National minimum wage 2008: cautious increase reflects economic uncertainty
The national minimum wage for adults will increase by 3.8% to £5.73 an hour from 1 October 2008, following a similarly cautious increase of 3.2% last year, and reflecting uncertainty about the global economic outlook.
On this page:
Protecting jobs
The increases in context
Coverage and "bite" of the national minimum wage
Impact of increased annual leave entitlement
Data on the impact of the national minimum
wage
Into the future
Young workers
Accommodation offset
Reviewing guidance on the national minimum
wage
Enforcement and compliance
Reactions to the announcements
Table 1: National minimum wage rates, 1999-2008
Box 1: Reactions to the national minimum wage announcement.
Key points
|
On 5 March 2008, the government announced1 that it had accepted the recommendations of the Low Pay Commission (LPC), the body responsible for monitoring the impact of the national minimum wage (NMW) and setting future rates, on the increases for this year. As a result, from 1 October 2008, the minimum wage will:
- increase by 21p an hour, from the current rate of £5.52 to £5.73, for workers aged 22 and over;
- increase by 17p an hour, from £4.60 to £4.77, for 18- to 21-year-olds; and
- increase by 13p an hour for 16- and 17-year-olds, from £3.40 to £3.53.
The LPC presented the recommendations in its 2008 report (PDF format, 1.5MB) (on the LPC website), which also sets out the reasoning behind them.
Its recommendations draw on two commissioned research projects - to assess the impact of the October 2006 NMW uprating and the impact the NMW has had on prices - and three in-house projects. It also uses earnings data from the Annual Survey of Hours and Earnings (ASHE) and the Labour Force Survey (LFS), both produced by the Office for National Statistics (ONS). Additional employment information is drawn from the ONS employee jobs series. The LPC receives submissions from organisations and individuals, and consults workers and businesses that are directly affected by the minimum wage.
The main findings of the report, including the factors considered in deciding the NMW increases and the impact of the statutory increase in holiday entitlement due to come into force in April 2009, are considered below.
Protecting jobs
In his foreword to the report, the LPC chairman, Paul Myners, notes that the situation the commission faced in setting the rates for 2008 was more complex than in previous years.
Reviewing the labour market over the preceding year, the LPC found evidence to support an optimistic picture. The LPC's research found few effects from the minimum wage on employment or hours - employment reached record levels in 2007 and the economy performed better than had been anticipated.
However, by the time the LPC met in January this year, it was clear that the credit problems in the US were affecting financial markets across the world. Forecasters were predicting slowing global growth in 2008 and, in the UK, consumer spending and business investment had slowed and government spending had weakened. This meant the outlook for the year ahead was much less positive.
Myners said: "In the circumstances and after much discussion and debate, we took the view that a degree of caution was advisable and this is reflected in a recommendation that is lower than the predicted increase in average earnings. We are conscious, above all, of the need to protect jobs."
The increases in context
The 3.8% increase to the adult NMW is 1.6 percentage points above the level of consumer prices index (CPI) inflation for January 2008 (2.2%; the current figure at the time the report was published), but 0.3 percentage points below the level of retail prices index (RPI) inflation for the same month (4.1%). However, RPI inflation is expected to fall to 2.6% by the fourth quarter of 2008.
The NMW increase is set at around the headline rate of increase for average earnings, which stood at 3.8% in December 2007 but is predicted to be around 4% for the second half of the year. The 2008 NMW uprating is in line with what the LPC described as a "cautious" increase of 3.2% in 2007, which broke a run of four years of "substantial" increases (see table 1).
The latest uprating means that, from 1 October 2008, the adult rate of the NMW will have increased by 59.2% since its introduction in April 1999 (see table 1). By comparison, the LPC estimates that average earnings had increased by around 41% between the introduction of the NMW and the time of the 2007 uplift.
Coverage and "bite" of the national minimum wage
Among the factors taken into account by the LPC when assessing the impact of previous increases to the NMW are the extent of its coverage, and its "bite". The bite of the minimum wage - its relative level as a proportion of the median hourly wage - reached a peak of 51.1% of hourly earnings in April 2007 after the large (5.9%) 2006 uprating. Following the more modest (3.2%) October 2007 increase, the LPC expects the bite to have moderated. The bite was 46.2% when the minimum wage was introduced in 1999.
Although it says it is too early to assess the impact of the October 2007 increase, the LPC estimates that around 4% of jobs held by adults (about one million jobs) would have seen an hourly rate rise as a direct result of the 2007 NMW uprating.
The Department for Business, Enterprise and Regulatory Reform (BERR) estimates that the October 2008 uprating will affect around 780,000 jobs held by adults (and 900,000 jobs in total, including those held by workers in the 16-21 age group). Two-thirds (64%) of those who benefit will be women, who remain disproportionately represented in low-paying sectors. Women are also more likely than men to be working part time (61% of minimum wage jobs are part time).
Impact of increased annual leave entitlement
When considering the 2008 NMW rises, the government asked the LPC to take into account the impact on wage bills of the increase in entitlement to paid annual leave due to come into effect from April 2009. This is the second stage of the increase designed to give workers leave entitlement in respect of bank and public holidays in addition to the statutory minimum of 20 days per year. The first stage of the increase took effect from 1 October 2007, adding an extra four days' leave (for those working full time) to give an annual total of 24 days' holiday. This will increase to 28 days from 1 April 2009.
Although the LPC took account of estimates of the increased wage cost of the first stage of the annual leave increase in its recommendations for 2007, at the time of writing its 2008 report no data were available to assess the effects of the implementation.
However, the first stage is estimated to have affected 3.4 million employees and added up to 0.2% to the wage bill for the whole economy. The second stage is expected to have a slightly larger impact than the first, affecting a total of 4.4 million employees (19% of all employees) and adding 0.3% to the wage bill. The total annual leave increase will therefore increase the economy's wage bill by up to 0.5%.
The impact will again be felt particularly in low-paying sectors such as hospitality, where around 49% of employees will be affected. For organisations where all employees will get the increase, the LPC estimates that the direct cost will be equivalent to 1.6% on the wage bill.
The LPC has said it will keep the impact of the increased entitlement under review in the coming year, during which time more data will become available from the LFS.
Employers’ concerns about the impact on wage differentials were also taken into account by the LPC in maintaining its cautious approach to the increase in the NMW. Research for the LPC revealed that differentials have been eroded in the retail, hospitality, childcare and cleaning sectors. The LPC has commissioned research into the impact of the NMW on wage differentials, and intends to include the findings in its next report.
Data on the impact of the national minimum wage
In its 2008 report, the LPC expresses concerns about the official data on which it relies to assess the impact of the national minimum wage. It says that the changes introduced by the ONS, including reductions in the sample of the ASHE survey, have affected the quality of the data on earnings at detailed industry level and impaired its ability to analyse employment in the low-paying sectors.
Such was the extent of its concern that one of the recommendations of the LPC's report was that the government should take steps to prevent further erosion of the quality of data provided by the ONS. The government noted this and said it would meet the new independent UK Statistics Authority (under whose control the ONS came on 1 April 2008) and other interested parties to discuss the matter.
Into the future
The LPC also looked at the factors that will influence its recommended increases for 2009. Of particular significance will be the results of research it has commissioned into the impact of the above-average earnings increases in the minimum wage since 2003. This will consider the effects on staff turnover and retention, employment and hours, competitiveness, vulnerable sectors and regional impact.
The broad economic environment and developments in low-paying sectors will also be important to its 2009 recommendation. The LPC expects its recommendation to be broadly around the predicted increase in average earnings, but says the decision will, as always, depend on the evidence.
As part of the terms of reference for its next report, the LPC has been asked to review the position of apprentices , many of whom are not currently covered by national minimum wage legislation. The report will also highlight the impact of the minimum wage on young workers.
Young workers
The LPC decided that the value of the youth rates relative to the adult rate should be maintained. The youth rate (for 16- and 17-year-olds) and the youth development rate (18- to 21-year-olds) will therefore see increases in line with the adult rate, rising by 3.8% and 3.7% respectively.
The employment rate for 18- to 20-year-olds has been in decline since 2000 and there has been a sharp rise in unemployment among this group since 2004. The labour market prospects of 16- and 17-year-olds not in full-time education have been worsening since the end of the 1990s and, although the LPC found signs that this decline was reversing in the past year, almost half this group was either inactive or unemployed in 2007.
The LPC believes that the decline in the labour market position of young people, together with evidence from other countries of the potential negative impact of a single rate on younger workers, justifies keeping a lower rate for workers aged under 21.
However, as in previous years, the LPC recommended that 21-year-olds should be entitled to the adult rate of the NMW. It believes this would not harm their employment prospects; it has found that most employers already pay 21-year-olds at least the adult rate.
Again, the government rejected this recommendation. The LPC expressed disappointment at this, saying: "We look forward to hearing the detailed reasoning behind the government's decision."
This proposed change has support in other quarters, and many unions would like to go further. In its submission to the LPC (on external website), the TUC called for the adult rate to be paid from the age of 18.
Usdaw's general secretary (on external website), John Hannett, reacting to the government's refusal to accept the recommendation, said: "We are disappointed that the Low Pay Commission's recommendation to lower the age for the adult rate of the national minimum wage to 21 has been rejected. Usdaw will continue to campaign for the adult rate to be paid at 18. We will also keep campaigning for a significant increase for 16- and 17-year-olds, to make sure they are not exploited at work." In its LPC submission, Unison (PDF format, 616K) (on external website) said it believes in the "rate for the job" and would like to see the full rate paid at the age of 16.
Accommodation offset
The provision by employers of accommodation is significant in some low-paying sectors, in particular hospitality and agriculture. The accommodation offset enables the cost of this to be set against the minimum wage, up to a maximum daily limit.
This limit has risen broadly in line with the rate of increase in the adult NMW in the past, and the government accepted the LPC's recommendation that this should continue. The value of the accommodation offset will therefore increase by 3.7% from the current level of £4.30 a day to £4.46 a day from October 2008.
Reviewing guidance on the national minimum wage
The LPC made specific recommendations on several areas in which difficulties have arisen in the current NMW arrangements.
The first relates to the obligation to make payments to workers who are provided with facilities to sleep at, or close to, their place of work in order to be available in the event of emergencies.
The LPC says that recent court and tribunal judgments have meant that existing guidance is not sufficient to enable employers to be certain of their responsibilities, and this has led to particular difficulties for social care employers. The LPC therefore recommended that the government should review the official guidance on sleepovers as soon as practicable.
The LPC also noted that it had received evidence of non-compliance with the minimum wage with regard to individuals on a period of work experience. While it does not believe that the rules need to be changed, the LPC recommended that the guidance relating to work-experience placements should be updated to help raise awareness of this issue.
In October 2004 a new system of "fair piece rates" was introduced by the government. The aim of the change was to improve understanding of, and compliance with, the arrangements covering homeworkers, many of whom are paid piece rates on the basis of their output for packing or assembly work. The LPC has received evidence that awareness and use of the new arrangements may be low, and therefore recommended that the government should evaluate whether or not the arrangements are meeting their objectives.
The government accepted these recommendations.
Enforcement and compliance
The LPC believes that the vast majority of employers support and comply with minimum wage legislation, and that many cases of underpayment arise through error. However, it says that "swift and firm action" should be taken against those employers that flout their responsibilities intentionally.
In its 2007 report, the LPC urged the government to introduce penalties for employers that underpay their workers, and compensation for those who have been underpaid. The latest report welcomes the action that the government has taken to strengthen the enforcement regime.
The BERR has said that new enforcement provisions will come into force on 1 October 2008. The changes are being introduced through the Employment Bill, which is currently going through parliament. The changes include:
- a fairer method of calculating arrears for workers who have been underpaid so they do not lose out;
- introducing a penalty payment for employers that do not pay the minimum wage; and
- a strengthening of the criminal regime for NMW offences.
The LPC believes that the measures that have been introduced and those that are under way will make "a significant improvement to raising awareness and provide a strong disincentive to non-compliance". It therefore decided not to make further recommendations on enforcement this year, believing that the focus should be on consolidation.
Reactions to the announcements
Some of the initial reactions from trade unions and employers' bodies are presented in box 1. Although unions broadly welcomed the increases to the rates of the NMW, many expressed disappointment that the below-RPI uprating would mean that the lowest-paid workers would struggle to pay higher food, energy and transport bills. Usdaw, however, said it believed the quality of life of many of its members would be improved. The TUC said: "The LPC must continue to recommend the highest minimum wage increases that can be sustained as it provides very important protection for low-paid workers."
The reactions of employers' bodies were similarly mixed. The CBI supported the "moderate approach" taken by the LPC. But, while the British Retail Consortium admitted that the increase was "more moderate" than previous rises, it expressed disappointment that there had not been a real-terms freeze in the NMW.
The TUC's general secretary Brendan Barber also supported the improvements in the enforcement regime, saying: "Bosses who fail to pay the minimum wage leave vulnerable workers in poverty and undercut the majority of employers who are happy to obey the law. Everybody stands to gain from making the minimum wage as robust as possible."
1. A statement from John Hutton (on the parliament website), secretary of state for Business, Enterprise and Regulatory Reform, responding to the Low Pay Commission's report. The BERR assumed responsibilities for the NMW from the Department of Trade and Industry in June 2007.
This article was written by Rachel Sharp, researcher/writer, Pay and Benefits Bulletin.
Table 1: National minimum wage rates, 1999-2008 |
||||||
Effective date |
Adult rate |
Development rate (workers aged 18 to 21) |
Youth rate (workers aged 16 and 17) |
|||
|
£ph |
Increase on previous year |
£ph |
Increase on previous year |
£ph |
Increase on previous year |
1 April 1999 |
3.60 |
– |
3.00 |
– |
– |
– |
1 June 2000 |
3.60 |
0% |
3.20 |
6.7% |
– |
– |
1 October 2000 |
3.70 |
2.8% |
3.20 |
0% |
– |
– |
1 October 2001 |
4.10 |
10.8% |
3.50 |
9.4% |
– |
– |
1 October 2002 |
4.20 |
2.4% |
3.60 |
2.9% |
– |
– |
1 October 2003 |
4.50 |
7.1% |
3.80 |
5.6% |
– |
– |
1 October 2004 |
4.85 |
7.8% |
4.10 |
7.9% |
3.00 |
– |
1 October 2005 |
5.05 |
4.1% |
4.25 |
3.7% |
3.00 |
0% |
1 October 2006 |
5.35 |
5.9% |
4.45 |
4.7% |
3.30 |
10.0% |
1 October 2007 |
5.52 |
3.2% |
4.60 |
3.4% |
3.40 |
3.0% |
1 October 2008 |
5.73 |
3.8% |
4.77 |
3.7% |
3.53 |
3.8% |
Total increase, 1999 to 2008 |
– |
59.2% |
– |
59% |
– |
17.7% |
Source: Low Pay Commission and IRS. |
||||||
Box 1: Reactions to the national minimum wage announcement Summaries of the views of various trade unions and employers' bodies on the increases in the national minimum wage due to take effect from 1 October 2008 are listed below, along with links to statements on their websites. Chris Hannant, head of policy, said: “It is reassuring for employers that the national minimum wage will not increase above average earnings. As we move into more uncertain economic times and credit is squeezed, businesses, particularly smaller enterprises, will be operating on tighter margins. It’s important that the Low Pay Commission ensures fair pay, but it must continue to balance this against the ability of employers to cope with the additional financial burden.” Although the organisation described the increase as "broadly satisfactory", the BRC's director general, Stephen Robertson, said: "Retailers have had to cope with a £2.7 billion hike in wage bills caused by the 2005 and 2006 above-inflation minimum wage increases … There should be a real-terms freeze while the Low Pay Commission reviews future direction." The CBI welcomed the increase in the national minimum wage as "striking a sensible balance at a time of economic uncertainty". Deputy director-general John Cridland said: "Over the last few years the Low Pay Commission has taken the right stance by not increasing the minimum wage by more than the growth in average earnings, whilst also taking into account the prevailing economic climate and firms' ability to pay." Alan Tyrrell, FSB employment chairman, said: "The FSB has previously welcomed the introduction of a sensibly set national minimum wage. We are pleased that the government and the Low Pay Commission have heeded the FSB's past concerns when increases were well above the rate of inflation. A sensibly set national minimum wage is in the interests of both employers and employees." The GMB believes that the increase falls short of what low-paid workers need to pay rising bills. Paul Kenny, GMB general secretary, said: "The living standards of the lowest paid will fall behind again. GMB would have wanted to see at least another 10p per hour so that the living standards of the lowest paid in the UK could at least stand still. GMB policy is that the national minimum wage should be moved up to £7 per hour to become a living wage." The TUC welcomed the announcement. Brendan Barber, the general secretary, said: "The Low Pay Commission was right to withstand pressure from business warning of economic trouble ahead. The truth is that employers will be able to absorb these sensible increases without too much difficulty." Unison welcomed the 21p increase in the NMW as "a step in the right direction" but says the rate is still too low. General secretary Dave Prentis said: "It falls short of its aim to protect the poor from the constant price rises in essentials like fuel, food and housing. A much more realistic figure would be a minimum wage of £6.75 an hour." While Unite welcomed the Low Pay Commission's efforts to stand firm against calls from the CBI for a freeze in the national minimum wage, its joint general secretary Tony Woodley said: "At a time when inequality is rising up the political agenda and business leaders are awarding themselves record pay rises, the lowest-paid workers continue to slip back. This cannot continue. Unite asked for a significant rise above the increase in average earnings that brings the adult rate above at least £6 an hour." General secretary John Hannett welcomed the announcement. He said: "It will increase the quality of life for many of our members, the majority of whom are women." |
