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 The National Minimum Wage. Retrospect and Prospect 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 The National Minimum Wage. Retrospect and Prospect 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 The National Minimum Wage. Retrospect and Prospect A brief history of minimum wages in the UK 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 The National Minimum Wage. Retrospect and Prospect 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 The National Minimum Wage. Retrospect and Prospect 71 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 The National Minimum Wage. Retrospect and Prospect What next? A positive prospectus for tackling low pay 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. The National Minimum Wage. Retrospect and Prospect 73 What next? A positive prospectus for tackling low pay 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 The National Minimum Wage. Retrospect and Prospect 75 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 The National Minimum Wage. Retrospect and Prospect 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. The National Minimum Wage. Retrospect and Prospect 77 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 The National Minimum Wage. Retrospect and Prospect 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 The National Minimum Wage. Retrospect and Prospect 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 The National Minimum Wage. Retrospect and Prospect What next? A positive prospectus for tackling low pay 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 The National Minimum Wage. Retrospect and Prospect 81 What next? A positive prospectus for tackling low pay 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) The National Minimum Wage. Retrospect and Prospect 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 Bibliography Astle J, Laws D and Marshall D, Britain After Blair. 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