Encouraging decent and sustainable wages.

Statutory minimum wages are not a direct requirement of the European Employment Strategy but are a right of employment supportive of the parts of the employment package aimed at encouraging decent and sustainable wages, and at reducing labour market segmentation between precarious and more stable employment. They also support job creation by transforming informal and undeclared work into regular employment, and by boosting take-home pay.

The policy was implemented at a time when the pay of the lower paid was deteriorating relative to median earnings but the level of demand was rising. Ten years later the economy was to suffer a severe recession from which it is still currently recovering.

The period leading up to the establishment, in 1997, of the Low Pay Commission (LPC) had been one of increasing income inequality. This resulted from, first, declining trade union membership, especially in the private sector. Second had been the abolition, in 1993, of statutory bodies which had fixed minimum wages for selected low-paying sectors. A third factor was the deterioration of relative wages of less skilled workers arising both from the expansion of the global trading economy and from technological change.

A growing problem was the cost to the government of the financial benefits paid to working parents to mitigate the effects of family poverty. With no statutory minimum wage, there was an unintended incentive for employers to minimise their wage costs by encouraging employees to maximise their in-work benefits.

In the mid-1990s the British economy had entered a period of low inflation, low unemployment, and sustained economic growth which was to continue until the financial crisis of 2008. The larger of those sectors most affected by the NMW – retail, hospitality, business services, and care homes – all benefited from this sustained growth. Unemployment was close to 5 per cent in 1999, rose sharply to 8 per cent in 2008, falling back between 2013 and 2015 to 5 per cent.

The position of the low paid had been deteriorating since the late 1970s. This was increasing the proportion of children who were growing up in extreme poverty and increasing the cost to the state of providing in-work benefits to needy families.

Income inequality was increasing generally over the preceding 20 years. Between 1978 and 1998 the increase in real hourly earnings of the lowest decile was 29 per cent while that of the highest decile was 66 per cent. This was substantially greater divergence than elsewhere in the EU. It particularly affected the wages of women. The proportion of children in households with an income less than 50 per cent of mean income rose from 10 per cent to 30 per cent between 1980 and 1999. The cost to the state of providing in-work benefits to families rose from £200m to £2,100m between 1988 and 1997 and was continuing to rise. There was a perverse incentive that encouraged low-paying employers to get their employees to maximise their benefit claims. The state was, in effect, subsidising low-paying employers and thereby both amplifying the downward pressure on wages and undermining what collective bargaining was still in place in the private sector.

The aim of the policy was to place a floor under wages that could be enforced by law but would not increase unemployment or inflation. 

The objectives were:

• to produce a definition of minimum wages that would apply to all sectors, and would be enforceable in law;
• to fix the minimum wage at a level where it would make a substantial difference to the low paid but not increase unemployment or inflation;
• to do it in a way that was seen to be transparent and politically independent of government; and
• to ensure that the NMW would be widely understood and effectively enforced.

The policy required the establishment of the Low Pay Commission to advise the government on the NMW and an enforcement body.

The Low Pay Commission established its integrity and independence of government by:

• having a ‘social partnership’ constitution of nine non-salaried members of whom three had a trade union background, three an employer background, and three were independents, of whom one was Chair;
• gathering evidence by both formal hearings and regular field trips to interview low payers and low paid in all economic regions;
• establishing a programme of research into the circumstances of low pay and the impact of the NMW, both by its own work and by the commissioning of work by academic and other experts; and
• encouraging the government statistics authority to improve the measurement of wages.

The enforcement of the NMW was made effective by:

• being made the responsibility of Her Majesty’s Revenue and Customs inspection system
• being subject to comprehensive legal definitions and penalties
• extensive publicity and education

The NMW had a substantial initial and continuing impact on the wages of the lower paid without any significant adverse consequences for employment or inflation.

The initial coverage of the NMW was about 1 million employees directly affected, about 4-5 per cent of all employees, with the NMW coming in at a ‘bite’ of 46 per cent of median earnings. Over the first five years after its introduction annual earnings increases of the bottom 10 per cent averaged over 2 per cent more than at the median. Coverage later increased as NMW increases were generally greater than average earnings increases. Indeed, such increases were a deliberate policy until the onset of recession. By 2015, the bite had risen to 54 per cent of median earnings, directly affecting around 1.6 million employees. The NMW had now become a major determinant of wages, reported in the 2011 Work and Employment Relations Survey to be an influence by 31 per cent of private sector employers.

The NMW had very limited ‘knock-on’ effects higher up the overall income distribution beyond the tenth decile, although such effects were greater in low-paying sectors. It had a substantial impact in narrowing the gender pay differential: the gender pay gap at the tenth decile fell from 13 per cent in 1998 to less than 6 per cent in 2014.

By 2014 there had been no evidence that the NMW had any adverse effects on employment or inflation. There was no evidence, despite extensive research, of any adverse effects on any vulnerable groups, sectors or regions. The share in total employment of major affected sectors increased. Workforce participation increased, and the workforce increased by 2 million between 1998 and 2014. The low-paying sectors (that is, those most affected by the NMW) were more resilient in the recession and its aftermath from 2008 to 2014 than other sectors.

In general terms the enforcement arrangements appear to have been effective. The government has more recently encouraged the use of ‘naming and shaming’ of firms breaching the NMW regulations. Responses by firms included some initial price increases, but no continuing price effects, some reductions in hours of employment, slightly lower profits in some sectors, and slight positive effects on training provision. Although impossible to prove, it is likely that the minimum wage has helped to mitigate any adverse impact of the large increase in immigration after 2004 on the wages and employability of the indigenous labour force.