National minimum wage 2011: increases in line with earnings growth

The 2.5% increase in the national minimum wage from October 2011 is in line with the modest rises made to the pay floor seen over the past few years. The commission's 12th report sets out the evidence it considered in making this year's recommendations.

On this page:
Box 1: LPC recommendations for the 2011/12 national minimum wage
Minimum wage increases are in line with average earnings growth
Minimum wage "bite" now stable
Minimum wage rates by sector
Chart 1: Minimum wage jobs by industry, April 2010
Youth rates
Apprentice rates
Getting the message across
Future increases to the minimum wage
Table 1: National minimum wage rates 2006-11
Additional resources on XpertHR.

Shortly after forming a government, the Conservative-Liberal coalition confirmed that the national minimum wage would be increased from October 2010 at the rates set by the previous Labour Government (external website). The 2.2% increase brought the adult minimum wage up to £5.93 per hour.

For 2011/12, the Low Pay Commission (LPC) was asked to "monitor and evaluate the impact of the minimum wage, to consider its effect on small firms, low-paying sectors and different groups of workers, and to make recommendations for the minimum wage rates".

It reported back to the Government at the end of February 2011, which announced its acceptance of the recommended increases (external website) to the minimum wage on 7 April. The LPC said that, in making its recommendations for the 2011 uprating of the minimum wage, it "recognised the continued economic uncertainty while protecting the lowest-paid workers from falling further behind the average". The findings of the LPC are published in full in its 2011 report (PDF format, 4.14MB) (on the LPC website), while the details of the 2011 recommendations are shown in box 1. Here, we look at the detail of the report to highlight some of the issues of interest to employers.

Minimum wage increases are in line with average earnings growth

The adult national minimum wage rate will increase by 2.5% from October 2011 to £6.08 per hour. It has been widely reported in the past that, had the minimum wage risen at the same pace as average earnings or inflation since its introduction in April 1999, it would be worth considerably less than it is now. In its latest report, the LPC notes that the minimum wage has risen 64.7% since its introduction, whereas retail prices index (RPI) and consumer prices index (CPI) inflation have risen 37% and 25% respectively. Had the minimum wage increased in line with one of these measures, it would stand £1.01 or £1.44 respectively below its current level. Likewise, it would stand at 45p per hour lower than currently if it had increased in line with average earnings growth since its introduction.

However, the LPC also notes a slowdown in the level of minimum wage increases since October 2006, coupled with higher inflation rates. The report shows that between October 2006 and October 2010 the adult rate increased by 10.8%, but average weekly earnings total pay was up 10.7%, and base pay up 11.1% over the same period. Taking inflation, RPI rose 12.7% over this period and CPI 11.6%. The report says that this "suggests that the relative value of the minimum wage has remained reasonably constant since October 2006 while the minimum wage has fallen slightly in real terms". See table 1 for details of minimum wage rates and increases since October 2006.

The LPC notes that the 2009 and 2010 minimum wage increases were roughly in line with the increases in pay settlements at those times. The 2.5% increase in the adult rate from October 2011 is, however, slightly above the forecast median pay increase for 2011. According to XpertHR's latest pay forecast survey, employers expect to award a median 2% pay rise during 2011. Our latest analysis shows that the median pay settlement in the three months to the end of April 2011 is worth 2%.

Minimum wage "bite" now stable

The LPC also publishes a measure of how the minimum wage compares with average earnings. At its introduction, the £3.60 per hour minimum wage was worth 45.7% of median earnings - the so-called "bite" of the minimum wage. This rose gradually but has stabilised in recent years - the current bite of 50.8% is almost exactly the same level as one year ago.

In the low-paying sectors, however, the bite is higher. For example, in the cleaning sector, the current minimum wage rate of £5.93 is worth 89.3% of average earnings in the sector. Across all low-paying sectors, the minimum wage is worth 75.8% of median average earnings, compared with 44.8% in non-low-paying industries.

The LPC estimates that the £6.08 minimum wage rate from October 2011 will be worth about 51.9% of the estimated median earnings for those aged 21 and over, roughly unchanged on the current percentage.

Minimum wage rates by sector

Another way of looking at the impact of the minimum wage on low-paying sectors is to look at the proportion of the workforce paid at this level. Across the economy as a whole, in April 2010 3.4% of jobs held by adults were paid at or below the prevailing minimum wage rate of £5.80 per hour. Chart 1 shows the proportion of workers in minimum wage jobs by industry - showing that almost a quarter of workers in the cleaning sector, and one-fifth of those working in hospitality, were paid at or below the minimum wage.

Overall, the LPC estimates that in April 2010 there were 992,000 "minimum wage jobs" - paid less than the October 2010 minimum wage rate of £5.93 per hour. In the press release announcing the October 2011 rates (external website), business secretary Vince Cable said that "more than 890,000 of Britain's lowest-paid workers will gain" from the October 2011 upratings.

Youth rates

The separate minimum wage rates for younger workers have their supporters and opponents. While some see the youth rates as "crucial to supporting young people's labour market participation", others argue that young workers should be paid the same as adults on the basis that "young workers carried out the same work as adults, had the same responsibilities, paid the same prices for goods and housing costs, and were financially independent". The LPC is firmly of the view that the youth rates are there to protect young people.

A key concern for the LPC was the position of young people in the labour market, something we have examined in the past. Not only does the LPC note the "continuing decline in the labour market position of young people", but also that their earnings have been rising more slowly than those of adult workers. This has resulted in the "bite" of the youth rates rising, to 71.4% for 16- to 17-year-olds and 78.9% for 18- to 20-year-olds in April 2010.

Although overall the LPC did not find any evidence of an adverse effect on employment from the national minimum wage, it did agree that "young people as a whole have been more affected by the minimum wage this year". However, this is in part due to the recession, with employers making "increased use of their ability to pay below the adult rate of the minimum wage".

In making recommendations for young workers, the LPC was mindful of the "bite" of the minimum wage for these age groups, not wanting to provide an incentive for young people to leave education or training, but also preventing exploitation of those in work. It therefore recommended a 1.2% increase in the youth rate for 18- to 20-year-olds, bringing the rate to £4.98 per hour. The 16- to 17-year-old rate increases by 1.1% to £3.68 per hour.

However, the LPC added that it made these recommendations "reluctantly" and would keep these rates under review: "If new evidence shows that the minimum wage has not in fact contributed to the employment difficulties of young people we shall recommend that their relative earnings be restored."

Apprentice rate

The highest increase this year will go to the apprentice rate, which increases by 4% (10p) to £2.60 per hour from 1 October 2011. It is still early days for the apprentice rate, having only been introduced in October 2010. However, the commission's report says that the evidence so far suggests that the apprentice rate "has had little or no negative effect on the supply of apprentice places". It says the initial rate from October 2010 was "cautious", hence the larger increase recommended for 2011.

Getting the message across

The Government has introduced a number of measures over the past year to promote good practice surrounding the minimum wage, including, from January 2011, a "name and shame" scheme for those that flout the minimum wage laws. However, the commission does raise concerns about the cuts to the budget for publicising the minimum wage, something we highlighted earlier in the year. It says that it will monitor the effect on enforcement of these cuts.

Future increases to the minimum wage

The Government published the remit for the 2012 Low Pay Commission (external website) report on 8 June. As previously announced in the March 2011 Budget, it asks the LPC to pay particular attention to "the best way to give businesses greater clarity on future levels of the minimum wage". It is hoped that an earlier indication of the forthcoming minimum wage increases, through two-year recommendations, will improve the willingness of organisations, particularly those operating in the retail sector, to invest.

This article was written by Sheila Attwood, editor, pay and benefits.

Additional resources on XpertHR

• National minimum wage 2011 This XpertHR survey examines employers' views on the level of the national minimum wage, the age of employees covered, and the method and outcome of the uprating process.
• The national minimum wage Guidance from the XpertHR employment law manual.
• National minimum wage case reports Browse the XpertHR case reports section for precedent-setting cases from the Employment Appeal Tribunal and appellate courts on the national minimum wage.