More Than a Minimum: The Final Report

8/12/2019 More Than a Minimum: The Final Report

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MORE THAN A MINIMUMThe Resolution Foundation Review of

the Future of the National Minimum

Wage: The Final Report


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Chairs Foreword 5

Executive Summary 7

Summary of Recommendations 12

SECTION 1 LESSONS LEARNED 15

Chapter 1 Evidence on impacts 16Chapter 2 Evaluating todays approach 26

SECTION 2 BUILDING ON SUCCESS 34

Chapter 3 A broader approach to low pay 35Chapter 4 A more far-sighted minimum wage 40Chapter 5 A more assertive approach with new tools 48

Conclusion 54

Contents


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Te panel would like to thank the wide range o experts who have given advicethroughout the project, including Proessor Jeff Borland, Proessor WilliamBrown, David Coats, Dan Corry, Matt Cowgill, Proessor Richard Dickens,Donald Hirsch and Proessor David Metcal. We are grateul or conversationswith representatives rom the Federation o Small Businesses, the Coneder-ation o British Industry and the rades Union Congress, and to those who

attended a roundtable to discuss our developing ideas in December 2013.

Te panels work has been hosted by the Resolution Foundation. Alex Hurrelland Giselle Cory led the analysis o sectors and provided analytical support tothe project throughout. Conor DArcy supported the project and provided anessential contribution to the interim and final report. James Plunkett oversawthe work.

Te work received the generous support o the Barrow Cadbury rust, anindependent, charitable oundation committed to bringing about socially

just change. Te rust provides grants to grassroots community groups andcampaigns working in deprived communities in the UK, with a ocus onBirmingham and the Black Country. Te rust also works with researchers,think tanks and government, ofen in partnership with other grant-makers,seeking to overcome the structural barriers to a more just and equal society.

Acknowledgements


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Professor Sir George Bain (CHAIR)founding Chair of the Low PayCommission and former President and Vice-Chancellor of Queens UniversityBelfast

Professor Paul GreggProfessor of Economic and Social Policy and Director ofthe Centre for Analysis and Social Policy, University of Bath

Professor Alan ManningProfessor of Economics and former Head of theEconomics Department, London School of Economics

Dr Abigail McKnightSenior Research Fellow at the Centre for Analysis ofSocial Exclusion (CASE) at the London School of Economics

Professor Karen MumfordProfessor of Economics at the University of Yorkand Chair of the Royal Economic Society Womens Committee

Dr John Philpott Director, Te Jobs Economist consultancy

James Plunkett Director of Policy and Development, Resolution Foundation

Nicola Smith Head of Economic and Social Affairs Department, radesUnion Congress

ony WilsonDirector of Policy, Centre for Economic and Social Inclusion

Expert panel membership


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The UKs minimum wage turns fifeen this year.As the chair o the Low Pay Commission thatset the first rate, I did not think it would survive

this long. In 1999 when the minimum wage becamelaw, the business community was roundly opposed,opponents predicted two million unemployed, and the

House o Commons was divided. We elt engaged in anembattled experiment.

odays context could hardly be more different. Te minimum wage enjoysbroad political support and the academic consensus shows clearly that itboosted earnings without causing unemployment. Low pay itsel has changedtoo. When we started our work fifeen years ago, I remember seeing jobsadvertised paying 1 an hour. Such extremes are now all but eliminated. Yetthe more general problem o low pay remains. Five million workers in the UKare low paid one in five o the total workorce, a figure that has barely dipped

in the last decade and a hal.

I decided to chair this review because it is time to reflect on what theminimum wage did and did not achieve, and to think about where the policyshould go next. Te minimum wage was one o the most radical policy inter-

ventions o modern times, yet while over one hundred empirical studies havebeen published to investigate its effects, its design has never been reviewed inthe round. Far rom protecting the policy, this lack o reflection risks allowingthe minimum wage to lose relevance. Indeed, it would be surprising i thesettlement built fifeen years ago was right or these different times.

For the past nine months I have worked with a panel o leading academicand policy experts, exploring whether there are practical ways in which theminimum wage could be strengthened while crucially not putting at riskwhat has already been achieved. At the outset o the work, I did not know ithis could be done. I now think it can. Te judicious reorms we recommendin this report would retain the core o the late 1990s settlement, but strengthenit or new times.

Chairs Foreword


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Not everyone will agree with our proposals. Some will say they ask too mucho the minimum wage and the Low Pay Commission. Perhaps more commonwill be the response that they do not go ar enough given the scale o low pay.My own view is that they represent a sensible middle ground, building onthe oundations o the minimum wage a broader, more ar-sighted and moreassertive approach, better equipped to take on todays challenge o low pay.

Professor Sir George BainChair of the Low Pay Commission, 1997/98 2001/02 and 2008/09


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This is the final report o the Resolution Foundations review o theuture o the National Minimum Wage. Te review has worked orthe past nine months under the chairmanship o Proessor Sir George

Bain, the ounding chair o the Low Pay Commission, exploring whetherthe minimum wage and its supporting architecture could do more to tackleBritains pervasive problem o low pay. Tis report sets out the collective

views o the expert panel that has led the work and arises rom primary andsecondary analysis and conversations with academics, employer organisa-tions and unions.

Since we began our work, interest in the minimum wage has grown. Tesystem that was established in 1998 is now more than ever in flux. Tere isa growing acceptance that the late 1990s settlement that served the policy sowell in its first fifeen years alls short o what is now needed. Recent inter-

ventions by the Chancellor, the Secretary o State or Business and the LowPay Commission (LPC) itsel have suggested the need or a stronger or more

ambitious ramework or the National Minimum Wage (NMW). But theseinterventions have so ar been ad hoc: they do not amount to a new policy andthere has been no official review o the National Minimum Wage and the LowPay Commission, or what should come next. Te purpose o this report is toset out proposals that strengthen the minimum wage more ormally, givingthe policy renewed relevance in the coming years.

Now is the right time to do this work, not least because the basic argumentsabout the minimum wage are largely settled. As Chapter 1 shows, we nowknow beyond any reasonable doubt that the minimum wage boosted earningsconsiderably without causing unemployment. Employers did not simply firepeople in response to the minimum wage; they were smarter than this. Teyadapted through other channels, adjusting profits and pricing strategies,changing pay differentials and, in low paying sectors, boosting productivity.Te simple lesson o the last fifeen years is that a successul strategy to tacklelow pay will need two pillars: new efforts to raise the productivity o low paidworkers, and judicious policies to push employers to pay more where they canafford to, especially in buoyant labour markets.

As we show in Chapter 2, the success o the minimum wage owes much tothe policys careul design. Te 1998 settlement was intentionally cautious.

Te Low Pay Commission did not bite off too much; it ocused on the narrow,technical (and difficult) task o setting Britains first minimum wage. It took

Executive summary


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things one step at a time; its overriding concern was to keep the minimumwage alive through its vulnerable inancy and not to worry overly aboutthe long-term. And beyond the NMW it stayed hands-off: its purpose wasto eliminate extreme low pay, not to worry about whether employers wentbeyond this legal obligation or to be concerned about the wider incidence olow pay. Tis reflected in part the governments wider economic strategy, inwhich other tools, notably tax credits, were used aggressively to address thewider issues o low earnings and incomes.

odays world is different in undamental ways: the minimum wage has

widespread support; there is a deep evidence-base; low pay itsel has changed;and this government and the next one are likely to be severely constrained byfiscal pressures. As a result, some o the minimum wages initial strengths arenow weaknesses. Tree stand out when we assess the settlement aresh in 2014.

First, the LPCs work, and the governments wider work on low pay, is simplytoo narrow. Te LPC is better described as a Minimum Wage Commission;it has never been asked to even measure low pay. Tis ocus made sense inthe late 1990s, when a third o low paid workers were in extreme low pay. Butmore than nine in ten low paid workers (91 per cent) now earn between the

minimum wage and the 7.71 low pay threshold two-thirds o the medianhourly wage - putting them in effect out o the reach o todays settlement.Tis limitation is not just a eature o the LPCs remit: it reflects the lack oany wider strategy to tackle low pay under current and previous governments.

Second, the LPCs one-step-at-a-time process or setting the minimum wagenow seems too short-sighted. Most immediately, this short-sightedness createsuncertainty or employers. Te NMW is announced barely six months beoreit comes into orce. More undamentally, the minimum wage as a whole lacksdirection. In its effort to keep politics out o the NMW, the government hasallen into a strange neutrality about the minimum wage: there is no officialpreerence over whether it rises or alls. Tis leaves the policy rudderless.Te LPC is only asked to describe the labour market as it sees it today, not toadvise the government on how to make a higher minimum wage possible. Adhoc political interventions to encourage a higher NMW are one result o thisormal lack o direction.

Tird, the LPCs ocus on extreme low pay is too restricted, inadvertentlyleaving the body concerned only that employers pay the minimum wage plusa penny. In the late 1990s, this was not anticipated to be a problem; it waswidely thought that the effects o the minimum wage would ripple upwards

naturally. On the contrary, the minimum wage has become the going rate insome sectors eight per cent o employees now earn within 25 pence o the


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NMW with employers ofen eeling no pressure to pay more. Tis in partreflects the powers that were given to the LPC, which has only the blunt toolo a single mandatory NMW at its disposal. It has neither the power nor theresponsibility to incentivise employers to go urther even when they couldafford to do so. And it has no role in inorming an important public debateabout what might be possible, even when there is evidence that large parts othe UK economy could pay more.

When we embarked on our review, we did not know i these weaknesses could

be fixed without breaking the current system. Afer nine months o research,consultation and deliberation, we now think they can. We can say this becauseour recommendations retain the undamentals o todays settlement but theyalso build on it in important ways. Our recommendations cover three areas,arguing or a broader, more ar-sighted and assertive approach.

First, we need a broader approach. We thereore recommend that thegovernment make it an explicit long-term ambition o economic policy toreduce the incidence o low pay, setting out a plan to reduce the share oemployees who earn below two-thirds o the hourly median wage. We suggest

that the government adopt the ambitious but achievable long-term goal oreducing the UKs high incidence o low pay rom 21 per cent to 17 per cent,a reasonable goal against international benchmarks. Tis would entail lifingaround 1 million employees out o low pay. o complement this ambition,we recommend that the LPCs erms o Reerence be revised to broadenand elevate the body into the governments official watchdog on low pay,monitoring and pushing progress in the manner o the Office or BudgetResponsibility on fiscal policy.

Second, we need to make the minimum wage more ar-sighted. Here werecommend that the process or setting the rate be reormed in several respects.We make two recommendations to increase clarity. In the short-term, theSecretary o State or Business should ask the LPC to set out how long it willnow take or the National Minimum Wage to recover the value it has lost inreal terms during the exceptional down-turn we have recently experienced.Tis is a short-term fix to an immediate and unprecedented problem, butsetting out a recovery path o this kind should also become standard practicewhenever the NMW alls in real terms, as it sometimes will. And to givebusiness more certainty, we recommend that the LPC be asked to publishalongside its recommendation or each years minimum wage a preliminary

view on its intention or the ollowing years minimum wage.


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More undamentally, the minimum wage should strike a better balancebetween short-term flexibility and medium-term ambition. o achieve this, werecommend a change in the governments relationship with the LPC. o theormer, we recommend that government routinely set out its views on how theNMW can contribute to its wider goal o reducing the incidence o low pay. Tisshould be done by publishing an ambition or the level o the minimum wageexpressed as a proportion o the median wage that could be attainable over themedium term (e.g., five years). Tis would clariy expectations about the role othe minimum wage, as well as its clear limits. Our view, based on UK and inter-

national evidence, is that a wage-floor worth 60 per cent o the median wage is areasonable lodestar, indicating the most that a minimum wage could contributeto the goal o reducing low pay over the medium to long term.

urning to the LPC, we recommend that it should retain its role o recom-mending the NMW that can saely be put in place at any point in time. Tisflexibility is a cornerstone o the current model. But the LPCs erms oReerence should be amended to support the governments objective. o thisend, the LPC should be required to publish not only its recommendation orthe NMW but also (a) an assessment o the extent to which this recommen-

dation differs rom the trajectory aspired to by the government; and (b) wherethe recommendation alls short, advice to the government on the blockagesto a higher rate and policy actions that could make a higher rate possible. Tisshould include work to identiy those sectors o the economy that could intheory already pay the higher rate today and the small handul o sectors thatace major barriers and that will require more undamental support. It shouldbe a goal o policy to make a higher NMW possible, or example by deliveringmore adequate and responsive unding in social care and a lower burden oemployer taxes on small employers.

Tird, because a single legal wage-floor which we avour will always be ablunt tool, a key role or the LPC should be to encourage a debate over whenemployers could go urther than todays statutory NMW. Te proper arenaor this debate is civil society, not Whitehall, but the state can help shif theterms o debate, in part by publishing inormation. Our analysis suggests thatindustrial sectors are a good way to start. Te Secretary o State or Businessshould ask the LPC to publish analysis to show which sectors o the economycould afford to pay more than its recommended NMW. Whatever its value,many employers will be able to go urther than the legal NMW. Te LPCsauthority should be brought to bear behind this argument.

Finally, we believe that a similar case can be made or London. While weoppose the idea o regional minimum wages, in the capital we eel there is


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a case or moving directly to the publication o a single reerence rate anon-mandatory minimum wage giving in effect a London-weighting orthe NMW. Te Secretary o State or Business should ask the LPC to carryout a review o the wage-floor that could be applied in London withoutsignificant negative employment effects. Tis figure should be published as anon-mandatory reerence rate, released annually to inorm wage negotiators,campaigners and public debate.

ogether these recommendations would mean a broader, more ar-sighted

and more assertive settlement, but they retain the undamental principles othe agreement struck in 1998. Tere must still be a single mandatory NMWthat is recommended rom year to year by the independent and evidence-based social partnership model o the LPC. Indeed, as insecurity has grownin Britains low paid labour market, a single, clear, mandatory NMW is moreimportant than ever. For this reason, we have rejected ideas that would unda-mentally break with this approach. We do not recommend regionalising theminimum wage or introducing mandatory sector minimum wages. Nor do wepropose raising the minimum wage to the Living Wage or indexing it to therate o inflation. We want more balance between flexibility and medium-term

ambition and we do not want to over steer.

In taking this overall approach, we diverge rom two schools o thought thatwe have encountered in the course o our work. One o these contends thatany change to the status quo runs the risk o breaking the minimum wage.We disagree: the evidence-base is strong enough, and indeed the reputationo the LPC is robust enough, to sustain a stronger version o the establishedsettlement. Te model designed fifeen years ago was never going to be perector all times, and we do not serve that settlement well by preserving it in aspic.

Te other school o thought argues or more radical changes to the minimumwage to tackle Britains pervasive problem o low pay. We sympathise with thisinstinct. But we also think it would be oolhardy to jeopardise an institutionlike the LPC without first seeing what a stronger version o that body can do.Te LPC has proven its worth and is the envy o many countries. Britain doesnot have many authoritative and evidence-based institutions that have orgedcross-party political support. Tose we have should be sustained.


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Argument ITe government should make it an explicit long-term ambition o economicpolicy to reduce the incidence and persistence o low pay in the UK labourmarket, and it should broaden and elevate the Low Pay Commission to be itsmain watchdog on low pay, monitoring and advising on the issue in a similar

manner to the OBR on fiscal policy.

Recommendation 1:Te government should commit to reducing the shareo employees who earn below two-thirds o the hourly median wage. Anambitious but achievable long-term goal, based on international benchmarks,would be to reduce the share o low pay in the UK economy rom 21 per centto 17 per cent o employees.

Recommendation 2: Te government should set out a practical cross-government plan to deliver on its ambition to reduce the incidence o low pay.

Tis should include but not be limited to its judgment o what the NationalMinimum Wage can and cannot contribute (see Recommendation 6).

Recommendation 3: Te Low Pay Commissions permanent erms oReerence should be revised to establish it as the governments main watchdogon low pay, broadening its responsibilities and elevating its status to monitorthe extent and persistence o low pay and to advise the government on how totackle these entrenched problems.

Argument IITe process or setting the National Minimum Wage should be reormed tostrike a more even balance between short-term flexibility and medium-termambition. Te goal should be to give more clarity and drive to the NMW inthe medium-term, while retaining the LPCs vital role in recommending therate rom year to year.

o bring more clarity to the minimum wage in the short-term:

Recommendation 4:Te Secretary o State or Business should ask the LPC topublish its best estimate o how long it will now take or the National MinimumWage to recover the value it has lost in real terms in recent years. It should become

standard practice or the LPC to publish a recovery path o this kind whenever itis in the unusual position o recommending a real terms cut in the NMW.

Summary of ourrecommendations


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Recommendation 5: Te LPC currently submits its recommendation orthe NMW in February and the government announces in March or Aprilthe rate that will apply rom October, giving barely six months betweenthe announcement and the rate becoming law. o increase certainty oremployers, the LPC should also be asked to set out a preliminary intention orthe subsequent year. Tis judgment would be open to revision.

o better balance the NMWs short-term flexibility with medium-term ambition:

Recommendation 6:Te government should, as a matter o routine, set outits ambitions or the uture value o the minimum wage. Tis should be nomore than an expression o intent, leaving the LPC ree to pass judgment onthe NMW that can be put in place rom year to year. Tis ambition wouldbest be expressed as a proportion o the median wage to be achieved over themedium-term. It would need to be arrived at by the government through anevidence-based assessment o what is possible but our early work suggests thata NMW o 60 per cent o the median wage is a reasonable lodestar, indicatingthe most that a minimum wage could contribute to the reduction o low payover the medium- to long-term.

Recommendation 7: Te LPCs permanent erms o Reerence should beamended to require that the LPC publish, alongside its recommendation orthe NMW (a) an assessment o the extent to which its recommendation meetsor alls short o the trajectory aspired to by the government; and (b) where itsrecommendation alls short, a commentary on the blockages to a higher rateand advice on policy changes that could make a higher rate possible in uture.Tis should include an assessment o how close different sectors o the UKeconomy are to being able to pay the governments aspirational NMW today.

Argument IIIA single mandatory NMW will always be a blunt tool and there is a risk thatthe minimum wage becomes a going rate as employers eel little pressure togo beyond their legal obligation. Te LPC should be given additional tools tocomplement the legal NMW, publishing analysis to indicate which parts othe UK economy could afford to pay their lowest paid workers more.

Recommendation 8: Many sectors o the UK economy could afford to paymore than the NMW. Tis is inevitable with any single national wage-floor,whatever its rate. A key role o the LPC should be to inorm public debateover when employers could go urther than the NMW. Te Secretary o State

should ask the LPC to publish analysis to inorm this debate, showing howaffordable it would be in different sectors to meet a higher wage-floor.


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Scope and Outline of the PaperTis report ocuses on the design o the minimum wage and its supportingpolicy architecture, the Low Pay Commission. o that end, we have not lookedin detail at enorcement, except where enorcement has a bearing on policydesign. Enorcement is nonetheless a oundation or the NMWs success andshould not be taken or granted. It is also not our intention in this reportto look at low pay more generally. Low pay is a ar broader problem thanthe NMW, being driven by a wide range o actors including the productivityand skills o low paid workers and collective bargaining arrangements. Werecognise that the minimum wage is a limited-purpose vehicle and only oneelement o any strategy to combat low pay.

In Section 1 o this paper we summarise the lessons learned during theNMWs first fifeen years.

Chapter 1outlines the evidence on the impact o the NMW to date, ocusingon its effects on wages and employment.

Chapter 2evaluates the strengths and weaknesses o the current settlement,identiying the aspects o the approach that must be retained and those thatare in need o reorm.

In Section 2o the paper we make three broad arguments or a stronger andmore confident settlement that more closely measures up to todays challengeo low pay.

Chapter 3considers how the narrowness o the policys scope holds it backrom tackling the wider issue o low pay. It contrasts the current arrangementwith the remit o a more genuine Low Pay Commission, making recommen-dations to broaden the approach.

Chapter 4 looks at the short-termism o the NMW. It makes recommen-dations that strike a more even balance between short-term flexibility andmedium-term ambition.

Chapter 5looks at how the LPC could be equipped with additional tools tocomplement the powerul but blunt tool o a single mandatory NMW.

Te Conclusion touches on the risks and rewards o our recommendedapproach.

Recommendation 9: Te Secretary o State or Business should ask theLPC to carry out a review o the wage-floor that could be applied in Londonwithout significant negative employment effects. Te LPC should publish thisfigure as a non-mandatory reerence rate to guide the behaviour o employers


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Section 1LESSONS LEARNED


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This chapter begins by outlining the evidence on the impact o theNational Minimum Wage (NMW). It ocuses on the two mostimportant questions or any evaluation o a minimum wage: what

impact did the policy have on the earnings o the lowest paid; and were thereany effects on employment? As well as summarising the evidence on earningsand employment, this chapter also reflects on the important question o whythe NMW did not impact on employment.

Overview of the policyTe NMW was eased in and then increased quickly before slowing down

Te introduction o the National Minimum Wage was a fiercely oughtbattle. But the hardest decision still lay ahead when the National MinimumWage Act received royal assent in 1998. Setting the rate (initially coveringall employees aged 22 and over, with lower rates or younger people) was adaunting proposition. As Te Economist wrote in 1997, coming up with aminimum wage that will not seriously harm the economy, and destroy jobs,will require the wisdom o Solomon or extraordinary luck.1Te rate alsohad to be set sufficiently high to have a meaningul effect on earnings.

1Te minimum wage: Devilish details Te Economist (5th June 1997)

Chapter 1Evidence on impacts

Box 1: Does a higher minimum wage raise household incomes?

Low pay is only one aspect o the wider question o household incomes and living stand-ards. A stronger minimum wage is not the only way to raise household incomes and indeedthe relationship between the two is more complicated than is commonly realised. Tere arewell-ormed arguments or why wages can have a limited impact on the incomes o cer-tain households.* Te flip-side o this argument is the likely savings to government roma higher minimum wage in reduced benefit spending and increased tax revenues, thoughthese too are complicated to calculate.

An increase in the minimum wage will not filter through equally or all households. Te sizeo that gain will depend on interactions between National Insurance contributions, incometax and tax credits. Te introduction o Universal Credit complicates matters urther. Casestudies can help us understand the proportion o a 10p increase in the NMW which is passedon to household income:

A single person in their twenties who lives with their parents and works part-time at theNMW would keep all o any increase in the minimum wage, assuming they earned below thethresholds or National Insurance and income tax and received no state support.

A single parent working ull-time at the NMW ares less well, with a net benefit o just overa quarter o the rise (2.7 pence). Tis is the result o lost tax credits in addition to direct taxes.

A second earner in a couple with children working ull-time at the NMW will also receive


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2.7 pence as a result o a 10 pence increase in the minimum wage. However, when UniversalCredit is introduced, that will all to 2.4 pence, highlighting the lower work incentives acedby second earners.

* Bennett, F. and Lister, R. Te Living Wage: Te right answer to low pay?

Te Low Pay Commission (LPC) was created to meet this challenge.Formed on the basis o a social partnership model, the LPC is made up onine members: three rom a trade union background, three rom an employerperspective and three independent members, including two academicsusually with expertise in industrial relations or labour market economics, andthe Chair. Its primary role was to recommend a rate or the very first NMW tothe Secretary o State or rade and Industry, todays Department o Business,Innovation and Skills. Despite the potential or disagreement among theCommissioners, the LPC has always reached a unanimous decision on theirrecommendation or the rate. Te Secretary o State retains the power to

disregard the LPCs recommendation on the NMW but none has ever doneso, with ministers diverging rom the LPCs broader advice only twice: on therate paid to apprentices, and the age at which the adult rate should begin.

Figure 1 tracks the path which the NMW has taken. Partly due to thecontroversy surrounding the introduction o the NMW and the uncertaintyover its effects, the UKs first rate was set at a low level, at 3.60 rom April1999. Te LPC was asked to monitor the impact o the NMW and offer adviceon whether and by how much the NMW should increase. Te first increasewas similarly circumspect, with the rate rising by only 10p in October 2000.

While the largest nominal increase occurred in 2001, with a jump to 4.10,it was the mid-2000s which saw the NMW experience its astest and mostsustained growth, rising by at least 30p each year between 2003 and 2006,equivalent to average annual increases o more than 6 per cent.

Te speed at which the NMW rose slowed considerably rom 2007 onwardswith small nominal increases in subsequent years reflecting the difficultprevailing conditions in the wider economy. Only in 2014, ollowing five yearso decline in real terms, is the NMW set to rise again, with the Chair o theLPC writing to the Secretary o State or Business, Innovation and Skills (BIS)to recommend a rise in October 2014 o 3 per cent to 6.50, and pointing tothe likelihood o urther real terms increases in subsequent years. Te PrimeMinister has indicated that the government will accept the recommendationor 2014.

What impact did the NMW have at these levels? Te LPCs terms oreerence ask it to recommend levels or the minimum wage rates that help asmany low-paid workers as possible without any significant adverse impact onemployment or the economy. In the ollowing section, we summarise the bestevidence on whether this was achieved, outlining the research on the effectson the NMW on wages, employment and other variables.


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Figure 1: Value of the UK minimum wage per hour, current prices not adjusting or inflation

Notes: Te adult rate o the NMW initially applied to employees aged 22 and over and this cut-off was laterreduced to 21.Source: Low Pay Commission

The NMWs eect on earningsTe NMW resulted in higher earnings for the lowest paid workersAssessments o the NMWs impact on the wages o the UKs lowest earnersare unequivocal: the NMW achieved its goal o boosting the wages o thelowest paid employees. In terms o the scale o its potential effects, the LPCssecond report estimated that around 1.7 million employees were entitled tohigher wages as a result o the NMW. A wide range o indicators can be usedto gauge the actual impact o the NMW on earnings. Figure 2 compares thedistribution o hourly wages in the UK in 1997 to the distribution in 2012.

Te large spike in the wage distribution at the minimum wage is clear.Although there remain concerns around the effectiveness o enorcementwith particular sectors seen as black-spots, the overwhelming majority oemployers have complied with the NMW.

3.60 3.70

4.10 4.20

4.50

4.855.05

5.355.52

5.73 5.80 5.93

6.08 6.19

6.316.50

3.00

3.20

3.50 3.60

3.80

4.104.25

4.454.60

4.77 4.83 4.92 4.98 4.98

5.03 5.13

3.00 3.00

3.30 3.40

3.53 3.57 3.64 3.68 3.68 3.72

3.79

2.50 2.60 2.65 2.68

2.73

2

3

4

5

6

7

1999 2002 2005 2008 2011 2014

Adult rate 18-20 16-17 Apprentce


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Figure 2: The distribution of UK wages before and afterthe minimum wagePercentage o workorce by 25 pence band

Notes: Gross hourly pay excluding overtime, set out in 25p bands. Te final column shows the proportion

earning in excess o 30 an hour.

Source: RF analysis o ONS, Annual Survey o Hours and Earnings

Several studies commissioned by the LPC give a more detailed account o

the policys effects on earnings. A recent paper finds that the NMW had apositive effect on the wage growth o low earning groups, particularly womenin part-time employment.2Impacts were not limited to those who previouslyearned below the NMW, with analysis finding that the NMW directly affectedearnings up to the 6th percentile, raising wages by around 7 per cent.3Wediscuss this in more detail below when we touch on so-called ripple effects.

While the UKs changing pay distribution provides a striking insight intothe wage effects o the NMW, it is also helpul to get a sense o how the NMWhas grown relative to prices and wages in the wider economy. In nominalterms, the level o the NMW increased by 75.3 per cent rom 1999 to 2013.Figure 3 shows how this compares to prices and earnings.4Average earningsgrew by 60.2 per cent over the same period. I the NMW had been indexed tothe growth o average earnings, it would be 5.77 in 2013, almost 60p lowerthan its actual rate. Te growth o the NMW is even stronger by comparisonto inflation. Te minimum wage has outpaced both the RPI (52.5 per cent)and CPI (37.3 per cent) measures o inflation. Te NMW roughly kept pacewith the growth o GDP rom 1999 to 2012.

2Dickens, R., Riley, R. and Wilkinson, D. (2012) Re-examining the impact o the national minimum wage on earn-ings, employment and hours: the importance o recession and firm size3Butcher, ., Dickens, R. and Manning, A. (2012) Minimum Wages and Wage Inequality: Some Teory and an Ap-plication to the UK

4Figure 3 is drawn rom data kindly provided by the Low Pay Commission. See also Butcher, . (2012) Still evidence-based? Te role o policy evaluation in recession and beyond: the case o the National minimum Wage, NationalInstitute Economic Review No 219


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While these data tell us a lot about how the NMW has grown over time,because o an error in the data supplied to the LPC when calculating thefirst rate, the first minimum wage was set much lower than intended. It isimportant to remember this artificially low base when considering how theNMW has risen since its introduction.5

Figure 3: The value of the NMW over time

Source: Low Pay Commission, with thanks to Yi Zhang or sharing data

Figure 4 also shows how the real terms growth o the NMW has differed overtime. Afer a tentative introduction, the NMW saw strong real terms growthor a number o years, rising relative to median earnings. But Figure 4 alsoshows the severity o the recent decline in the NMW relative to inflation.Had the NMW kept pace with the CPI rom 2008, the rate would be 6.64today rather than 6.31 (in 2013 prices). Figure 5 shows that even afer itsplanned increase in October 2014, the minimum wage will still be no higherthan its level in 2005 in real terms. While the rise to 6.50 represents a 3 percent increase over its 2013 level, given that the OBR estimates that inflation(measured with the CPI) will run at 2.3 per cent or 2014, that amounts to areal terms increase o just over 4 pence.

5

Had the LPC set a rate to cover 8 per cent o the workorce in 1998, the NMW would have started at around 3.96.Raising this to its subsequent rate o 6.31 in October 2013 would have meant growth o 59.3 per cent, below GDPand earnings growth but above inflation.


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Figure 4: The real terms value of the National Minimum Wage

Source: Resolution Foundation analysis o ONS, Annual Survey o Hours and Earnings; and OBR

Economic and Fiscal Outlook December 2013

Another important indicator o the strength o the NMW is its bite relativeto the median gross hourly wage. Tis is in some ways a more useul measure

than comparisons to average earnings, which include bonuses and are skewedupwards by a small number o very high earners. Te bite gives a better senseo how the NMW compares to the earnings o a typical employee.

Despite recent alls in the real terms value o the NMW, the bite remainsnear to historic highs. In 2012, the UK NMW was 55.1 per cent o hourlymedian earnings and in 2013 it ell back to 54.6 per cent. Te bite o the NMWhas risen even while its real value has allen because o historic declines inmedian earnings. It is also important to note that the bite varies widely, orexample by age, gender and by sector. For example, industries that contain aconsiderable proportion o low paid employees such as accommodation, oodservice and retail have bites o 75 per cent and higher, while sectors with arelatively low proportion o low paid people, or example finance, have bites inthe region o 40 per cent. We return to this point later in the report.

The NMWs eect on employmentTe minimum wage has not caused unemploymentWhat price was paid or these positive effects on earnings? On the policysintroduction, opponents o the NMW eared that employers would adjustby reducing their employment o low paid workers. Te most pessimisticorecasts predicted that up to 2 million jobs would be lost as a result o the

policy, with higher unemployment having a fiscal cost in terms o reduced


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income tax receipts and higher welare spending.6Tere were concerns thatolder workers would be displaced by younger employees as employers tookadvantage o the lower youth rate.7Tere were even worries that the negativeimpact would not be limited solely to employment but would raise inflationacross the economy.8

Tere is now academic consensus that the UK NMW has not had a negativegeneralised effect on employment. As the LPC notes in its 2013 report, ouroverall conclusions are that as a result o the NMW the lowest paid havereceived higher pay rises than their peers, and that there remains little evidenceo a significant adverse effect o the minimum wage on employment.9

Tese findings remain robust or the effects on overall employment, onemployment in low paying sectors, on the employment prospects o differentindividuals and social groups and on employment levels in different regions.10Evidence also shows no overall effect on hours worked and no larger effect

on the hours worked by low paid workers. Latest research confirms that thesefindings have held throughout the recent recession, the deepest in moderntimes. Indeed, the labour market has been in the words o the LPC remarkablyresilient when compared with previous recessions and both employment andunemployment have recovered aster than expected. Tis has happened whilethe NMW, despite having allen in real terms, has risen relative to medianearnings throughout these difficult years.

While the balance o academic opinion is clear, the evidence on the minimumwage is not unanimous. Figure 5 makes this point or the US literature. It draws

rom a study o over 1,500 estimates o the impact o the US minimum wageon employment.11Te horizontal axis shows the estimated employment effecto the minimum wage, rom negative to positive, and the vertical axis showsthe statistical accuracy o the estimate (or example, reflecting the samplesize). Te cluster o accurate estimates at zero is clear; this reflects the balanceo opinion that there is no overall employment effect. But individual resultsare scattered rom negative to positive. Tis is why supporters and opponentso the NMW have each been able to cite studies in support o their arguments.A meta-analysis or the UK finds similar results.12

6For more discussion see Te National Minimum Wage: Te Evidence o its Impact on Jobs and Inequality, CentreFor Economic Perormance, LSE7See or example http://news.bbc.co.uk/1/hi/uk_politics/113011.stm8 See or example http://news.bbc.co.uk/1/hi/uk_politics/115395.stm9Low Pay Commission (2013)10p.182, Low Pay Commission (2013), Lanot and Sousounis (2013) Dickens, Riley and Wilkinson (2012), orexample, find that the minimum wage may have had positive effects on employment rom 2003 to 2007. Dolton,Rosazza Bondibene and Stops (2012) find no impact, including in the recession, and again find a positive impact onemployment in some areas.11Doucouliagos H. and Stanley .D. (2009) Publication Selection Bias in Minimum-Wage Research? A Meta-

Regression Analysis.12Linde Leonard, M. Stanley .D. and Doucouliagos, H. (2013) Does the UK Minimum Wage Reduce Employment?A Meta- Regression Analysis.


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Figure 5: The eect of the US minimum wage on employment

Source: Doucouliagos and Stanley (2009)

Evidence also points to where employment effects would show up firstAs well as examining headline indicators, an extensive literature has examinedthe effects o the NMW on specific groups o workers. No overall effect has beenound on the employment and participation rates o women, older workers,people with disabilities or migrants.13While research has not ound statistically

significant employment effects or any major group, results do point to parts othe labour market that are more vulnerable to the minimum wage: While no employment eect has been found overall, there is weak evidence thatgrowth in employment has been slower in some very low paid regions, potentiallyreflecting the higher value o the NMW relative to median pay (the bite) in theseareas.14Other papers have ound more mixed effects or even positive effects.15

Early research into the minimum wage found a small negative eecton employment in care homes containing a high share o minimum wageworkers.16Tis likely reflects both the low pay o this sector and its heavyreliance on inadequate, unresponsive public unding. While evidence on younger employees remains mixed, one study ndsreduced hours or young people in the years afer the 2008 recession as a resulto the NMW.17Although the authors have not been able to replicate thesespecific findings, young workers have been shown to be more sensitive to the

13Butcher, . (2012) Still evidence-based? Te role o policy evaluation in recession and beyond: the case o theNational minimum Wage, National Institute Economic Review No 219.14Galindo-Rueda, F. and Pereira, S. (2004) Te Impact o the National Minimum Wage on British Firms, Centre orEconomic Perormance, LSE, Yale University and University College London.15Dolton, P. Rosazza-Bondibene, C. and Wadsworth, J., (2009) Te Geography o the National Minimum Wage, Royal HollowayCollege, University o London and Dolton, P., Rosazza Bondibene,, C. and Stops, M., (2012) Te Spatial Analysis o the Employ-ment Effect o the Minimum Wage in a Recession: Te Case o the UK 1999-2010, University o Sussex, CEP, LSE, NIESR and IABNurnberg.16 Machin, S., Manning, A. and Rahman, L. (2003) Where the Minimum Wage Bites Hard: Introduction o Minimum

Wages to a Low Wage Sector. Journal o the European Economic Association. 1(1), pp. 154-180.17 Bryan, M., A. Salvatori and M. aylor, (2012) Te Impact o the National Minimum Wage on Earnings, Employ-ment and Hours Trough the Recession, Institute or Social and Economic Research.


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effects o a minimum wage in a range o studies.18

Recent research nds evidence of reduced job retention among femalepart-time workers.19Tis does not directly imply lower employment, and maysimply represent increased churn into and out o work; it may nonethelessreflect the relatively large impact that the NMW has had on this group.

Tis evidence should guide our caution on the NMW. It reminds us that theLPC is right to be careul when recommending the rate o the NMW but italso suggests that a higher NMW would not lead to a sudden spike in overallunemployment effects would show first in specific areas. Moreover, it seemsthat these effects have not happened yet, even in parts o the economy that arehighly exposed to the NMW. Tis may also suggest, as the LPC has hinted inrecent work, that in the rest o the economy there is headroom or a higher rate.

Why did the minimum wage not cause unemployment?A key question raised by the literature is: why did the minimum wage not

cause unemployment?20In the years since the NMW was introduced in theUK, labour market economists have sought to understand why classical labourmarket theory ailed to model accurately the minimum wages impact, andsome have developed new models that better explain the empirical results.21Tese are complicated debates relating to questions o employer monopsonyand to the extent that rictions affect low wage labour markets. But it nowseems that one basic mistake o the early opponents o the minimum wagewas that they over-simplified the reactions o employers. We now know thatemployers did not simply reduce employment in response to the NMW, butinstead adapted strategically through a range o other channels:

Some rms absorbed higher wage-bills into lower prots.22 Importantlythough, this did not cause an increased rate o business ailure among lowpaid firms.

Some employers compressed their wage distributions.23Tis had the positiveeffect o absorbing the cost o the NMW without causing unemployment andthe negative effect that workers paid slightly above the NMW ofen saw ewo the benefits; their pay went up but not as much as had been anticipated.24

18 See, or example Bryan, M., Salvatori, A. and aylor, M., (2013) Te Impact o the National Minimum Wage onEmployment Retention, Hours and Job Entry, Institute or Social and Economic Research, University o Essex andDolton, P. and Rosazza Bondibene, C. (2011) An Evaluation o the International Experience o Minimum Wages in anEconomic Downturn, Royal Holloway, University o London.19 Dickens, R., Riley, R. and Wilkinson, D. (2012) Re-examining the Impact o the National Minimum Wage onEarnings, Employment and Hours: Te Importance o Recession and Firm Size. University o Sussex and NationalInstitute o Economic and Social Research.20 For urther discussion o this question see Schmitt, J. (2013) Why Does the Minimum Wage Have No DiscernibleEffect on Employment? Center or Economic and Policy Research and Metcal, D. (2007) Why has the British nationalminimum wage had little or no impact on employment? Centre or Economic Perormance, LSE.21 For the leading work on labour market monopsony, see the work o Alan Manning. For example, Manning, A.(2010) Imperect Competition in the Labour Market, CEP Discussion Papers DP0981, Centre or Economic Peror-mance, LSE.22 Draca, M. Machin, S and Van Reenen, J. (2005) Te Impact o the National Minimum Wage on Profits and Prices:Report or Low Pay Commission.23 Butcher, ., Dickens, R. and Manning, A. (2012) Te Impact o the National Minimum Wage on the Wage Distri-

bution. Low Pay Commission, University o Sussex and London School o Economics.24 Denvir, A. and Loukas, G. (2006) Te Impact o the National Minimum Wage: Pay Differentials and WorkplaceChange, Institute or Employment Studies.


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Employers in the UKs low paying sectors raised productivity in response tothe NMW. 25Tis effect was more marked in larger firms.26Evidence suggeststhat this increased productivity was the result o capital-deepening in lowwage sectors.

Tere is some evidence that the NMW resulted in higher prices for specicgoods that are dependent on very low paid workers.27Other research suggeststhat these specific effects did not eed through into more widespread effectson prices. 28In general, early concerns that the NMW might cause generalisedinflation have proven unounded. Tis is partly because the NMW has hadlower ripple effects than anticipated, not raising wages across the economy.

Some employers experienced reduced sta turnover meaning they couldabsorb the costs through reduced spending on recruitment and retraining.29Tis finding reflects the importance o rictions in labour markets, aphenomenon that was underplayed in predictions o unemployment effectsrom the minimum wage.

Tese lessons do not mean the minimum wage would never causeunemployment. At some level the NMW would inevitably cost jobs. Butthe evidence on the NMW does show clearly that any strategy to boost theearnings o low paid workers will need two pillars: efforts to raise the produc-tivity o low paid groups and low paying parts o the economy, or examplethrough skills policy; and judicious tools to put pressure on employers to paymore when they can afford to. Fifeen years o research suggests that the lattercan do more work than we thought but it is still a key challenge or policy toget this balance right.

25 Croucher, R. and Rizov, M. (2011) Te Impact o the UK National Minimum Wage on Productivity by Low-paying Sectors and Firm-size Groups, Middlesex University and Riley, R. and Rosazza Bondibene, C. (2013) TeImpact o the National Minimum Wage on Firm Behaviour During Recession, National Institute o Economic andSocial Research.26 Croucher and Rizov (2011).27 Wadsworth, J. (2008) Did the UK Minimum Wage Affect Prices? Royal Holloway College, University o London.28

Draca, M., Van Reenen, J. and Machin, S., (2005) Te impact o the National Minimum Wage on profits andprices, LSE and UCL.29Schmitt (2013).


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Chapter 2Evaluating todays approach

Having assessed the empirical effects o the minimum wage, thischapter evaluates the strengths and weaknesses o the widersettlement that underpins the policy. Tis is important i we are to

retain and reorm the right aspects o the system. In addition to its success atrecommending a sensible level or the minimum wage, the approach o theLPC has had several clear strengths in the policys first fifeen years.

First, it has helped to establish a strong and objective body of researchTe evidence-base the LPC has developed in the UK is one o the largest inthe world, matched only by that o the US. And the objectivity o the UK

evidence-base is arguably stronger, with statistical analysis suggesting thatthere is less publication bias in the UK minimum wage literature than in itsUS equivalent.30Te LPC has played a central role in this, commissioning themajority o UK research on the minimum wage. Tis has transormed ourunderstanding o the impacts o wage-floors and the operation o low wagelabour markets, producing most o the findings outlined in Chapter 1.

Second, the LPC has helped to depoliticise Britains minimum wageOpinion over the NMW was divided in the late 1990s. Te UK minimumwage now enjoys extremely broad political support. Secretaries o State under

both Labour and todays Coalition government have always accepted theLPCs main recommendation or the adult minimum wagein all politicaland economic weather. Tis is testament to the work o successive LPC chairsand the bodys commissioners and secretariat. It is important not to orgethow difficult this basic job is, particularly in recent years.

Te success o the LPC in depoliticising the NMW is all the more impressivewhen the UK is compared with the US. Americas Federal Minimum Wage(FMW) can only be raised by an Act o Congress meaning that increases areperiodic and come only through hard-ought battles in which politics can takeprecedence over evidence. Te US FMW is now worth around 30 per cent lessthan it was worth in 1968 afer controlling or inflation.31As yet unable tosecure the support o Congress, President Obama has been limited to raisingthe FMW solely or ederal contractors, something that stands within hisexecutive authority. Tis does not simply reflect the tone o US politics; incertain others policy areas, such as the Earned Income ax Credit (Americasequivalent o tax credits), debate has been less highly charged.

30 Linde Leonard, M. Stanley .D. and Doucouliagos, H. (2013) Does the UK Minimum Wage Reduce Employ-ment? A Meta-Regression Analysis; Doucouliagos H. and Stanley .D. (2009) Publication Selection Bias in

Minimum-Wage Research? A Meta-Regression Analysis31 Cooper, D. (2013) Raising the ederal minimum wage to $10.10 would lif wages or millions and provide a modesteconomic boost, EPI


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CPI

Historic

level of

NMW

GDP

95

100

105

110

115

2001 2002 2003 2004

100 = October 2001

CPI

Historic

level ofNMW

GDP

95

100

105

110

115

2009 2010 2011 2012

100 = October 2009

Tird, the LPC has secured the buy in of employers and unionsTe UKs decision to use a social partnership model to recommend the rateo the minimum wage has proven highly successul, securing the buy-in obusiness and trade unions. Te LPCs union and employer representativeshave agreed a unanimous recommendation every year since 1999, includingin the difficult years rom 2008. Tis is a major achievement, particularlygiven the wide diversity o opinion which eeds into the LPCs deliberations.

Fourth, the UK minimum wage responds to labour market conditionsTe LPCs annual process o reflecting on evidence and then recommendinga rate has made the UK minimum wage highly responsive to labour marketconditions. Tis has led to smooth annual increases, avoiding the sporadiclarge jumps seen in economies like America.

Te UK minimum wage has also been less rigid than equivalent policies incountries like France, where the minimum wage rises in line with a measure o

prices. Figure 6 shows what would have happened in the UK i the minimumwage had been linked to inflation. On the lef, it ocuses on the buoyant economicperiod o 2001 to 2004 and on the right on the difficult years o 2009 to 2012. I ithad been indexed to inflation, the UK minimum wage would have grown muchmore slowly in years when the economy was strong and much more quickly whenit was weaker. Overall, it would have ended up lower than it is today.

Figure 6: The path of the UK minimum wage had it been linked toinfation

Increase over time, indexed start date = 100

Source: RF analysis o data rom Low Pay Commission and ONS

Te minimalism of the 1998 settlement now falls short in several waysTe LPC has perormed admirably against the tasks it was set. But three

weaknesses now stand out when the settlement is assessed aresh in 2014.


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Low paid (LHS)

% of low paid who are

extremely low paid (RHS)

Extremely low paid (LHS)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

5%

10%

15%

20%

25%

1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Introducton ofminimum wage

As Figure 7 also shows, a fifh o all employees remain low paid on the moregeneral measure o two-thirds o the median. Tis share o low pay is arhigher in the UK than in most developed economies.34Te 9 in 10 workerswho earn in the region between the NMW and the low pay threshold are thenew rontline in the battle against low pay

Figure 7: The changing composition of low payPercentage o UK workorce who are low paid (earning below two thirdso median hourly earnings) and extremely low paid (earning below hal omedian hourly earnings).

Notes: Figures are drawn rom three separate data sources. Where these sources overlap, differences exist

in the proportions o employees reported to be below the various low pay thresholds. Figures prior to 1997

have been adjusted to account or the magnitude o difference recorded in these overlapping periods, in

order to create a consistent time series. Te original, unadjusted, data is presented in Whittaker, M, (2013)

Low Pay Britain 2013.

Sources: RF analysis o DWP, Family Expenditure Survey (1968-1981); ONS, New Earnings Survey Panel

Data (1975-2012); and ONS, Annual Survey o Hours and Earnings (1997-2012)

Another important weakness o todays narrow settlement is the lack oattention it gives to the persistence o low pay. Te NMW was intended to actas the wage-floor rom which employees should move up with experience andskills. Tere was even hope that the NMW might encourage employers to investin their staff to allow or progression. Findings rom the Resolution Foundationsuggest that all too ofen, the NMW is ailing to act as a springboard to higherearnings. In 2012, just under a fifh (17 per cent) o minimum wage workers,around 320,000 people, had only held minimum wage jobs in the last fiveyears.35Te problem is not limited to the NMW. Almost three-quarters o lowpaid workers in 2002 had not ully escaped low pay ten years later in 2012,36asFigure 8 shows.

34 See annex 2 or a more in-depth overview o the state o low pay today and how the UKs perormance compareswith other developed economies35 Minimum wage workers and jobs defined as within 25 pence an hour o the NMW. DArcy, C. and Hurrell, A.

(2013) Minimum stay: understanding how long people remain on the minimum wage.36 Hurrell, A. (2013) Starting out or getting stuck: An analysis o who gets trapped in low paid work and whoescapes.


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Figure 8: Earnings mobility of the low paidProportion o low paid employees in 2002 who escaped low pay, cycled in andout o low pay, remained stuck on low pay and exited the labour market overthe subsequent decade

Notes: (1) Escapers are defined as those among the 2002 low paid who are in work and no longer on lowpay in the most recent three years (2010, 2011 and 2012).(2) Te stuck are defined as those o the 2002 low paid who only ever held low paid jobs or all years theywere employed in the subsequent decade (2003-2012).(3) Cyclers are defined as those among the 2002 low paid that had a non-low paying job or at least one year

in the subsequent decade (2003-2012).(4) Exiters are defined as those among the 2002 low paid who became sel-employed or lef the workorceor the entirety o the subsequent decade. Reasons or leaving the workorce include: retirement, death,requent or long-term unemployment, moving abroad or prolonged economic inactivity (e.g. those inull-time education, stay-at-home parents and ull-time carers).

Source: Resolution Foundation analysis o NESPD 1975-2012

2. Te process for setting the minimum wage is short-sightedTe second clear shortall o todays settlement is the short-termism o the processor setting the minimum wage. Te LPC has never been required to look aheadto the medium-term when making its recommendations or the uture value othe NMW, although it did choose to do so in its earlier years, beore the economyweakened in 2008. Tis short-sightedness plays out in a number o respects.

O late, it has raised pressure on politicians to say when the NMW willrecover the value it has lost in recent years. As we saw in Figure 4, theminimum wage ell in real terms or five years in a row rom 2008 to 2013,dropping back to a level last seen in 2004. Te LPC has now recommended acash increase in the minimum wage to 6.50 in October 2014, representinga small real terms rise. Te government suggests it will accept this recom-mendation. Even so, the minimum wage still looks likely to be lower in realterms in October 2014 than it was in October 2008. Te pressure to restore the

NMWs lost value is quite specific to todays context and helps to explain theChancellors recent advocacy o a higher minimum wage. Te LPC has now


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itsel begun to respond to this concern, saying that 2014 will mark the start oa new phase o bigger increases than in recent years.37

A more permanent aspect o the minimum wages short-termism is theuncertainty it creates or employers. Te minimum wage is announced barelysix months beore it comes into orce.38Tis has been a particular complainto small firms and is increasingly out o line with best practice in economicpolicy, where there has been a general move to giving more clarity over policyintentions.39Some employers have argued that more notice would make iteasier to adapt to the NMW in positive ways. While it is hard to test thisargument, evidence does suggest that employers have adapted to the NMWin both short-term ways (such as raising the price o certain goods) and morepositive long-term ways (raising productivity in low paying sectors throughcapital-deepening). It might be that more notice could encourage the latter.

Te most undamental aspect o the NMWs short-termism, though, is its

lack o direction. In its effort to depoliticise the minimum wage, the governmenthas ended up in the strange position o being ormally neutral about the rate.Neither the government nor the LPC have any stated goal or aspiration on thereduction o low pay, nor any preerence over whether the minimum wagerises or alls. Leaving to one side the Chancellors recent remarks which havenot as yet been ormalised into a new policy, this lack o direction leaves theminimum wage rudderless. Te LPCs job is simply to describe the labourmarket it sees today. Te LPC itsel acknowledges that the minimum wage theUK economy can bear is not an unalterable act; policy changes can constrain orree up the NMW.40For example, the LPC suggests that inadequate social care

unding holds back the minimum wage across the entire economy because oconcerns about unemployment in that sector. Without any ambition to raise theminimum wage, there is no impetus in the system to identiy these blockages.

As with the other shortalls we identiy, the lack o direction in the minimumwage was less problematic when the policy was introduced. Te LPCs task wasthen to take Britain rom having no NMW to having one set at a reasonable level.In the early years, research into the past effects o the NMW lit the way down thispath, giving the LPC enough confidence to raise the rate rom its very low startingpoint to a rate that puts Britain in the middle o international league tables. oday,things are different in two respects. First, the journey is harder: the job is now totake Britain rom an average NMW to an ambitious one. Second, the evidence isless illuminating: little is learned by refining earlier findings on the back o smallincremental changes in the NMW rom year to year. A more ambitious minimumwage is likely to require a more pro-active research agenda.

37 David Norgroves letter to the Secretary o State, February 2014.38 While the LPC typically submits its recommendation to government in February each year, the timing o thegovernments announcement varies; in 2013 the NMW or 1st October was not announced until 15th May.39 See or example recent comments by the Federation o Small Businesses which called or the NMW tobe set out five years in advance, with an upper and lower range or each year. http://www.sb.org.uk/News.aspx?loc=pressroom&rec=8549.40 Tis was most recently spelt out by the chair o the LPC, David Norgrove, in his letter to the Secretary o State or

BIS: government measures to reduce employer costs increase the scope or higher pay, and the opposite. But or thepurpose o the minimum wage the effects o government policy are ofen elt more at a sectoral level. Local authorityspending on social care and regulation in many industries are a case in point.


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3. Te approach is passive, putting no pressure on employers once they paythe NMWA concern on the introduction o the NMW was the extent to which its effectswould ripple up through the labour market, pushing up wages across theeconomy and causing inflation.41Te opposite problem has transpired. Tespill-over effects o the NMW have been ar smaller than anticipated, leaving agrowing number o workers to be paid at or around the NMW. Te minimumwage has become in effect the going rate in some sectors and occupations othe UK economy, something the LPC was clear it never intended.

Figure 9 shows how the share o people paid the NMW has grown. Around5 per cent o employees, some 1.2 million people, are now paid within 5p o theminimum wage. An additional 1.4 million people earn between 5p and 50pabove the NMW. Tese shares have increased even as the NMW has allen in realterms since 2008, either because new entrants to the labour market earn less thanpreviously or because the NMW has allen by less than the earnings o employees

who are paid slightly more. Figure X shows the same phenomenon rom a differentangle. In recent years the wage distribution has become increasingly clustered atthe minimum wage as employers have aced little pressure to go beyond their legalresponsibility to pay the NMW. Te spike at the NMW has grown by around 58per cent since 2008, even as the rate itsel has allen in real terms.

Figure 9: The UKs growing minimum wage workforce

Sources: RF analysis o ONS, Annual Survey o Hours and Earnings (1997-2012)

41 See or example http://news.bbc.co.uk/1/hi/uk_politics/115395.stm.


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Figure 10: The growing spike at the minimum wagePercentage o workorce, 5p bands current prices not controlling or inflation

Notes: Gross hourly pay excluding overtime, nominal terms, in 5p buckets.

Sources: RF analysis o Annual Survey o Hours and Earnings (1997-2012)

Te lack o pressure beyond the NMW is notable given that evidence suggeststhat many employers would see only a small effect on their overall wage billi they were to pay their lowest paid workers more. While this point has beenacknowledged by the LPC itsel, this cannot be taken into account in the

current ramework.42

On the contrary, because the LPC is tasked with settinga single mandatory national rate, the LPC rightly bases its judgment on whatcan be borne in the most vulnerable part o the labour market. Tis generateslittle pressure or insight around whether particular sectors or regions couldafford to pay more.

42 In his 2014 letter to the Secretary o State or Business, Innovation and Skills, the current Chair o the LPC DavidNorgroves note that [m]any employers may be able to raise their wages without damage to their businesses.


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Section 2BUILDING ON SUCCESS

We have seen in Section 1 of this report that much has been learnedsince the National Minimum Wage (NMW) came into force. Teeconomic and political context has also changed considerably.

We now face a different challenge to fieen years ago and some of the policys

key strengths have become weaknesses. In recent months, policymakers havebegun to respond to these changes by modifying this years process for settingthe NMW in an ad hoc fashion. But no new policy has yet been developed. Inthis section we describe how the minimum wage could be strengthened moresystematically, securing a more confident approach while retaining the coreprinciples of the 1998 Act.

Te three arguments of this section respond to the three weaknesses identifiedabove:

In Chapter 3 we argue for a broader approach to low pay that goes beyonda narrow focus on the minimum wage. We argue that the government shouldmake it a clear goal of economic policy to reduce the number of workers paidbelow two-thirds of the median wage and should broaden and elevate theLPC to become a watchdog on low pay in the manner of the Oce for BudgetResponsibility (OBR) with regard to scal policy.

In Chapter 4 we make the case for more ambition and direction on theminimum wage itself. We set out reforms that retain the flexibility of theminimum wage from year to year, and that keep the LPCs central respon-sibility to make this judgment, while at the same time injecting politicalambition into the value of the minimum wage over the medium-term.

In Chapter 5 we argue that a single mandatory minimum wage will alwaysbe a blunt tool and that the LPC should have additional powers and responsi-bilities to push employers to pay more when they could afford to. We argue inparticular that the LPC could do more to inform a public debate about partsof the UK economy that could afford to pay their low paid workers more.

In all cases we recommend retaining the fundamental core of todaysapproach.


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In this chapter we describe a broader approach to low pay and theminimum wage. Tis goes beyond the institutions of the minimum wageand the LPC, with recommendations that bear on the governments

wider approach to low pay. Tese broader recommendations seem to us apre-condition for a stronger and more strategic minimum wage.

Our central argument in this chapter is that the government should makeit an explicit long-term ambition of economic policy to reduce the incidenceof low pay in the UK labour market. e LPC should then be broadened andelevated to become the governments main watchdog on low pay, supporting

its wider ambitions in a similar fashion to the Oce for Budget Responsibilityon fiscal policy.

In the course of our deliberations we have weighed up several ways in whichthe government could drive its work on low pay, most prominently the ideathat it should pledge to reduce the share of people earning below the LivingWage. We have settled against this specific idea and argue instead that thegovernment should build its low pay strategy on the ocial relative denitionof low pay: those who earn below two-thirds of hourly median wage.

Specifically, we recommend that the government make it an explicitgoal of economic policy to reduce the share of employees earning belowtwo-thirds of the hourly median wage.Tis commitment should be in theform of an ambitious but achievable long-term goal, informed by a reasonablebenchmark from international evidence. Reducing the UKs share of low payfrom 21 per cent to 17 per cent seems to us to a reasonable goal given inter-national evidence. Tis ambition to reduce the incidence of low pay shouldbe complemented by new work on the persistence of low pay, including newefforts to understand the scale of the problem.

We make our recommendation on the incidence of low pay aer weighingup the well-known downsides of relative measures as a guide to governmentpolicy. We recognise that such measures are necessarily arbitrary and tell uslittle about the actual adequacy of peoples pay and how this is changing overtime. And we recognise that such measures have performed counter-intui-tively in recent years: since 2008, ocial rates of low pay and relative povertyhave fallen slightly as the bar against which they are measuredthe medianhas itself become lower.

But relative measures do tell us something important about how low paidworkers are faring relative to the wider workforce. It is a problem, both socially

and for the UK economy, that a large swathe of workers in the UK labourmarket are paid so much less for their labour than a typical worker.

Chapter 3A broader approach to low pay


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% of low paid employees

Figure 11: Low pay in the OECDPercentage of full-time workers earnings below two-thirds of the grosshourly wage for full-time workers, 2011

Sources: RF analysis of stats.OECD

o make its ambition meaningful, we recommend that the government setout a practical plan to deliver on its ambition to reduce the incidence andpersistence of low pay.Tis should include its view on the contribution thatthe minimum wage can and cannot make to its broader ambition on low pay(see later recommendations in Chapter 4). But this cross-government planshould extend well beyond the minimum wage and the wider work of the LPCto include, for example, targeted skills investments to raise the productivity oflow paid groups of workers and specific work in regions and sectors of the UKeconomy that fall short on international productivity comparisons.

Te governments plan to tackle low pay should also major on earningsmobility. Tis area of policy is less well developed and we would not wanta focus on persistence to distract from work on the incidence of low pay,which we think is important in its own right. Te priority accorded to both

of these areas should be raised. But in the case of persistence, there is astronger case for new work, particularly to develop fuller and more timely


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measures of the persistence of low pay for different groups, so that policycan better be targeted.

Te LPC should be broadened and elevated to become the governments mainwatchdog on low payHaving set out an explicit objective and plan to tackle low pay, the governmentwould benefit from a fuller policy infrastructure to support this goal. In otherareas of economic policy, from fiscal policy to skills policy, well-resourcedbodies (e.g. the OBR and UK Commission for Employment and Skills(UKCES)) are established with wide-ranging responsibilities to drive progress.

We believe that a similar architecture would improve the quality of policy-making and the momentum behind an ambition to tackle low pay. Werecommend that the LPCs permanent Terms of Reference be revisedto give it a central role as the governments main watchdog on low pay,broadening its work to include monitoring the extent and persistence of

low pay, diagnosing its causes and consequences, advising the governmenton how to reduce its scale and assessing the governments performance onachieving its ambition.

A number of core responsibilities should be included in the revised erms ofReference for a broader LPC:

To publish a comprehensive annual audit of the scale and persistence of lowpay in the UK labour market. A primary shortcoming of the current settlementis that the LPC does not monitor the extent or persistence of low pay. As the

problem of low pay has grown, parts of governmentthe Social Mobility andChild Poverty Commission, UKCES and parts of the Department of Workand Pensions and BIShave picked up some of these responsibilities. But nopart of government is tasked with setting out a full account of the extent andpersistence of low pay. Again, it would be wise for the LPC to focus on theocial measure of low pay in its work on the incidence of low pay. (AnnexA gives a guide to the kind of analysis that could be included in an audit oflow pay.) But this work should also be extended to cover the vital issue of thepersistence and to develop more accurate and timely ways of understandingthis problem.

To analyse the causes, costs and consequences of low pay. is shouldinclude research into the skills and productivity of low paid workers and thewidespread costs of low pay for individuals and society but should also coverthe impact of low pay on the public finances. A number of estimates have beenmade for the impact of low pay, and of a higher minimum wage, on the publicfinances. While there are large direct positive effects from a higher minimumwage as a result of reduced benefit spending and higher tax revenues, thereare also indirect effects that, while much harder to measure, are likely tobe negative. Given the importance of this issue, far more work is needed tounderstand fully the interaction of low pay and the minimum wage with the

fiscal position.


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Chapter 4A more far-sighted

minimum wage

In this chapter we turn to how the minimum wage itsel could be mademore ar-sighted and ambitious, contributing more to the govern-ments overall goal on low pay. Tis is not an easy reorm to get right.

Te flexibility with which the NMW is set and its responsiveness to labourmarket conditions are essential to the policys success. Te minimum wageis cautiously set or good reason and in our discussions we have rejectedseveral ideas that would have departed too ar rom the simplicity o the 1998settlement. Our proposals retain the core o this approach and build on it

rather than changing it undamentally.

Te minimum wage has a short time horizon for good reasonWhile some o the short-termism o the minimum wage reflects the particularbattles o 1997-98, other aspects are more undamental to the policys success.In particular, it is vital that the minimum wage stay responsive to changinglabour market conditions. Tis is an essential eature o the UK NMW andone that should not be sacrificed. We are clear thereore that the undamentalrole o the LPC, recommending the rate o the minimum wage each year onthe basis o the latest evidence and the agreement o social partners, should

be retained. Handing this decision to politicians, or committing the LPC inadvance or example by pledging to raise the NMW to a rate such as theLiving Wage would destroy much o what is good about todays system andwould ragment its coalition o support.

For the same reason, we reject the idea o indexing the NMW to a measureo the cost o living. As we saw in Chapter 2, had the UK minimum wage beenlinked to inflation it would have grown more slowly in the good years andmore quickly in the bad years, and would have ended up lower overall. Tisseems to us in all respects a worse outcome than todays approach.

Box 2: Why cant the government raise the minimum wage to the Living Wage?

Te Living Wage campaign itsel recognises that the Living Wage (LW) should not bemandated through government policy. It is clear that the LW is to be pursued through a

voluntary civil society campaign. o understand why this approach is necessary, we need tounderstand how the LW is set. Te national rate is calculated as ollows:*

Focus groups agree on the basket o goods that is needed to live a basic standard o living inBritain today or nine different types o households.

Te cost o these baskets is used to calculate the lowest wage a person living in each o thehouseholds would need to earn, working ull-time and afer taxes and benefits are taken into

account, to pay or these goods. Tese nine results are then averaged to produce a single figure.


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Te minimum wage can be strengthened while retaining flexibilitySo we agree that the core process or setting the minimum wage should beretained. But we see a strong case or building on this oundation, giving moreclarity over the uture direction o the minimum wage and striking a more

judicious balance between short-term flexibility and medium-term ambition.Tere are two main aspects to the short-termism that we identified in Chapter2, and these demand slightly different responses:

First, there is a lack of clarity. Tis has an immediate aspect, in that thereis political pressure to restore the value that the minimum wage has lost inrecent years. Tis is essentially a one-off problem that has arisen rom thehighly unusual situation in which wages have allen across the economy inrecent years, with the NMW being allowed to all alongside them. And it alsohas the more permanent element that employers receive little notice each timethe NMW is uprated. Tis creates uncertainty and has long been a complainto small employers and employers in low paying sectors whose work requiresthem to bid or contracts, ofen more than a year in advance.

Second, there is the more fundamental and general question of how theprocess or setting the minimum wage balances short-term flexibility withmedium-term ambition. Tis is a more challenging problem to fix but ourwork, drawing lessons rom other areas o economic policy, suggests that astronger approach is not impossible. As things stand, the process or settingthe NMW stresses short-term flexibility at all costs and has no direction. Werecommend a more balanced approach.

Tis figure is in effect the real LW and is known as the reerence rate. In 2013-14 it is9.08. However, to prevent the LW rom rising too quickly, annual increases are capped at thegrowth o average earnings plus two percentage points. In recent years this cap has limited theapplied LW to 7.65 an hour. Tis is the rate o the LW used by campaigners today. Whenthe applied rate lags the real rate, as it does today, it is allowed to catch up over time, limitedonly by the cap.

Tis ormula has a number o implications. First, because the applied rate has allen someway behind the real rate, the Living Wage is now all but certain to rise 2 per cent aster thanaverage earnings or the oreseeable uture as it catches up with the rate calculated by theormula. Second, the value o the LW is affected by changes to welare policy; the LW riseswhen state support is cut and alls when state support is made more generous. Tird, becauseit reflects the cost o a minimum standard o living, the LW is highly sensitive to the prices ocertain goods.

Tese characteristics are inevitable in any attempt to calculate an absolute measure o livingstandards like the LW. Tey do mean, though, that the LW moves largely independently o

wider earnings in the economy. Tey also mean that the LW will cover a rapidly growingshare o the UK workorce in coming years, building on the growth seen in recent years. From2009 to 2012 the share o UK employees earning below the LW rose rom 14 to 20 per cent.

* Te London Living Wage also takes into account the poverty line and adds a buffer o 15 per cent to reflect the need to save or largeirregular costs.


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Starting with clarity, we sympathise with those who want to know whenthe minimum wage will recover its lost value. For this reason, we support thesentiment o the Chancellors recent announcement. But we have concernsabout ad hoc interventions late in the course o the LPCs well-ormed processand would argue or a more ormal, considered approach. We recommendthat the Secretary of State for Business ask the LPC to publish its bestestimate of how long it will take for the National Minimum Wage to recoverthe value it has lost in recent years. In our view, it should become standardpractice or the LPC to publish a recovery path o this kind whenever it acesthe unusual situation o having to recommend a real terms cut in the NMW,as it sometimes will.

o reduce uncertainty or employers in the longer-term, our view is thatthere would be more benefit than harm in the LPC being open about its utureintentions or the minimum wage. Te LPC currently submits its recommen-dation on the NMW in February and the government typically announces the

new rate in April. Tis gives employers just six months notice beore the newNMW comes into orce. Small firms have understandably complained aboutthis process and employers in low paying sectors have noted the difficulty obidding or contracts with little clarity over their uture costs. We recommendthat the LPC be asked to publish, alongside its main recommendationfor the NMW that can safely be introduced later that year, a preliminaryrecommendation for the subsequent year.

Te LPCs preliminary second-year recommendation would be open torevision. Te LPC would be wise to set out its logic or this recommendation

to reduce the political costs to either employers or unions rom changing thefigure in its final recommendation a year later. For example, the LPC mightexplain that its second-year recommendation is based on the NMW risingto a certain proportion o median earnings. I median earnings growth wasthen weaker than orecast, the figure could be revised. We understand thedifficulty o orecasting over 18 months. But much longer-term orecasts arenow commonplace in economic policy, including in areas where they guidegovernment policy. For all their uncertainty, most would accept that thesestatements are better than having no orecasts and no signal o the govern-ments intentions at all.

Te main game making the minimum wage more ambitiousTe second and more undamental respect in which the NMW is short-termist isin the balance it strikes between short-term flexibility and medium-term ambition.Currently, the NMW leans entirely towards the ormer and the process or settingthe UK minimum wage gives no sense o direction. Tis reflects the extremecaution with which the settlement was designed. In its effort to depoliticise theminimum wage, the government has allen into the unnecessary position o beingentirely neutral about its value. Tis constrains what the minimum wage achievesby making the policy more passive than it needs to be. Without a sense o wherethe government would like the NMW to go, the LPC is lef simpl

Documents

More Than a Minimum: The Final Report