 over this period have had
a major impact. This initial caution followed by growing ambition was entirely predictable for
those who took careful note of the changing tone of the LPC’s reports. Fixing the NMW at a
low level on introduction is consistent with the review of the economic literature reported in
the previous chapter. In the absence of any previous experience of the NMW, the LPC could
do little more than try and establish a wage floor towards the lower end of Card and Krueger’s
48
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
Figure 2. NMW increases, earnings growth and inflation
£5.50
£5.50
£5.00
£5.00
£4.50
£4.50
£4.00
£4.00
AEI
RPI
NMW
£3.50
Apr 99
£3.50
Apr 00
Apr 01
Apr 02
Apr 03
Apr 04
Apr 05
Apr 06
Source. Office for National Statistics
This chart takes the initial adult minimum wage rate in 1999 and inflates it by average earnings growth (pink line), RPI (green line) and the
actual increases in the minimum wage over the period (blue line)
‘range of indeterminacy’. Once it was clear that there were no negative effects on employment
(of which more is said below), the LPC had scope for somewhat greater ambition in testing the
boundaries. Far from being replacing caution with recklessness, the LPC has consistently sought
to exercise rational judgment and justify their decisions on the basis of the evidence – despite
the points made earlier about the contested nature of negotiations at the final stage. This is
precisely how good policy is made.
Some employers have suggested that the NMW has now become an escalator rather than a
floor, and predict an ever upward movement. This is misconceived for two reasons. The first
is that an escalator takes passengers from one floor to another – there is an unavoidable
destination at which all passengers must alight. Once again Card and Krueger’s analysis is
helpful; the highest level for the new floor can only be fixed at the higher end of the ‘range of
indeterminacy’. The second reason is related to the first and draws on the theoretical insight
that minimum wages can cause unemployment even in a labour market characterised by
monopsony. In other words, there is a line in the sand marked ‘this far and no further’ which the
LPC would be unwise to cross.
The National Minimum Wage. Retrospect and Prospect
49
Implementation and impact
Quite where this line should be drawn is an issue about which reasonable people might
reasonably disagree. Indeed, the upper end of the ‘range of indeterminacy’ may vary according
to economic circumstances. Sometimes it will be right to increase the NMW ahead of average
earnings, sometimes the LPC may wish to hold the level steady and sometimes they may even
look for a modest reduction – if they wish to send a signal that wage inflation is a problem, for
example. We will consider in the next chapter what the LPC ought to do in their 2007 review,
but a casual observer might conclude that we have reached the point where a period of
consolidation is required.
Another useful way of thinking about the issue is to look at the ‘toughness’ or ‘bite’ of the NMW
in relation to median earnings. This is a good benchmark of just how much impact the NMW
has had on the labour market. As the DTI’s most recent evidence to the LPC has shown (see
Figure 3), the NMW’s bite has become much harder since introduction in 1999.49
What is most striking perhaps, given our earlier observations about the impact of minimum
wages on youth employment, is that the NMW is significantly ‘tougher’ for young workers than
for adults. This is at least suggestive of the need for a degree of caution in handling youth rates
and reinforces the view that it is sensible to retain a lower rate for younger workers. We have
already noted that some trade unions are campaigning for the payment of the adult rate at the
age of 18. At first glance our review of the literature and our assessment of the ‘bite’ suggests
that the trade union campaign is something of a forlorn hope and potentially damaging to the
employment prospects of young workers – an issue to which we return in the next section.
Young workers are amongst the most vulnerable people in the labour market and most
exposed to the scarring effects of early unemployment. The LPC is therefore well advised not
just to be cautious, but to be extra cautious in making recommendations that affect the youth
labour market. It is right to say that we are talking about small numbers of people – only 3.5 per
cent of 18-21 year olds are paid at the level of the NMW – but these young workers will already
be experiencing multiple disadvantages and it would be reckless to take any action that might
further damage their prospects.50
In addition to examining the ‘bite’ of the NMW, the LPC has devoted some attention to the
question of coverage – in other words the number of people affected by the NMW. It is hard
to estimate the number of beneficiaries of the NMW simply because some employers may
anticipate minimum wage increases by giving their employees a pay rise before any uprating
49
50
50
The Government Evidence to the Low Pay Commission, DTI (2006)
Ibid, Chart 6, 18-21 pay distribution
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
Figure 3. The ‘bite ‘ of the NMW 1999-2006 – The level as a percentage of median earnings
80%
80%
16-17
18-21
22+
75%
75%
70%
70%
65%
65%
60%
60%
55%
55%
50%
50%
45%
45%
40%
40%
1999
2000
2001
2002
2003
2004
2005
2006
Source. Office for National Statistics, Annual Survey of Hours and Earnings
* As a percentage of median hourly earnings
Note. Changes in wording and definitions to the ASHE survey means that there is a discontinuity in data between time periods after (and
including) 2004 and earlier periods
becomes effective. The LPC has also experienced difficulty in assessing coverage accurately
because of inadequacies in the official statistics, although this problem has been addressed in
more recent times. Figure 4 shows the percentage of the employed workforce earning specific
sums at 5p intervals in the earnings distribution. As with minimum wages elsewhere a ‘spike’
can be observed at the level of the NMW.
Initially it was believed that the introductory rate of £3.60 benefited around 1.9 million
employees. However, this figure was revised downwards to 1.5-1.7 million in 2000 and
downwards again to 1.3 million in 2001. The increases to £4.10 and £4.20 in 2001 and 2002
benefited around a million workers or 4 per cent of employees. Around 1.1 million were said
to have benefited from the increase to £4.50 in 2004.51 In part, it was this rather sorry tale of
misleading statistics informing cautious judgments that led many campaigners to suggest
that the NMW was far too low. There was a widespread view that the LPC had fallen short of
its original ambition of protecting the interests of around 2 million workers. However, this
interpretation was based in part on a misunderstanding, since the LPC had never aimed at a
‘target’ figure for coverage. It is also important to understand that the relationship between
51
See LPC reports
The National Minimum Wage. Retrospect and Prospect
51
Implementation and impact
Figure 4. Adult low-pay distribution, April 2006
2.5%
2.0%
2006
2005
1.5%
1.0%
0.5%
£2.95
£3.05
£3.15
£3.25
£3.35
£3.45
£3.55
£3.65
£3.75
£3.85
£3.95
£4.05
£4.15
£4.25
£4.35
£4.45
£4.55
£4.65
£4.75
£4.85
£4.95
£5.05
£5.15
£5.25
£5.35
£5.45
£5.55
£5.65
£5.75
£5.85
£5.95
£6.05
£6.15
£6.25
£6.35
£6.45
£6.55
£6.65
£6.75
£6.85
£6.95
0.0%
Source. Office for National Statistics, Annual Survey of Hours and Earnings
the NMW and average earnings has changed in the last three years to the extent that the
LPC revised upwards its estimate of the coverage of the 2006 increase from 1.25 million
to 1.28 million workers, partly reflecting the fact that, at that time, average earnings were
growing more slowly than had been anticipated. It will be interesting to see whether a further
reassessment of the number of employees affected appears in the LPC’s 2007 report.
The composition of the groups benefiting from the NMW is well known, but is worth repeating
nonetheless. As the LPC’s 2005 report made clear, women working part-time in retail, social
care, hospitality and hairdressing are the most obvious beneficiaries. Indeed, 68 per cent of
those affected by the NMW are women.52 It is not surprising therefore that the NMW has had
some impact on the gender pay gap – an issue that we consider in more detail below.
It is at least interesting to compare what has happened in the UK since 1999 with the trajectory
of minimum wages in other countries. Again, this is a story of steady progress, with the UK
rising up the league table of OECD countries. Figure 5 shows the UK NMW and minimum wages
in other countries measured in terms of purchasing power parities. In other worlds, it makes
adjustments for differences in the cost of living so that we can assess the ‘real’ value of the
minimum wage to a low paid worker in each of these countries.
52
52
LPC Report (2005) Figure 2.1
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
Figure 5. Comparison of minimum wages across countries, measured by purchasing power
parities, 2000-04 (£)
UK
6
Australia
5
NZ
4
USA
3
France
2
Neth
1
Ireland
0
2000
2002
Spain
2004
Japan
Source. Low Pay Commission
On this measure, we can see that the NMW has been on a consistent upward path since 2000,
with minimum wages elsewhere holding their level (Australia and France for example) or
falling in real terms (the USA). The same is equally true if we apply our analysis of the ‘bite’ of
the minimum wage to the same range of countries, where we can see that the NMW has now
reached the upper echelon of OECD minimum wages (see Figure 6). The data for 2006 are
incomplete, but, consistent with the DTI’s analysis, the NMW is now set at just above 50 per
cent of median earnings. As we can see, the upper bound for the NMW across these countries
is generally between 50 and 60 per cent of median earnings– although some countries have
consistently chosen to keep their minimum wages at a much lower level (Spain, Japan and the
USA) and France and Australia look like outliers with somewhat higher minimum wages.
It might be said therefore that the NMW has now reached the ‘right’ level in relation to median
earnings, simply because it is fixed at a point that bears favourable comparison with other
countries. On the other hand, we have already examined the evidence showing that the SMIC
in France has no impact on adult unemployment - and the SMIC is fixed at between 60 and 70
per cent of median earnings. This suggests that there may be some scope for the LPC to look for
further real increases in the NMW that make the ‘bite’ harder.
The National Minimum Wage. Retrospect and Prospect
53
Implementation and impact
Figure 6. Adult minimum wages as a % of median earnings – the ‘bite’ of the minimum
wage across countries, 2000-06
80
UK
70
Australia
60
NZ
50
USA
40
France
30
Netherlands
20
Ireland
10
0
Spain
2000
2002
2004
2006
Japan
Source. LPC reports and government evidence to the LPC (2006)
A clear signal of the likely trajectory of the NMW will be given by the LPC in their next report.
But whatever they decide to do, we can be confident is saying that the NMW is not fixed at an
exceptionally low level when viewed in an international context. Once again this is a powerful
indication of the change that has taken place in the UK’s policy discussion since 1997.
The NMW,
Yet despite this history of success, the NMW continues to face criticism from those who say
poverty and
it is inadequate as a redistributive tool (higher benefits and more generous tax credits work
inequality
better to tackle in-work poverty). This argument was used rather duplicitously by those who
were against minimum wage fixing in principle and were willing to use all the weapons at their
disposal to undermine the case for the NMW. Certainly in the early stages of implementation
it was difficult to be clear about the redistributive impact because the labour market data
were either incomplete or misleading. However, research conducted at the end of the 1990s
suggested that low pay and poverty were more closely associated that had been believed
hitherto.53 A study examining the distributional impact of the NMW in the period immediately
after introduction revealed that more than a third of the beneficiaries were to be found at
the bottom of the income distribution.54 A more recent assessment reaches a very similar
conclusion, with the majority of beneficiaries to be found in the bottom 30 per cent of the
Dickens, Poverty, Low Pay and the National Minimum Wage, Low Pay Commission Occasional Paper 2 (1999)
Manning and Dickens, The Impact of the National Minimum Wage on the Wage Distribution, Poverty and the Gender Pay
Gap (2002)
53
54
54
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
income distribution.55 This is not to deny that the poorest cannot benefit from the NMW,
simply because they are not in work, but the evidence is very compelling. the NMW is a highly
effective instrument for improving the incomes of the working poor. As the authors of the study
recognised.
NMW households were not heavily concentrated towards the bottom of the overall household
income distribution. However, they were concentrated in the bottom 30% of the income
distribution of working-age households, and of working-age households in which at least one
individual was in work. This discrepancy can be explained by the fact that the very poorest
households with the lowest incomes typically contain no earners at all. Therefore although
it appears to be secondary earners who received the NMW, this evidence would suggest that
such earners make an important contribution to household income. This is supported by
the fact that we find larger proportions of NMW households than other working households
received benefit payments.56
The results are presented in more detail in Figure 7, which shows that the NMW does principally
benefit the poorest working households, although there are beneficiaries in the middle of the
distribution too. These latter households are the classic dual earner couples cited by opponents
of the NMW as ‘undeserving’ beneficiaries. Of course, it is an inevitable consequence of any
effort to eliminate low pay that some better off households will benefit. Indeed, one might say
that this phenomenon adds to the political legitimacy of the NMW because some lower middle
class households see their incomes rise too. A NMW that benefited only the poorest would rest
on a rather narrower base of political support and might therefore be treated as a lower priority
by politicians concerned about the incomes of middle Britain.
So what
It is often said that the NMW’s impact on inequality has been muted, again because the level
about
has been too low. Moreover, the low minimum wage is said to explain the continued growth
inequality?
of income inequality in the UK. Put crudely, the government has done too little to improve the
incomes of the poor and too little to curb the excesses of the rich. This is a widespread and
deep-rooted belief in the popular consciousness of those on the centre-left. However, while
this may have been true of the period from 1997-2000, it is by no means clear that it is still true
today.
The most extensive recent review of the topic suggests that income inequality, as measured by
the gini coefficient, has fallen since 2001-02 (see Figure 8, which presents the extent of
55
56
Bryan and Taylor, An analysis of the household characteristics of minimum wage recipients (2004)
Ibid, 39
The National Minimum Wage. Retrospect and Prospect
55
Implementation and impact
Figure 7. Household characteristics of minimum wage recipients
Proportion of minimum wage
households to each decile group
30
25
20
15
10
5
0
Lowest
All households
2
3
4
5
6
Household income decile
Working-age households
7
8
9
Highest
Working-age households with 1 or more employed
Source. Bryan and Taylor, analysis of BHPS 2004
inequality expressed on various measures of income).57 In practical terms this means that
income inequality in the UK has fallen to a level last witnessed in 1987, although the big
increases in income inequality that took place in the early 1980s have yet to be reversed.
The gini coefficient is a technical measure that expresses inequality as a ratio. A gini coefficient
of zero is defined as perfect income equality, where all members of a society have access to
exactly the same resources and a gini coefficient of 1 is perfect income inequality where one
person has all the income and the others have nothing. Of course there are other ways of
measuring inequality and income is not necessarily the only or even the best benchmark, since
it takes no account of the other capabilities that individuals must possess to pursue what they
feel is valuable in life – good health, decent life expectancy, access to education and decent
housing for example.58 However, those countries with wide income inequality are also those
most likely to suffer from a deficiency of the factors necessary to enlarge human capabilities.
Income inequality remains a powerful indicator of the life chances of individuals at different
points in the income distribution.
57
58
56
Jones, The effects of taxes and benefits on household income, 2004/05, ONS (2006)
For a wider discussion of the notion of capabilities see Sen, Development as Freedom (1999)
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
Figure 8. Income inequality 1980-2005 (gini coefficient)
60%
Equivalised original income
50%
Equivalised post-tax income
40%
Equivalised gross income
30%
Equivalised disposable income
19 93
93
/
19 94
94
/
19 95
95
/
19 96
96
/
19 97
97
/9
19 8
98
19 /9
99 9
/2
0
20 00
00
/
20 01
01
/
20 02
02
/0
20 3
03
/
20 04
04
/0
5
92
19
91
19
19
90
89
19
88
19
87
19
86
19
85
19
84
19
83
19
82
19
19
81
19
19
80
20%
Source. ONS
It would be wrong to attribute all of the effect reported here to the NMW, but the evidence that
we examined earlier suggests that the poorest working households have seen their incomes
rise as a result of the recent increases in the NMW, reinforcing the argument that minimum
wages are able to effect a modest redistribution from rich to poor. As Francis Jones points out is
his measured assessment.
The impact of the minimum wage on the earnings distribution will have had some effect [in
reducing inequality].59
Other commentators offer a less positive account, with the Institute for Fiscal Studies
suggesting that income inequality rose during the first term of Labour government (19972001) and fell back slightly after 2001, but not to a very large extent.60 These differences of view
between the IFS and the ONS can be partially explained by differences in analytical technique
and interpretation of the data. But the common factor in both analyses is that inequality has
not increased – the argument is now about the extent of the reduction. Moreover, even the
sceptical IFS give the government credit for making progress in tackling child poverty and
note that income inequality would have widened still further were it not for the significant
programme of tax and benefit reform implemented since 1997. We can be confident in saying
then that the NMW has proven its usefulness as a redistributive tool when married with other
59
60
Jones, op cit, 11
Brewer et al, Poverty and Inequality in Britain 2006, IFS (2006)
The National Minimum Wage. Retrospect and Prospect
57
Implementation and impact
appropriate policies like tax credits – and in its absence income inequality would have been
significantly worse.
The Impact
We have already reviewed the international evidence exploring the employment impact of
on Jobs
minimum wages. But what do we know about the UK’s experience since 1999? The LPC has
commissioned an array of groundbreaking research to inform their recommendations. And as
the earlier literature predicted, it has been hard to detect any ‘significant’ negative employment
effect as a result of NMW implementation and uprating.
For example, Stewart, writing in 2003, was clear in finding that there were no adverse effects
detectable on any appropriate specification of the data – small effects could be shown if
certain assumptions were made, but these generally depended on less credible models than
those which showed no significant impact on employment.61 Equally, if specific sectors were
examined, rather than the whole economy ‘no compelling evidence of a negative effect on
employment is found’.62
Dickens and Draca, writing two years later and examining the effects of the 2003 uprating,
produced similar results. They noted that the NMW had risen in value from 1999-2003 and that,
if employment effects were going to emerge, they would have done so by this time. The tone of
their paper is rather dry and the conclusions offered with a degree of academic reticence, but
the policy implications are clear. nothing the LPC did over the period in question jeopardised
the UK’s good employment performance.
This is an essential point to bear in mind as we consider the employment impact of the
NMW. Throughout the period since introduction the UK’s labour market has performed well.
Unemployment has remained low, employment has grown, pay settlements have been
moderate and prices have been stable. In other words, the NMW has yet to experience testing
times. However, we might note that the evidence from other countries covers the whole
economic cycle – booms, slumps and recoveries – so it would be quite wrong to conclude that
the UK’s benign economic record over the last decade can explain why the NMW has had so
little impact on employment. Indeed, it would have been a much greater surprise, given Card
and Krueger’s ‘new economics’ if a big negative effect on adult employment had been detected
in the UK data.
61
62
58
Stewart, Modelling the Employment Effects of the Minimum Wage (2003)
Ibid, 36
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
However, there is one sector where evidence exists to suggest that the NMW has had an
adverse impact on jobs. Residential care is rather unusual in that care homes are unable to set
their own prices, which are instead fixed by their clients (principally local authorities). Profit
margins are relatively low and it is difficult to accommodate minimum wage rises through
reduced profits. The scope for productivity improvements to reduce unit labour costs is also
somewhat limited. When confronted with a rising wage bill it is not entirely surprising that the
response of some employers has been to reduce both hours worked and levels of employment.
However, as the authors of this study are honest enough to admit, it is very difficult to draw
any general conclusions from this experience and it would be quite wrong to say that the
NMW is having a damaging widespread effect on employment63. Moreover, the study could
find no evidence of care homes closing as a result of the NMW and it is more plausible to say
that the sector was experiencing transitional problems in adjusting to the new reality. Another
important factor is that this sector would have experienced restructuring without the presence
of the NMW. Economies of scale allow large suppliers to trump their smaller competitors on
price. This makes it much harder to tease out any specific minimum wage effects, especially
among the smaller owner-managed care homes where most of the pressure is to be found.
A further possible conclusion of course is that we face some major choices as a society about
how we should pay for the care of the elderly and whether we should accept that higher costs
are an inevitable consequence of a higher quality service. Perhaps this example reinforces the
case for the state not only to be a good employer but a responsible client too, ensuring that
all those employed by publicly funded private contractors are treated fairly and enjoy decent
conditions of employment. At the very least, one would expect public bodies to make an effort
to guarantee that the smallest number of outsourced employees are in receipt of tax credits by
setting pay at a ‘decent’ level – which for these purposes means above the NMW. We return to
this issue in the next chapter when we discuss the role of public procurement as an instrument
to reduce further the incidence of low pay.
We have already noted that one of the reactions of care home owners was unilaterally to reduce
the hours worked by existing employees. There is some evidence to suggest that this is a more
widespread reaction than a straightforward reduction in employment. Card and Krueger may
have rejected Neumark and Wascher’s finding that the minimum wage increase in New Jersey
led to a reduction in employment but they have subsequently accepted that the New Jersey
increase may have slightly reduced the number of hours worked per employee.64
Machin, Manning and Rahman, Where the Minimum Wage Bites Hard. the introduction of the UK national minimum wage
to a low wage sector (2002)
64
Card and Krueger, Minimum Wages and Employment. A case study of the fast-food industry in New Jersey and
Pennsylvania. Reply, American Economic Review, 90 (2000) 1397-1420
63
The National Minimum Wage. Retrospect and Prospect
59
Implementation and impact
Can we observe a similar effect in the UK? This is an important question if we are concerned
about the impact of the NMW on the overall incomes of the working poor. In other words is an
increase in the NMW cancelled out by a reduction in the hours available to an employee and
does this then mean that the employee is just as dependent on tax credits as a result? The best
place to look for an answer is Stewart and Swaffield’s paper for the Low Pay Commission, which
found that the introduction of the NMW did lead to a reduction in the paid working hours of
both male and female low-wage workers.65 However, these findings should be handled with
care, not least because of weaknesses in the data that we have already explored. Moreover,
the effects were relatively small – of the order of one to two hours per week for both men and
women. This suggests that the affected workers were still better off as a result of the NMW
and that their incomes were relatively higher. We should also note that one of the estimation
methods found a larger reduction in basic hours for men than for women – most of whom
were working part-time anyway. Finally, there appears to have been no adverse impact on the
number of overtime hours worked. As a coping strategy, hours reductions may help employers
at the margin without having a significant negative effect on employees.66
A criticism often levelled against ‘regulated’ labour markets is that they protect ‘insiders’
(through strong employment protection legislation and high minimum wages) and exclude
‘outsiders’ (the unemployed) because employers find it expensive to recruit additional
employees and prefer to substitute capital for labour – in other words they are more likely to
look for technology driven productivity improvements in preference to recruiting from the
ranks of the unemployed. It is difficult to take this criticism seriously in the UK, simply because
both labour and product markets are amongst the least regulated in the developed world
– and we have already noted the absence of a positive productivity response to minimum wage
increases.67 However, it is important to have an answer to critics of the NMW who suggest that it
has created an insider/outsider labour market, with fewer opportunities for the excluded to find
worthwhile employment.
Mark Stewart has subjected the phenomenon to a forensic examination in another paper for
the LPC.68 At the heart of his analysis is an assessment of the changes in the labour market
prospects of different groups after the implementation of the NMW. He found that the
probability of remaining in the lowest group of wage earners declined over the period
Stewart and Swaffield, The other margin. do minimum wages cause working hours adjustments for low-wage workers?
(2004)
66
Ibid, 23
67
Coats, Who’s Afraid of Labour Market Flexibility? (2006)
68
Stewart, The National Minimum Wage and Labour Market Transitions (2002)
65
60
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
of the study (in other words low paid employees were becoming more likely to move into a
higher income group) and that the likelihood of moving from unemployment into low wage
work also declined over the period. At first glance this second finding may sound like an
endorsement of the ‘insider/outsider’ thesis, but we should note that the likelihood of moving
from unemployment into employment increased slightly over the period of the study. In other
words, the unemployed seemed to be moving into better jobs after the introduction of the
NMW than was the case hitherto.69 There also seems to be a positive labour supply response
because the percentage of the ‘economically inactive’ group who would like to work rose
following the introduction of the NMW. Again, far from being a case of keeping people out of
the labour market, the NMW seems to be lubricating labour market transitions.
However, these findings also need to be treated with caution. They explore the probabilities
that an individual in one part of the labour market will be in the same position at some later
date. As such, the results cannot be described as demonstrating a causal linkage between
labour market transitions and minimum wage developments. Nor can we necessarily point to
an association between the NMW and the possibilities of remaining low paid or unemployed.
On the other hand, these findings are useful because they suggest that the effect of the
NMW has not been to create a labour market with ‘insiders’ and ‘outsiders’. Expressed in more
conventional terms, a rising minimum wage is entirely compatible with the retention of a high
level of labour market flexibility.
The NMW
and
We have already noted that the largest single group of beneficiaries from the NMW is women
working part-time (see Figure 9). Indeed, we might reasonably say that the UK’s low pay
women’s
problem is essentially a gender pay problem. If this is the case then part of the solution may lie
pay
in closing the gender pay gap, but part of the solution lies too in increasing the value attached
to ‘women’s jobs’ in retail, social care, hospitality and hairdressing – a theme to which we
return in the next chapter. We would also do well to recall of course that the Women and Work
Commission has set out a comprehensive series of recommendations that, if implemented with
enthusiasm, could begin to close the gender pay gap more rapidly than reliance on the vagaries
of equal pay litigation, which is complex, time consuming and often unsatisfactory in outcome.
In the remainder of this section we will consider the impact of the NMW on the gender pay gap
and will briefly review some of the evidence on the impact that working part-time has on levels
of pay.
69
Ibid, 12
The National Minimum Wage. Retrospect and Prospect
61
Implementation and impact
Figure 9. Beneficiaries of the NMW
Male full-time
(21%)
Female part-time
(49%)
Male part-time
(12%)
Female full-time
(19%)
Source. Low Pay Commission (2005)
It may be helpful to deal with the latter issue first to set the context for the rest of our
discussion. As Manning and Petrongolo have explained with great clarity, there is a ‘part-time
pay penalty’70, which combined with other characteristics of women’s employment, helps to
explain the persistence of the gender pay gap.
The central findings of their report are worth setting out in some detail, not least because they
give a very clear indication of the scale of the UK’s problem. Most striking perhaps is that a
woman working part-time earns, on average around 22 per cent less than a woman working
full-time. The gap has increased over the past 30 years, with most of the increase taking place in
the 1990s.
Women working full-time and part-time are segregated by levels of education and occupation.
For example, women working part-time have lower levels of educational attainment, are more
likely to have (numerous) dependent children and to work in small and medium sized firms.
70
62
Manning and Petrongolo, The Part-time Pay Penalty, DTI (2005)
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
Twenty-five per cent of women working part-time are shop assistants, care assistants or
cleaners. One in six women working full-time are managers whereas the same is true of fewer
than one in twenty women working part-time. Much of the increase in the part-time pay
penalty can be explained by this occupational segregation – women in part-time jobs have
simply failed to benefit from the improvements experienced by women elsewhere. Similarly,
rising wage inequality has exacerbated the problem – women working full-time have benefited
from the rising incomes of those with higher pay, women working part-time have often seen
their earnings stagnate. Women moving from full-time to part-time work generally make what
Manning and Petrongolo describe as a ‘downward occupational move’. This is a problem in
other EU countries too, but the UK has a larger pay penalty. The authors conclude by noting
that the NMW and other recent policy innovations, like the Part-Time Workers Regulations
(2000) and the Flexible Working Regulations (2003) (establishing the right to request reduced
hours) ‘appear to have had little impact on the part-time pay penalty as yet although it is too
early to make a definitive assessment’.71 They also observe that the best approach to reducing
the part-time pay penalty would be to ‘strengthen the ability for women to move between fulltime and part-time work without losing their current job’.72
Whether this is the best or the only instrument available will be considered in the next chapter.
For the time being, however, we might spend a moment evaluating the impact of the NMW on
the gender pay gap, where a more positive story can be told. Figure 10 shows the trajectory
of the gender pay gap from 1998-2005. The closer a point on the curve is to 100 on the x-axis,
the narrower the gap. The y-axis plots the income distribution by percentile. If we take the fifth
percentile, we can see that women were earning around 87 per cent of the pay of a comparable
man in 1998, but almost 98 per cent in 2005. This is a significant effect, much of which can be
attributed to the NMW compressing the gender pay distribution.
We can also see that the gap has continued to close across most of the distribution over this
seven-year period until we reach the ninetieth percentile – in other words, the top ten per cent
of the income distribution. It is here that the gap seems to be stubbornly wide and it is here too
of course that the NMW has no effect whatsoever. Reducing the gap between male and female
investment bankers or City lawyers requires a rather different range of policy instruments.
To reinforce the point, the LPC’s analysis of the Annual Survey of Hours and Earnings (ASHE)
suggests that the gender pay gap between male and female median earnings in 2005 was
around 13 per cent. This is slightly narrower than the figure shown on the raw data (more than
71
72
Ibid, 6
Ibid
The National Minimum Wage. Retrospect and Prospect
63
Implementation and impact
Figure 10. Women’s hourly pay as a percentage of men’s hourly pay 1998-2005
100
90
90
80
80
70
70
60
60
Women’s hourly pay as a percentage of men’s
100
50
50
0
5
10 15 20 25 30 35 40 45 median 55 60 65 70 75 80 85 90 95 Percentile point of the hourly earnings distribution for adults aged 22 and over
1998
2004
2005
Source. Low Pay Commission (2005)
20 per cent). Furthermore, the increase in the NMW from £4.50 to £4.85 in 2004 closed the
gender pay gap at the median by 1.5 per cent. These may look like small effects but they are
important and, when married to the recommendations of the Women and Work Commission,
could begin to make serious progress in eliminating gender pay inequality.
The story so
far
What can we say then about our story so far? Is it a tale of unqualified success, or have we
identified serious deficiencies in the NMW regime that require further action? To begin with, the
LPC has proved to be an effective institution in both setting ‘realistic’ levels for the NMW and in
64
The National Minimum Wage. Retrospect and Prospect
Implementation and impact
establishing a consensus that minimum wage fixing is here to stay. This is a huge achievement
given the national conversation about the NMW in the early 1990s.
Second, we can see that the NMW has also proved effective in improving the wages of the
lowest paid. The toughness or bite of the NMW has risen over time (and is much tougher for
youth than for adults) and has also progressively risen up the league table of minimum wages
across the OECD.
Third, contrary to the conventional view, the NMW has proved to be a useful redistributive tool
when seen in conjunction with other government interventions – the new tax credit regime
and increases in child benefit. Similarly, and again contrary to the conventional wisdom,
income inequality has fallen somewhat in the UK since 2001 and the NMW is at least partially
responsible for this phenomenon. We should note that this data only runs to 2005 and the
significant increases in the NMW since that time should have narrowed the distribution still
further – although much remains to be done to achieve a genuinely egalitarian distribution of
income.
Fourth, the NMW has had no detectable adverse impact on employment, either for adults or for
young people. It may have smoothed the path of some labour market transitions too, although
this effect is difficult to disentangle from other economic factors determining the overall level
of employment and unemployment.
Finally, the NMW has had a big impact on women’s pay. Most of the beneficiaries of the NMW
are women and the largest single group of beneficiaries are women working part-time. Not
surprisingly, the NMW has also proved effective at narrowing the gender pay gap somewhat,
particularly at the bottom of the distribution. But other factors still seem to have a more
powerful effect, for example, collective bargaining on pay reduces the overall gender pay gap
in a workplace by an average of 2-3 per cent.73
While all of these developments are positive it is important to be vigilant against complacency
and it would be quite wrong to believe that the battle against low pay has been won. There are
still too many workers being paid the NMW or earning just above that level. At £5.35 an hour
the NMW produces gross earnings of £214 for a standard 40-hour week, which means that it is
difficult if not impossible for a family to be supported by one individual paid at the NMW. This is
not to suggest of course that the NMW should be set at the level of a ‘living wage’ – the case
Metcalf et al, Unions and the Sword of Justice. Unions and Pay Systems, Pay Inequality, Pay Discrimination and Low Pay,
National Institute Economic Review (2001)
73
The National Minimum Wage. Retrospect and Prospect
65
Implementation and impact
for a judicious mix of minimum wages and in-work benefits remains compelling. But equally,
we would be wrong to believe that the status quo is sustainable. If we are serious about
widening the life chances of those on low incomes and wish to create a world where there are
more ‘good jobs’ than ‘bad jobs’, then we must pay relentless attention to those who happen to
find themselves, for whatever reason, stuck at the bottom of the income and status hierarchy.
The next chapter builds on this fundamental insight, sets out some priorities for the future
and offers an integrated strategy for continued progress in eliminating low pay from the UK
economy.
66
The National Minimum Wage. Retrospect and Prospect
Chapter 5. What next? A positive prospectus for tackling low pay
So if the NMW has been a success but has still left a large number of workers struggling to
achieve a decent income then what more can be done? It would be a little too pessimistic to
say that the answer is ‘nothing’, but equally, we can see from the international comparisons
reported in the previous chapter that the NMW is reaching the point where there is rather
limited scope for significant further increases. Some campaigners reject this view with passion
and conviction, suggesting that there is nothing in the data to support the view that the NMW
is already ‘high enough’ and indeed that the NMW should become a ‘living wage’. But these
campaigners are equally unwilling to accept that there are any limits to the level of the NMW, or
that at some point all economic theories point to a negative impact on jobs.
Before we consider these broader questions there is a rather more prosaic issue that needs to
be addressed. Just what do we think that the LPC should do in making their recommendations
for an NMW increase in 2007? At this point it is important to understand that, contrary to usual
practice where a two-year settlement is concluded, the LPC will now be recommending an
increase for one year only. This does not necessarily herald a move to annual recommendations
and seems to reflect the changing composition of the LPC over the next year (six members are
due to retire) and the legitimate unwillingness of the current members to bind their successors.
This question is explored in more detail below, along with some consideration of the other
instruments available to reduce the reliance on low pay, many of which are drawn from the
government’s manifesto commitments. We will also need to consider the case for the payment
of the full adult rate at the age of 18, for no better reason than this is a demand advanced by
many trade unions and they have an expectation that their ideas will be given a proper hearing.
There are some practical questions around the enforcement of the NMW that also deserve
further attention, particularly the steps that need to be taken to ensure that migrant workers
and other vulnerable groups receive their full legal entitlements.
More can be done too if government and private sector organisations adopt responsible
procurement practices. Not surprisingly, low paid contract cleaners or catering workers feel
justifiably aggrieved if they are providing services to a highly profitable company (which offers
high wages to its own staff ) and find themselves paid at or close to the NMW.
There are many useful policy ideas already in the public domain that, if combined in a
comprehensive package, could build on the achievements of the NMW and further reduce
the incidence of low pay. Whatever happens, however, it would be unwise to expect overnight
The National Minimum Wage. Retrospect and Prospect
67
What next? A positive prospectus for tackling low pay
success; all developed market economies have some experience of ‘low pay’ and all struggle to
a degree with questions of poverty and social exclusion.
And before we fall prey to those siren voices who suggest that a more egalitarian distribution of
income in incompatible with ‘competitiveness’, we should note that many other countries have
enjoyed higher prosperity, higher growth and stable economies with higher taxes, stronger
welfare states and less inequality than the UK.74 There is no iron law telling us that we have to
accept more inequality and a weaker welfare state in a world of intensified competition and
more integrated markets.
So what
It has already been observed that the LPC has recommended quite large increases in the NMW
should the
since 2003 and growth in the minimum wage has outstripped the growth of average earnings.
LPC do
next?
Similarly, we have seen that the ‘bite’ of the NMW has got significantly harder since introduction
in 1999, even if the numbers covered have continued to fall short of the original 1.9 million
employees. The NMW also compares favourably when benchmarked against the minimum
wages of other OECD economies.
This means that the LPC, in making their recommendation for 2007 have some simple and
straightforward choices. They can.
•
•
Maintain the real value of the NMW by uprating in line with average earnings.
Test the upper bound of the ‘range of indeterminacy’ by increasing the ‘bite’ still
further, recalling for example that the French, New Zealand and Australian minimum
wages have had no negative effect on employment even though they have a harder
bite.
•
Allow the minimum wage to fall back slightly because the evidence they have received
suggests some potential for a negative labour market impact if the real value is
maintained. A reasonable benchmark here would be to uprate in line with inflation.
Uprating in line with average earnings (including bonuses) would require an increase of 4.1 per
cent, taking the NMW to £5.56 in 2007. A sensible measure of rounding up would take the NMW
to £5.60. A more ambitious effort to test the upper bound might take the NMW towards £6.00
an hour, although the evidence that the LPC has received makes this a rather unlikely prospect
and there may be more of an appetite for some further testing of the current level (maintained
at its real value) before adopting a more ambitious approach. This would also be consistent
74
68
Coats, Who’s Afraid of Labour Market Flexibility?, TWF (2006). Giddens and Diamond (ed) The New Egalitarianism (2005)
The National Minimum Wage. Retrospect and Prospect
What next? A positive prospectus for tackling low pay
with the cautious approach taken in the 1999-2002 period, with a low level set at the point of
introduction followed by upratings in line with or very slightly ahead of average earnings.
The third option is based on the assumption that the NMW is slightly too high and therefore
needs to fall back a little. Some employers have taken this view, but it is difficult to find any
strong support for it in either the UK data, recent research findings or international experience.
Nevertheless, were the LPC to be persuaded by these arguments, they might chose to
recommend that the NMW be fixed at £5.50 – a simply increase in line with the consumer price
index (currently running at 2.7 per cent, which is of course above the Chancellor’s inflation
target).
Of course the LPC are unlikely to discuss their possible recommendation in precisely these
terms. Most importantly perhaps, they will eschew the rather formulaic description that has
been outlined above and will pay rather more attention to the evidence they have received,
analysis of the data and the negotiating positions of the trade union and employer members of
the Commission. On the other hand, earnings, prices and a tougher ‘bite’ are useful benchmarks
in specifying the range within which the LPC’s recommendation might be fixed, with (say)
£5.80 as the upper bound and £5.50 as the lower bound. Understanding these limits can also
help us to make a judgment about whether the LPC have decided to be ambitious or cautious.
Setting some boundaries can give us a clear sense of the limits of the possible and allow us
to understand that the wilder demands made in recent times for a NMW of £7.00 an hour are
somewhat utopian or, in less measured language, disconnected from the realities as seen by
the LPC.
For the avoidance of doubt, I should perhaps make my own position clear. The best assessment
of the evidence today suggests that a period of consolidation is required. However, this
does not require an excessive exercise of restraint by the LPC and the case for maintaining
the current bite of the NMW is compelling. Given the significant increases over the last two
upratings it would be unwise to press ahead too quickly and it is right to resist the suggestion
that the LPC should continue to test the upper bound of the ‘range of indeterminacy’. Fixing the
NMW for 2007 at £5.60 would be reasonable given the experience so far in the UK and would
also be consistent with international experience. No doubt this view will disappoint those in
the trade union movement committed to higher figures but, in Paul Gregg’s words, this is my
‘best bet’ on a sustainable level that can lay solid foundations for a little more ambition in the
future. So far as the LPC is concerned caution has always proved an effective policy. There is no
The National Minimum Wage. Retrospect and Prospect
69
What next? A positive prospectus for tackling low pay
reason for them to abandon it now, but nor is there any reason for a loss of nerve. Allowing the
NMW to fall in value would be a disappointment and would send a troubling signal about the
direction of policy.
…and what
about ‘living
wages’?
We have already seen too that some campaigners have argued that the NMW should be
converted in to a ‘living wage’. This is the position of Unison, the large public service union,
which has consistently complained that the NMW is too low and insufficient to support a
family. In their view, the NMW should be increased to £7.00. Similarly, Compass, the centre-left
pressure group, have referred favourably to the Greater London Authority’s calculation that
£7.05 an hour is the lowest possible ‘living wage’ for London and have also suggested that a
‘standard living wage should be introduced across the country’.
Why should companies get away with paying less than it costs to live?75
At first glance this looks like a very simple principle that can be embraced by all people of
goodwill with a proper sense of fairness. Unfortunately, it takes no account whatsoever of the
fact that different household types have different needs. It seems wholly unrealistic to argue
that employers should bear full responsibility for meeting such needs, not least because it
suggests that wages should vary by household type. A natural consequence of this argument is
that a low paying employer may offer wages that allow a single person or a childless couple to
keep body and soul together but condemns a household with children to penury. Somewhat
paradoxically, Compass argue for an increase in in-work benefits at the same time as they
deplore the fact that in-work benefits are being used by employers as a subsidy for low pay
and bad employment practice. Indeed, they suggest that it will be impossible to achieve the
government’s child poverty targets without an increase in transfer payments to poor families.
It will need a combination of increases in benefits and tax credits and a range of other measures
to help disadvantaged groups, such as improving educational outcomes and targeting public
services towards the worst off.76
As a practical matter it would appear that some combination of minimum wages and in-work
benefits is an absolute necessity for the foreseeable future. But if this is the case then where
does it leave the advocates of a ‘living wage’? In their defence we can probably endorse the
view that no government will wish to offer an excessive subsidy to low paying employers, if
only because taxpayers may wonder whether this is a good use of ‘their’ money. But we might
75
76
70
Rutherford and Shah, The Good Society, Compass (2006) 41
Ibid, 30
The National Minimum Wage. Retrospect and Prospect
What next? A positive prospectus for tackling low pay
also note that one of the purposes of the NMW is to limit the extent to which the state has to
subsidise low pay. Indeed, the trajectory of the NMW over the last three years has placed a
much more effective floor under wages and reduced further the scope for exploitation of this
kind. A swift glance at the data from the middle 1990s emphasises the point. Government
expenditure on income support for the low paid climbed consistently from the abolition of
wages councils to the introduction of the NMW.77 Even if we assume that the LPC exercises
caution in their forthcoming recommendations, we can be confident that the NMW counteracts
the worst excesses of employer exploitation of the benefits system.
We should also note perhaps that the combination of the NMW and tax credits has a broadly
redistributive effect. Table 2 sets out the real increase in the weekly incomes of different
household types from April 1999 to April 2007 (based on the announcements in the
Chancellor’s Pre-Budget report). It can be seen that for all the household types recorded here
actual income is above the current level of the NMW.
Table 2. Weekly minimum income guarantees
April 1999 April 2007
% Increase
in real terms
‘Effective’
minimum
hourly
wage
Family with one child, full time work
£182
£275
22%
£7.86
Family with one child, part-time work
£136
£215
27%
£13.43
Couple, no children, 25 or over, full-time work
£117
£211
45%
£6.02
Single disabled person in full-time work
£139
£222
29%
£6.34
Single disabled person in part-time work
£109
£163
20%
£10.18
Source. HM Treasury, Pre-Budget report 2006
Assumes a single earner household, the prevailing rate of the NMW and that the family receives the full
entitlement of Family Credit/Disability Working Allowance or Working tax Credit/Child Tax Credit. Full-time
work is assumed to be 35 hours, part-time work is assumed to be 16 hours.
This is a largely positive story, which shows how much progress has been made since the
middle 1990s. It also demonstrates the government’s commitment to helping those who might
otherwise find integration into the labour market difficult because life on out-of-work benefits
would be more attractive than work. It is inconceivable, for example, that a NMW of more than
£10 an hour will be established, but that is precisely what a single disabled person in part-time
77
See Department of Social Security, Family Credit/Family Income Supplement Awards and Expenditure 1988-97
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What next? A positive prospectus for tackling low pay
work ‘effectively’ receives through a combination of the NMW and tax credits. It is not entirely
clear how proponents of a ‘national living wage’ react to what must be, in their eyes, a rather
unpalatable fact.
Finally, we have already examined minimum wages across the developed world and noted
that countries with the highest minimum wages fix the level between 50 and 60 per cent of
median earnings (with France and Australia as outliers at 60 to 70 per cent). Even though we
have accepted that the competitive market model is an inadequate description of reality, we
have also recognised that at some point a negative effect on employment will appear if the
minimum wage is set too high. There is a very strong case for saying that the limit has been
breached at £7.00 an hour. If this is the case it is difficult to see how supporters of the NMW as
a living wage can achieve their objective – even after a Herculean effort they are unlikely to
have found compelling evidence that offers a persuasive alternative to either the conventional
competitive market model or to an analysis rooted in monopsony.
However, this is not to rule out the idea of ‘living wages’ as an instrument with some potential.
For example, there are good examples of ‘living wages’ being used to lever up pay through the
supply chain, both in the USA and the UK, of which more is said below. But even if campaigners
make some progress on that front, for the foreseeable future national policy must rest on a
sensibly fixed NMW supplemented by relatively generous tax credits. This is how to ‘make work
pay’ and put more money into the pockets of poor working families.
And what
We began our discussion by noting that some organisations (principally trade unions) continue
about youth
to argue for the payment of the full NMW at the age of 18. But we have also reviewed evidence
rates?
showing that minimum wages, if fixed inappropriately, can adversely affect the employment
prospects of vulnerable young people. Where then does this leave the case for the abolition of
age rates?
During my time as a member of the LPC I sought to argue that age rates were unfair on ‘rate
for the job’ grounds. If an 18 year old is doing the same job and achieving the same level of
productivity as another employee aged 35 then why should the younger worker suffer an
age related penalty? Furthermore, there was evidence available shortly after I was appointed
(2000-01), which suggested that employers were abandoning age-related pay rates. In
these circumstances it seemed sensible to argue that over time one might expect to see
a convergence of pay at the lower end of the distribution and that the youth NMW might
72
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gradually be pushed up to the level of the adult NMW, effectively abolishing the age-related
rate.
Unfortunately, subsequent experience has proved that this was merely wishful thinking.
Indeed, employers began to reintroduce age-related pay rates as the adult NMW rose in relation
to median earnings.78 Moreover, in 2003 the LPC introduced a lower rate for those aged 16
and 17 – and nobody has yet made the case for the adult rate at 16. For these reasons I have
changed my mind, despite the power of the argument from fairness. It is now my considered
view that youth rates should be a permanent feature of the NMW regime.
No doubt this will enrage some of the more enthusiastic proponents of ‘the adult rate at 18’ but
to defeat my argument they need to have a better case of their own. In other words, they must
use the evidence to show that payment of the adult rate at 18 will not potentially damage the
life chances of the most disadvantaged young people; as with the case for a NMW of £7.00 an
hour, it is difficult to see where such evidence might be found.
There is a further consequence of youth rate abolition that supporters of the argument have so
far proved unwilling to address, which is highly relevant as we consider the future of the NMW.
The argument can be expressed in simple and straightforward terms. the NMW would be lower
and would probably fall in value if the adult rate were payable at the age of 18. This may sound
like a bold statement, but it is easily explained. We can see from Figure 2 that the 18-21 NMW
has reached 75% of median earnings for this age group. Paying £5.35, or £5.60 or whatever the
level happens to be in autumn 2007 will increase the ‘bite’ of the NMW to an unsustainable level
for young workers. In these circumstances, it is highly likely that there would be some adverse
employment effect and the Spanish case discussed above suggests that the consequences
could be serious. If this argument is right (and it almost certainly is) then the LPC could only
put the adult NMW on a downward glide path. In other words the adult minimum wage would
have to fall significantly to minimise any adverse impact on youth employment. Eventually, one
might find that the NMW was nothing more than a youth minimum wage and a rather weak
labour market floor for adults.
The choice then is clear. We can either have a very low NMW, which is paid at the age of 18 or
we can keep the youth rate and continue to have an adult NMW that compares favourably with
much of the rest of the developed world. A dispassionate observer might say that this is really
no choice at all. The point about young people is that they get older and eventually qualify for
78
See for example the account given in the LPC’s 2005 report.
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the adult NMW. It is far better then to have the highest possible adult rate and recognise the
powerful case for treating young workers differently.
For the sake of completeness we should record that the LPC has consistently recommended
that the adult rate should be payable at the age of 21 rather than the age of 22 as is currently
the case. I endorse this position and find it difficult to understand why the government has
consistently rejected the LPC’s unanimous view on the treatment of young workers. HM
Treasury have sought to argue that 21 are year olds are at much greater risk of unemployment
than those aged 22 or over, but the numbers are very small and the evidence is by no means
compelling.
A new menu
of policies
Having identified the ‘right’ level of the NMW for the future and having ruled out both the
notion of the NMW as a ‘living wage’ and the abolition of youth rates, we now turn to the
positive prospectus for the future. Even though significant progress has been made since
1999 there are large numbers of low paid workers in the UK. Moreover, we can say with some
confidence that the NMW itself is a low wage and it would not be appropriate for an increasing
proportion of the workforce to experience earnings either at this or at a slightly higher level. But
what more can be done if increasing the level of the NMW is not really an option because we
are at the upper end of the ‘range of indeterminacy’? What other policy instruments might be
used?
We can begin to answer this question by referring to the government’s 2005 election manifesto,
which contains a wealth of useful ideas to continue the battle against low pay. As we noted
earlier, employers so far have been willing to pay for the NMW through a reduction in profits or,
in more limited cases, through an increase in prices. But the challenge now is to seek to improve
the performance of low wage businesses. Just what do they need to do to achieve a stepchange in performance and to what extent can strategies be devised for skills development
or investment in technology that might increase productivity, reduce unit labour costs and
allow these employers to pay relatively higher wages? Similarly, given our earlier observations
about the gendered nature of low pay, are there any proposals made by the Women and Work
Commission that may help in this context?
The government’s manifesto commitments with labour market relevance are to be found in
the conclusions of the Labour Party’s 2004 policy forum held at Warwick University – generally
referred to as ‘the Warwick agreement’ or simply ‘Warwick’.79 There are six specific commitments
79
74
Labour Party Policy Forum Conclusions Summer 2004, Section 3. Full employment and working in modern Britain (2004)
The National Minimum Wage. Retrospect and Prospect
What next? A positive prospectus for tackling low pay
of relevance to the question of low pay. For convenience they are set out in summary form in
the box below and then discussed in more detail.
Box 2. The government’s manifesto commitments
•
•
•
•
•
•
Conclude a new compact on employment standards where public services are outsourced
to ensure that employees have access to advice, basic training and skills and trade unions
‘should they wish them’.
Make the monitoring and enforcement of the NMW a priority to ‘root out the exploitation of
the vulnerable, especially migrant workers’.
Bring together the social partners to develop a voluntary and comprehensive ‘standard of
good employment practice’, with a process of employer accreditation potentially linked to
the Investors’ in People standard.
Explore how to improve the co-ordination of enforcement activities across government
agencies like the ‘Health and Safety Executive (HSE), ACAS, the Contributions Agency and
others’. Draw on the experience of community campaigns like London Citizens to improve
the condition of low paid workers.
Improve the quality of advice, guidance and support available form government agencies on
such issues as skills, work benefits and employment rights.
Establish sector forums, bringing together the social partners in those sectors where low pay
is most entrenched to ‘discuss strategies for raising productivity, health and safety standards,
as well as employee pay, skills and pensions.
Before we embark on our discussion of these proposals we might first observe that they
have largely disappeared from the national political conversation. Trade unions seem to have
developed an obsession with either the NMW as a ‘living wage’ or with the abolition of youth
rates, neither of which make much practical political sense. It is curious too that trade unions
complain about the slow progress in implementing the Warwick but have paid little attention
to this potentially radical menu of policies that could have a significant impact on low pay.
From a low paying employer’s point of view this is a rather happy set of circumstances. If there
is no consensus between government and NMW supporters about what should happen next
then there is very little pressure on employers to change their behaviour at the ‘rough end’ of
the labour market. Those who claim to be serious about their desire to sweep low pay from the
face of the British economy should press harder for the implementation of these commitments
or face the accusation that they are happier with oppositionist rhetoric than the sometimes
messy compromises of policy implementation.
Public
That the public sector should only procure goods and services from reputable contractors is
service
an idea with a long pedigree. This was the inspiration for the FWR and for a range of contract
employment
compliance initiatives implemented up to the middle of the 1980s. It is exemplified today
standards
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What next? A positive prospectus for tackling low pay
in the various codes of practice designed to eliminate the so-called two-tier workforce from
contracted out public services and it can be seen of course in the government’s manifesto
commitment to a compact on public service employment standards.80 So far this idea remains
relatively undeveloped, although it is understood that some preliminary discussion have taken
place between trade unions and private contractors under the auspices of the Public Services
Forum (PSF). The PSF is chaired by Pat McFadden MP, the cabinet office minister, and brings
together public service trade unions and employers.
The intention is clear. It is inevitable that the private sector will play a more important role in
public service provision in a world where ‘contestability’ is a fact of life. From the employees’
point of view this process could create great turbulence, uncertainty and insecurity. By
adopting a set of common employment standards many of these anxieties can be properly
addressed. Employees will be confident that they enjoy the same basic standards of decent
treatment no matter who their employer happens to be.
We have also seen what can happen when there is no effective dialogue in place to allow
employers, workers and their trade unions to reach a reasonable understanding with the
government as the client. Residential care is a fine example of how the system can break
down and how both employees and citizens can suffer as a result. In that case local authority
budgets were not increased following the implementation of the NMW, prices (as fixed by local
authorities) stayed the same, profits fell and there was a negative effect on employment. A
properly negotiated compact ought to create the conditions for a better conversation between
public and private sectors about how care should be funded and for a more sophisticated
discussion with citizens about how we care for the elderly. This would be a huge improvement
on the present situation.
A moderate sceptic might argue that this is far too optimistic and that the compact as proposed
will only cover a ‘lowest common denominator’ range of issues – advice, basic training and
skills, access to unions etc. Most importantly perhaps, there is no suggestion yet that the
Compact should cover pay. On the other hand, we might respond by saying that any dialogue is
better than nothing and opening up the conversation may eventually lead the parties to accept
that rather more should be on the agenda, including issues such as informing and consulting
the workforce, management cultures and behaviours and the delivery of wider social objectives
like diversity, commitment to local employment and relationships with schools and colleges to
facilitate labour market transitions for the most disadvantaged young people.
The two-tier workforce arose when employees were transferred from the public to the private sector and retained
their public sector conditions of employment whereas new employees were offered less generous terms with often
inferior pensions
80
76
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What next? A positive prospectus for tackling low pay
Perhaps the most important feature the proposed Compact is the likely demonstration effect.
We have already noted that the recission of the FWR gave a very clear signal to employers that
the quality of employment would no longer be a relevant consideration in the procurement
process. Of course the effect here is to the contrary (employment standards do matter) and the
government is being equally clear in identifying its objective – high quality employment is as
important in contracted-out as in directly delivered public services.
Perhaps the real value of this initiative is that it shows a willingness to use the supply chain
to raise employment standards, a model that might also be usefully applied in the private
sector. Of course, there is a cost attached to higher quality employment and the public sector,
as the purchaser of services, will have to accept relatively higher contract prices. But before
Treasury officials start squealing with fiscal anguish, it must be understood that higher quality
employment is likely to lead to higher levels of output, lower levels of sickness absence and (if
wages are higher as a result) less reliance on tax credits as a supplement to earnings. It would
be absurd to argue that the policy is completely cost free, but it is likely to be close to cost
neutral and is as much about improving the services for citizens as it is about improving the lot
of producers.
Read alongside the measures discussed below, it is not too fanciful to suggest that at some
point there may be a desire to extend the compact to embrace wages too, particularly given
our assessment below of the relationship between low pay and the proposed ‘standard of good
employment practice’. Almost 120 years after the adoption of the first FWR, government may be
rediscovering the importance of acting responsibly in the procurement of goods and services,
understanding that high quality public services cannot be delivered by employees who are low
paid, disaffected and therefore less productive than they might be if they were managed fairly
and effectively.
Enforcing
Some action has already been taken to improve the enforcement of the NMW. For example,
the NMW
the Chancellor announced in his 2006 Pre-Budget Report that the resources available to HMRC
– protecting
for minimum wage enforcement would be raised by 50 per cent from April 2007. This is not
migrant
to suggest that there is widespread non-compliance with the NMW, although it is sometimes
workers
difficult to gauge the size of the informal economy where non-compliance is likely to be rife.
Similarly, while the government refers specifically to the imperative to protect migrant workers
it is equally fair to say that we cannot be certain whether this is a big problem or not. Perhaps
the best that we can say is that further research is required.
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What next? A positive prospectus for tackling low pay
200
200
150
150
100
100
50
50
0
0
Natural increase
1991-92
1991-92
1991-92
1991-92
1991-92
1991-92
1991-92
1991-92
1991-92
1991-92
1991-92
-50
1991-92
-50
1991-92
Thousands
Figure 11. Migration and the natural increase in the UK population, 1991-2004
Net migration & other changes
Source. Low Pay Commission, ONS, General Register Office for Scotland, Northern Ireland Statistics and Research
What we do know, however, is that there has been an increase in the flow of migrants to
the UK accounting for much of the recent population growth (see Figure 11). There is also
some evidence too that inward migration is helping to offset inflationary wage pressures by
improving labour supply.81 Although another way of expressing the same thought is that
migration is acting to depress wage growth in the UK, particularly at the lower end of the
earnings distribution.
While the Bank of England sees migration as an important instrument of counter-inflation
policy, the DTI have offered a more measured assessment of the impact on wages. For example,
the DTI’s most recent evidence to the LPC notes that around 40 per cent of known migrant
workers in the UK are paid at or close to the NMW.82 However, average earnings growth seems
not to have been affected by inward migration, even in those geographical areas with a
concentration of migrant workers. The effect is best explained by the recent developments in
the level of the NMW, which has been rising faster than the growth of average earnings. Given this
fact, it is hardly surprising that migration has had no ‘dampening effect’ on aggregate earnings
growth.
81
82
78
Bank of England Inflation Report
DTI evidence to the LPC, op cit, 106
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What next? A positive prospectus for tackling low pay
Of course, this situation could change, particularly if the real value of the NMW were to fall in
relation to the median. A natural conclusion is that maintaining the NMW at its current level in
real terms is essential if we are to limit the potential for downward pressure on wages following
an influx of migrant workers.
In line with the manifesto commitment, the government has already identified that there
should be targeted enforcement of the NMW in to those sectors identified as vulnerable to noncompliance. Hairdressing was chosen in 2005/06 and childcare has been selected for 2006/07.
Experience so far points to a modest degree of success, with £380,000 in unpaid wages
recovered for workers in hairdressing alone in 2005-06.
However, we should note that the government has ruled out targeting a sector with a high
number of migrant workers in the next year, despite the LPC’s recommendation that they
should do so. Apparently, this is not because of any reluctance on the government’s part, but
because the Home Office led Joint Workplace Employment Pilot (JWEP) has been in operation
in the West Midlands since 2005 adopting a multi-agency approach to tackling ‘both the use
and exploitation of illegal migrant workers’.83 We would strongly urge the government to
evaluate this initiative as quickly as possible and proceed with the implementation of a national
enforcement programme focused on improving the circumstances of vulnerable migrant
workers (whether legal or illegal). There is no excuse for delay. To refuse to proceed until a full
evaluation of JWEP has taken place sounds like bureaucratic foot dragging at a time when the
problem maybe getting considerably worse.
We should perhaps be clear too that none of the official figures give a clear picture of the extent
of non-compliance with the NMW. For example, estimates from the Annual Survey of Hours
and Earnings (ASHE) show that in 2006 336,000 workers or 1.3 per cent of jobs were paid below
the level of the NMW. However, this does not mean either that all these workers were being
underpaid or that the figures represent the ‘real’ level of non-compliance with the NMW. Some
of these workers may be trainees and therefore exempt from the NMW, whereas others may
have a legitimate deduction made from their wages to cover the costs of their accommodation,
which is perfectly lawful as long as the employer does not exceed the limits set in the NMW
regulations.
The extent of non-compliance in the informal economy is, by definition, impossible to measure
since there is no data whatsoever on which an assessment can be made. It is reasonable to
83
Ibid, 19
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79
What next? A positive prospectus for tackling low pay
conclude that compliance with the NMW is a problem in a small number of sectors and only a
targeted, risk based approach to enforcement can reveal just how many employers are flouting
their legal obligations. In general it is not wise to make policy on the basis of anecdote or
intuition but so far as the most vulnerable workers are concerned enforcement agencies may
have little else to help them.
A standard
of good
employment
practice
The best that can be said for the proposed Standard of Good Employment Practice is that it
remains an idea in gestation. The nature of the government’s commitment is not entirely clear,
although it might be interpreted as an attempt to establish some basic principles with which
businesses should comply if they are to be seen as socially responsible. There are already many
standards in existence that are relevant in this context – the HSE’s Management Standards,
ACAS’s model of Good Employment Relations, IiP itself and, in the public sector, the model of
the Well-Managed Organisation developed by the Ministerial Task Force on Health, Safety and
Productivity.
On one view, the new Standard might offer little more than an endorsement for minimum
levels of compliance with employment law, although this sounds terribly unambitious and
would be of limited practical use. A closer reading of Warwick indicates that the government
have something altogether grander in mind, with a standard that is ‘comprehensive’ and
presumably covers all aspects of the contract of employment as well as model HR policies
and practices. If this commitment were to be taken seriously it could have a huge impact on
the quality of employment in the UK, not least because it would put job quality back at the
centre of the national conversation. In the context of our discussion, it is difficult to see how
an organisation could qualify for the standard if it employed a large number of workers on the
NMW.
It would, of course, be unwise to reinvent the wheel and much more sensible to build on the
benchmarks that already exist. Furthermore, the Department of Health and the Department
for Work and Pensions have already developed a strategy for promoting the Health Work
and Well-Being of Working Age People. This is a useful foundation on which to build since the
implementation of the strategy includes some consideration of the notion of a ‘good job’.
Somewhat surprisingly, this agenda has, so far, been entirely disconnected from the DTI’s
strategy for the protection of vulnerable workers set out in their 2006 strategy paper Success at
Work. At the very least there is a need for better collaboration across departments. Government
has begun, albeit tentatively, to evince a growing concern for the quality of employment. But
80
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all of these strategies depend for their success on the development of a clear and coherent
narrative about the link between high quality employment, high productivity and strong
organisational performance. The NMW is an important element in the overall policy mix,
but over time it should, if the strategy is successful, become less important because more
organisations are able to offer better quality jobs to their employees.
Better
A sceptical reader might think that the account given so far is simply too optimistic and that
and more
government will be uneasy about a major initiative of this kind. A degree of scepticism may
joined up
seem sensible given past experience, but there is some evidence to suggest a serious wish to
enforcement
make more rapid progress. It is impossible otherwise to make sense of either the government’s
desire for more ‘joined-up’ enforcement or the explicit support that has been given to the
work of London Citizens, an organisation that has used the power of public embarrassment to
encourage major corporations to take responsibility for the low pay of contracted out support
workers like cleaners, catering staff or security guards.
Helping
A huge problem for some low paid workers is that they stay low paid throughout their working
people ‘get
lives. Worse perhaps, some people find themselves in a revolving door between low pay and
on’ at work
unemployment. Youth unemployment has a scarring effect and those who began their working
lives in a vulnerable position are likely to remain vulnerable until they retire. In large measure
this is a consequence of low skill and low pay. Those deemed to have failed in formal education
have no choice but to accept an unskilled job at precisely the time when the demand for
(particularly male) unskilled labour is falling quite rapidly. Widening the life chances of the least
advantaged is about much more than the NMW and this is why the government has agreed to
invest in services that provide better advice, guidance and support to those at the bottom of
the labour market.
The genesis of this idea can be found in a speech delivered by John Denham MP, in which
he argued that JobCentre Plus should become an ‘Advancement Agency’ enabling people to
make progress in their lives and careers, through the provision of advice on skills development,
job opportunities and the possibilities of retraining to find higher quality (and more highly
paid) employment.84 While the government has yet to take up the specific suggestion of a
comprehensive redesign of Jobcentre Plus, the 2006 Pre-Budget report more than nodded in
the direction of this agenda in identifying for example that lone parents need tailored support
‘to enable progression in work’ rather than just to find work. ‘Work first’ remains the foundation
on which the government’s model of full employment has been built, but it would be absurd
84
Denham, Making Work Work, Fabian Society (2004), at http.//www.fabian-society.org.uk/documents/searchdocument.
asp?DocID=82
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to deny that there is growing interest in the quality of work as a political issue and in allowing
those at the bottom of the labour market to find a route to a better job.
Further support for this case can be found in the final report of the Leitch review.85 While the
focus of the recommendations is on the notion of ‘economically valuable skills’ much attention
is also devoted to the need to create a culture of learning and raise employee’s aspirations.
Giving people a credible reason for believing that they can do better is critical not just in
meeting the challenge of more intense competition in more integrated markets but in giving
people meaningful opportunities to escape from low pay too.
Sector
But even if these policies are implemented with enthusiasm and prove to be effective, we will
forums
still be left with a large number of organisations whose business models depend on low pay
and an acceptance of low productivity. Ewart Keep and Ken Mayhew have argued that this is
an entirely rational course of action for a business to pursue if the ‘low road’ model continues to
offer a decent rate of return.86 Indeed, there is no reason whatsoever for a business to change
if a market for their products and services exists amongst a large group of relatively poor
consumers. In other words, a society characterised by wide income inequality is more likely
to find itself suffering from a low skills equilibrium. Employers operating in these markets can
continue to take the low road unless government intervenes by introducing more rigorous
statutory employment standards. Without such regulatory intervention poor business practice
can continue.
This argument is much harder to sustain of course in sectors that are internationally traded. At
the low end of the spectrum of consumption it is highly likely that low cost domestic producers,
supplying high volume, low specification, undifferentiated products will find themselves
undercut by lower cost producers abroad. This is a well-documented phenomenon, which helps
to explain some of the deindustrialisation of Britain over the last thirty years.
However, as a preliminary point, we might observe that most low paid workers are employed
in industries that cannot be exposed to low-wage competition from abroad. It will be some
time before we travel to Bangalore for a haircut or to Beijing for a pleasant meal in a reasonably
priced restaurant. It might be thought therefore that an agenda of investment in skills and
physical capital or the more widespread application of best practice would have little resonance
with employers in these sectors. However, it was striking that the LPC’s regional visits revealed
85
86
82
Leitch, Prosperity for all in the global economy – world class skills, HMT (2006)
Keep and Mayhew, Was Ratner Right?, EPI (1998)
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What next? A positive prospectus for tackling low pay
some prosaic but nonetheless important innovations that had boosted productivity and made
compliance with the NMW a more manageable process for these firms.
Two examples spring immediately to mind. The first concerned a contract cleaning company
that had improved productivity and service quality by using more effective dusters and more
portable vacuum cleaners – apparently these rather basic things really do matter. The second
concerned a laundry, where the owner-manager was hostile to the NMW in principle, but
admitted that he had been compelled to invest in new machinery to boost productivity and
reduce unit labour costs. Much to our surprise, the Commissioners participating in these two
visits concluded that small changes can sometimes have large effects.
The case for sector forums, bringing together the social partners (employers and trade unions)
in low wage industries is not to reinvent corporatism or develop ‘industrial strategies’ to meet
major competitive challenges but to focus on best practice and knowledge transfer activities.
Obviously there will need to be some assessment of strategic threats and opportunities for an
industry – new markets, new products, new technologies and new competitors. But most of the
activity could focus on the small scale changes reported above, with the core question for all
sector forums being ‘what are we doing today, how can we do it better and how can we make
this sector fit for the future?’. Paul Edwards, in a very helpful paper for The Work Foundation, has
suggested that sector forums, far from being an attempt to resurrect the National Economic
Development Council, are more appropriately seen as building on that myriad of formal and
informal business networking activities that have burgeoned over recent years.87 It is important
to ensure that these new bodies have clear and specific responsibilities that do not overlap with
the well-established roles of other organisations. An obvious risk here is that the sector forums,
in looking at issues like skills will inevitably reproduce some of the activities of the sector
skills councils. The problem might be avoided though if it were made clear that sector forums
were responsible for looking at the deployment rather than the formation of skills. SSC’s can
continue to develop the qualifications framework and identify employer skill needs, but sector
forums would look at work organisation, job design and the utilisation of skills to achieve high
performance.
Edwards suggests therefore that sector forums might initially be responsible for the following.
•
Utilisation of Skills. What models of high performance exist within similar groups of
firms? In this specific context, how should pay be linked to performance?
87
Edwards, Justice in the Workplace, The Work Foundation (2006)
The National Minimum Wage. Retrospect and Prospect
83
What next? A positive prospectus for tackling low pay
•
Teamwork. What constitutes the appropriate model of teamwork in a specific sector?
If a pattern of ‘lean teams’ seems to fit product market conditions then what are the
disadvantages of this model and how might they be minimised? What conditions
support the successful operation of teams and what factors retard the generalisation
of team models?
•
Employee representation. Are their cases where employee representation has
contributed to improved efficiency? How can representatives be supported in their
role through training? How can the opportunities for engaged discussion between
employers and employee representatives be developed?88
We should remember of course that the commitment is to establish bodies that are not
simply focused on improving productivity, but also have responsibility for health and safety,
pay, skills and pensions. The skills issue has been dealt with already – it’s about utilisation not
technical competence – but what more might be said about the other issues? Health and
safety institutions are well established and again it would be unwise to reinvent the wheel.
But equally, there may be some practical steps to improve health and safety in a sector for
which the sector forum could take responsibility, in collaboration with the Health and Safety
Executive. The same might be said of pay and pensions, where the role of the sector forum
would not just be to identify best practice, but to work out what kind of support employers
need to implement best practice.
This would leave us with a sector forum that looked much less like Neddy and much more
like a combined social dialogue and business support institution. Bear in mind that many of
the employers in low wage sectors are SMEs, with limited resources of their own. They often
complain that are bereft of the support they need to ‘do the right thing’. Sector forums can help
to fill that gap.
That still leaves us with a difficult practical question. when and how should sector forums
be established? Warwick is rather opaque on the point, referring on the one hand to the
government ‘bringing the social partners together’ and to on the other to government ‘awaiting
proposals from the social partners’. Given the lack of employer enthusiasm so far, one can
only conclude that the initiative will need to be taken by government or else this manifesto
commitment will be left unimplemented.
88
84
Ibid, 15
The National Minimum Wage. Retrospect and Prospect
What next? A positive prospectus for tackling low pay
An obvious place to start would be in those sectors with a high percentage of low paid and
vulnerable workers; government should at the very least open up some exploratory discussions
with employers and trade unions in these industries. Employers may be slightly keener to
get involved if the case is presented as an opportunity to identify and apply best practice,
particularly if it is clear that these policies and practices can have a positive impact on ‘the
bottom line’.
However, neither employers nor trade unions are well organised in the sectors under
discussion. There may be some trade bodies in existence but they are relatively weak and have
only limited influence over employers in the sector. The same is true on the trade union side.
union membership has always been low in these industries and there are few indications that a
change is imminent.
But before we conclude that the problems are insurmountable, we would do well to remember
Paul Edwards’s observation that there are lots of networks in operation at a local level where
business people do meet to discuss their problems and exchange ideas. Building the capacity
of these local networks could give sector forums some real resonance with people on the
ground if it were clear that the forums were deliberately designed to get close to actors
at a very local level. Obviously this demands a fairly sophisticated articulation of roles and
responsibilities but, as Edwards notes, sector forums have not been tried, and accepting the
status quo means accepting low pay and poor organisational performance. Establishing some
new institutions, however modest in the initial phase, certainly looks like a risk worth taking.
More
We have already noted that the low pay problem is essentially a gender pay problem. The
progress on
reasons for the gender pay gap and the possible remedies were explored at length in the
the gender
pay gap
report of the Women and Work Commission published in 2006. It is not our intention to review
all those recommendations, but we might at least note that the implementation of the report
would have a significant impact on gender equality at work. The following proposals are
particularly important in the battle against low pay.
•
Ensuring the every Sector Skills Agreement includes a comprehensive plan to break
down the segregation of jobs by gender.
•
Establishing a Part-Time Work Change Initiative to achieve a culture change so that
more ‘high quality’ jobs are available on a part-time basis.
The National Minimum Wage. Retrospect and Prospect
85
What next? A positive prospectus for tackling low pay
•
Setting targets for the various new deals aimed at women returners to the labour
market with an explicit focus on promoting higher quality part-time work, with more
tailored personal advice for lone parents and women who have never worked – a
recommendation that cuts with the grain of our ‘getting on’ proposal set out above.
•
Additional targets for JobCentre plus to place women in sustainable jobs, which take
specific account of the needs of lone parents, black and minority ethnic women and
disabled women.
•
A new package to pilot measures to enable women to change direction or progress
in their jobs and careers through raising their skill levels. In essence this would be
focused on an agenda of skills development, with Train to Gain including a specific
target for improving the skill levels of low paid women (especially those from ethnic
minorities).89 Moreover, it suggests that there should be an extension of Train to Gain
in what are described as the ‘five Cs’ sectors, occupations that are regarded as ‘women’s
work’ and are undervalued90, so that women have an opportunity to acquire level 3
skills.
Some of the recommendations will help to eliminate low pay by revaluing women’s work so
that higher wages are paid in the future. However, this is a long-term project and it will be
some years before we can say with confidence that this ‘revaluation’ process is complete. The
experience of equal pay legislation over the last thirty-seven years shows that the pace of
change can sometimes prove very slow indeed.
However, it is also clear that the purpose of the recommendations is to help women escape
from low pay by creating pathways into higher quality employment. The existence of a large
low wage sector is not necessarily a problem if these jobs are seen as ‘entry jobs’ and as the
first rung on a ladder of achievement. A problem arises if workers are condemned to perpetual
low pay or, even worse, find themselves in a revolving door between low paid, insecure work
and unemployment. If we are serious about making further progress in the battle against low
pay then these recommendations must be an integral element of the comprehensive strategy
presented in this chapter.
Train to Gain is the government’s new national programme that offers an entitlement to free tuition for all workers
who have yet to achieve a level 2 qualification.
90
The ‘Five Cs’ are caring, cashiering, catering, cleaning and clerical. This is a relatively good match to those sectors
where the NMW has had the most impact – hairdressing, retail, hospitality and residential care.
89
86
The National Minimum Wage. Retrospect and Prospect
What next? A positive prospectus for tackling low pay
‘Living
Of course, there are other methods that might be used to improve the wages of low paid
wages’ and
women. In the past, one might have expected trade unions to negotiate collective agreements
the supply
that raised wages and achieved equal pay objectives too. Indeed, there is some evidence that
chain
trade unions continue to have these effects, reducing the number of low paid workers in a
bargaining unit, limiting the extent of wage inequality and narrowing the gender pay gap.91
However, trade unions are absent from much of the private sector today and although it would
be unwise to rule out a resurgence of organising activity and membership, it would be equally
sensible to look for other institutions that might have the same effect.
A useful example can be found in the work of London Citizens, a coalition of community
activists, faith groups and trade unions, which has used the power of public embarrassment to
encourage the purchasers of contracted out cleaning services to ensure that the contractors
are offering a ‘living wage’ to their employees. Essentially, this is an argument about corporate
social responsibility and the moral obligations of multi-national corporations. In the most
famous case a worldwide banking corporation that made huge profits was compelled to
increase the price it paid for cleaning services so that the cleaners themselves could be paid
higher wages. It was said to be morally indefensible that huge global profits were being made
while cleaners languished on the NMW and tax credits. The campaign was well organised and
the moral case compelling. It was hardly surprising that a decent settlement was reached given
the potential damage to the bank’s brand.
There are two further observations that we might make at this point. First, the argument for a
‘living wage’ in this context reflects the concern that inspired the Fair Wages Resolution in 1891
– the reputable should not be doing business with the disreputable. Second, the campaigners
sought to exercise leverage over the client rather than the contractor by arguing. ‘you should
be willing to pay a higher prices for these essential but unglamorous services that enable you
to run your business effectively’. Concerns about the impact on ‘competitiveness’ are therefore
misplaced because the client is saying that they are willing to pay a higher price for the service
and that this higher price should be passed on to employees as a pay increase. In other words,
from a contractor’s point of view these ‘living wage’ agreements have no impact on profitability.
Indeed, we might even anticipate improvements in performance if vacancy rates are lower,
labour turnover is reduced and employee commitment is improved.
‘Living wages’ can therefore make a valuable contribution when viewed as essentially voluntary
instruments that are managed though the supply chain. This is certainly how we might best
91
Metcalf et al, op cit
The National Minimum Wage. Retrospect and Prospect
87
What next? A positive prospectus for tackling low pay
characterise the living wage ordinances adopted by municipal authorities in the USA and by
the Mayor of London.92
A new role
for the LPC?
These proposals when combined with an effective NMW have the potential to reduce still
further the number of low paid workers in the UK economy. However, that begs the question
just who is supposed to be responsible for the strategy? One might say that the answer is clear.
these are highly political issues and only DTI ministers can be in the driving seat. To a degree
this is true, but there is a case for learning from the experience of the LPC too. A dispassionate
analysis of the data, followed by some highly contested negotiations has proved an effective
method for establishing a consensus between the social partners. If this is the case, then we
might consider whether the role and remit of the LPC could be extended in the future to
analyse the causes of low pay, the consequences for low paid workers, employers and the wider
economy as well as potential remedies beyond the limits of the NMW. In other words, the LPC
would become a genuine Low Pay Commission, rather than just a body that recommends the
level of the NMW and evaluates the impact.
For example, the LPC could be charged with the responsibility of providing information to
the sector forums and for monitoring their effectiveness. The LPC’s reports could become
indispensable audit tools for measuring the progress made in the battle against low pay.
Equally, having a single institution at the centre looking at the cures for low pay would offer
a wider context for the best practice activities of the sector forums and the local networks
that Edwards suggests should also be drawn into the process. Associating the NMW with
best practice, knowledge transfer and productivity enhancement may elicit a more positive
response from employers than a simple set of recommendations about NMW uprating.
Finally, giving the LPC this wider role would also enable the government to link low pay to a
broader set of policy objectives, including the reduction of child poverty, the improvement of
skill levels and the development of a comprehensive programme of business support activities,
particularly focused on SMEs.
Summary
We have seen in this chapter that some of the stances taken by low pay campaigners have
become rather disconnected from the realities of the minimum wage debate. The claim for a
£7.00 NMW as a national ‘living wage’ rests on very shaky economic foundations and takes no
account of experience in the UK or in other developed countries with well-developed minimum
For a useful account of living wages in the USA see Thompson and Chapman, The Economic Impact of Local Living
Wages, EPI (2006) and Bernstein, The living wage movement. Pointing the way toward the high road, EPI (1999)
92
88
The National Minimum Wage. Retrospect and Prospect
What next? A positive prospectus for tackling low pay
wages. To implement policy on this basis would leave the UK with the toughest minimum wage
in the world and would certainly generate some negative employment effects. The same might
be said for the call to abolish youth rates, where the best evidence available suggests the need
for caution and endorses the view that young people should be treated differently.
However, this does not mean that we should accept the status quo or fall into the trap of
believing that nothing more can be done. The critical task in the immediate future is to hold the
government to the implementation of their manifesto commitments of relevance to low pay. In
particular government must be pressed to make progress with.
•
•
The proposed compact on public service employment standards.
More effective enforcement of the NMW in vulnerable sectors, with a particular focus
on migrant workers.
•
•
The development of the proposed ‘Standard of good employment practice’.
Improving the advice, guidance and report available to low paid workers from
JobCentre Plus.
•
Establishing sector forums in low wage industries to develop social dialogue and apply
best practice more widely.
All these initiatives must be reinforced by a determination to improve the prospects of women
at work through the enthusiastic implementation of the recommendations of the Women and
Work Commission. A re-energised LPC, taking strategic responsibility for the battle against low
pay could accelerate the pace of change and allow more rapid progress to be made.
The National Minimum Wage. Retrospect and Prospect
89
Chapter 6. Some final reflections
This paper has sought to explore some of the issues related to the history, implementation
and the future of the NMW. On balance there can be little doubt that the policy has made
a difference to the lives of the low paid and has contributed in some measure to the recent
fall in income inequality. There is much that we can learn from the experience, not least the
importance of the LPC as an institution that has taken much of the political heat out of the
minimum wage debate and has helped to establish the NMW as a permanent feature of the
labour market.
It would be unwise to be too sanguine about the future and there is no absolute guarantee
that this ‘consensus’ will not crumble following a change of government. But we might pause
to note too that if the process is politicised then both trade unions and employers may
miss the LPC once if it disappears. Indeed, the dynamics that committed both parties to the
Commission process will not have changed fundamentally – it is just that employers may find
that Labour governments are inclined to increase the NMW and Conservative governments
inclined to let the NMW fall in real terms. Experience in the USA suggests that this model leads
to very intermittent but significant increases in the federal minimum wage and therefore to
intermittent but significant labour market shocks. It would be odd to say the least if either one
of the social partners chose to surrender direct influence over the level of the NMW for a rather
crude process of political lobbying.
The danger in the immediate future is the crumbling of the consensus about the trajectory
of the NMW. Proponents of the NMW have taken very different views about where the level
should be fixed and how young workers should be treated. One would hope that the reader
views the presentation of the evidence on these questions as fair, balanced and dispassionate. If
this is indeed the case then the conclusions are reasonably clear. The NMW is reaching its limits
as an instrument to eliminate low pay; its level in relation to median earnings bears comparison
with minimum wages in other developed countries and the best assessment of both theory
and practical experience suggests that further significant increases would be unwise. A NMW of
between £5.60 and £5.80 in October 2007 would maintain the real value of the minimum wage
and, at the higher level test the upper boundary of what Card and Krueger call the ‘range of
indeterminacy’
Similarly, both theory and experience suggest that young workers should be treated differently
from adult workers. Not only is the ‘bite’ of the NMW already harder for this group than the
‘bite’ of the adult rate, but there is persuasive evidence to show that an inappropriately fixed
90
The National Minimum Wage. Retrospect and Prospect
Some final reflections
minimum wage exposes young workers to a higher risk of unemployment. The case for keeping
the youth rates is compelling.
The low pay problem is, more than anything else, a gender pay problem. Full implementation of
the recommendations of the Women and Work Commission could have a significant impact on
women’s pay. Enhancing the life chances of low paid women working part-time is good for the
reduction of income inequality and child poverty.
There is no reason why the UK has to accept the current levels of low pay but instruments
other than the NMW must be used if significant progress is to be made. Many of the present
government’s policies are moving in the right direction, but there is a pressing need for more
effective co-ordination and for the rapid implementation of commitments that currently seem
to be rather neglected. Furthermore, in addition to initiatives to tackle gender pay inequality,
the government should identify those industries where sector forums should be established to
give the battle against low pay a new impetus. Far from being an attempt to revive a flagging
model of corporatism, this should be viewed as a serious effort by the social partners to identify
best practice in work organisation, job design and the utilisation of skills. Addressing the low
pay problem should therefore be seen as another dimension of the project to improve the
performance of low productivity organisations.
A mix of carrots and sticks will be needed if employers are to choose different business models.
Taking the high road is most likely to be achieved where regulatory interventions (like the
NMW) are matched by voluntary activities (like sector forums). The point here of course is that
we are talking about a mix of policies. Carrots without sticks or sticks without carrots are likely
to offer an inadequate incentive to change.
This paper has been written in a sprit of optimism. It is rooted in the belief that low pay is
not simply a force of nature and that we can make conscious policy choices that reduce the
UK’s reliance on low pay. It is important, however, for there to be a broad coalition of forces
committed to this project and it will be disastrous if the low pay coalition founders on the rocks
of an argument about the NMW as a ‘living wage’ or the payment of the adult rate at 18. Some
of the policy instruments identified here may be unglamorous but that does not make them
ineffective. We need a mature and sophisticated discussion about the best policy prospectus
with all sides of the argument advancing their case by using the best evidence available. Those
without evidence of course simply do not have a case – whether on the pro or anti side of the
The National Minimum Wage. Retrospect and Prospect
91
Some final reflections
argument. Appealing for a high minimum wage on moral grounds alone may be politically
attractive but practically undesirable. Minimum wage supporters have learned through
bitter experience that caution and responsibility make better watchwords than ambition and
recklessness – even when the case is made in the language of justice and fairness. We cannot
forget that lesson now if we are to face the future with confidence.
92
The National Minimum Wage. Retrospect and Prospect
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