Minimum wage increased by inflation-busting 5.9%
With the latest increases to the national minimum wage confirmed, along with a 10% rise in the minimum rate for young workers, the Low Pay Commission recommends in its latest report that it could now be the time to slow the pace of future increases to the wage floor.
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Key points
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In the seven years since its introduction in April 1999, the national minimum wage (NMW) for workers aged 22 and over has risen by 48.6% (see table 1). The government's decisions on increases to the statutory pay floor have been continuously guided by the independent Low Pay Commission (LPC), formed in July 1997 after the newly elected Labour government committed itself to tackling low pay with the introduction of an NMW.
As announced on 20 March 2006, the government has accepted the LPC's recommendations for the next stage of increases to the NMW. This means that, with effect from 1 October 2006:
- the adult national minimum wage for workers aged 22 and over will increase by 30p, to £5.35 an hour, a rise of 5.9%;
- the development rate for workers aged between 18 and 21 will rise to £4.45 an hour, from £4.25 an hour, an uplift of 4.7%; and
- the youth rate, the minimum rate of pay for 16- and 17-year old workers, will rise by 10%, to £3.30 an hour, from the current rate of £3.00.
The LPC has set out its justification for the accepted recommendations, along with other key issues raised by the government for investigation in its sixth report1. A central point concerns the accelerated increase of the NMW in recent years, with the latest upratings representing the recurrent trend of increases to the NMW that are significantly above both the rate of inflation and national average earnings growth.
It was noted in the LPC report that economic growth for 2005 was lower than anticipated when recommendations for the 2006 increases to the adult and development rates were originally made in February 2005, and that average earnings growth was more muted throughout this period than expected. These factors may have provided a case for reducing the recommendation for the October 2006 uprating, but the LPC concludes that "the divergence of economic outcomes from those anticipated was not a sufficient basis on which to agree a reduction in the 2006 increase." The commission also noted in the report that, according to National Statistics, more than 38,000 new jobs were created in low-paying sectors in the year to September 2005, with no documented job losses in the retail sector, which had been widely predicted to occur as a result of high NMW uplifts.
However, the trend of increasing the NMW significantly above national average earnings growth appears to be drawing to a close. While the LPC reiterated its commitment in the past to increase the NMW ahead of earnings growth, its report states that the commission now considers this phase "complete and, looking forward, we have no presumption that further increases above average earnings are required". The LPC considers that a detailed analysis of sectoral earnings, to investigate the lag of private sector earnings growth behind that of the public sector, is particularly necessary over the next year, given that the NMW affects mainly private sector workers.
Youth rate sees 10% hike
October 2004 saw the introduction of a statutory pay floor for 16- and 17-year-old workers, set at £3.00 an hour. Following the LPC's recommendations in February 2005, a lack of evidence of the impact of this minimum rate meant that the youth rate was frozen at the time of the October 2005 increases to the adult NMW and the development rate, subject to a review for the October 2006 upratings.
Submissions of evidence in October 2005 by trade unions, including the GMB, Unison and Usdaw, argued strongly in favour of an increase to the youth rate, with calls to bring it in line with the development rate. Meanwhile, a small increase in the minimum rate for young workers saw little opposition from employers' bodies, with retail employers' federation the British Retail Consortium commenting that, as long as the rate was increased at a lower rate than the adult NMW, minimal damage would be inflicted on retailers.
In its report, the LPC points out that the primary purpose for an NMW for 16- and 17-year-old workers is to prevent exploitation of this age group, as concerns remain about the number of people in this age group not in education, employment or vocational training. After assessing statistical evidence concerning labour market implications for 16- and 17-year-olds, the LPC concluded that no adverse effect was felt by employers from the introduction of a youth NMW. Similarly, there was no evidence to suggest that the £3.00 an hour minimum rate had encouraged young people out of education or training. However, the LPC rejected calls from trade unions that the youth rate should be brought in line with the development rate, stating that there is a "need to protect the position of 16- and 17-year-olds in the labour market and to do this it remains appropriate to have a separate minimum wage set at a lower level than that for older workers".
The concluding belief of the LPC was that the current minimum rate of £3.00 an hour for young workers is now too low, as it wishes to "guard against the risk that young people may feel disillusioned with the world of work due to very low wages". The recommended increase of 10% takes the minimum wage for youth workers to £3.30 an hour, effective from 1 October 2006. The LPC goes on to recommend biennial reviews of the youth rate in line with the development rate and the adult NMW, but emphasises its position that there is no correlation between the youth rate and the development rate.
Salary-sacrifice schemes
In 2005, the government asked the LPC to review the relationship of benefits in kind and salary-sacrifice schemes to the NMW. Under current regulations, employees are not allowed to sacrifice their salary if their net pay subsequently falls below the NMW. This results in employers with low-paid workers potentially introducing benefits that are not available to a proportion of their workforce. The LPC acknowledged in its 2005 report that this causes difficulty for some large retailers, particularly as the gains for both employers and staff taking part in salary-sacrifice schemes are now widely documented.
In its 2005 review, the LPC invited submissions of evidence into the effects on employers in the retail and other low-paying sectors where salary-sacrifice schemes have been introduced. While employers' bodies argued that low-paid workers were being unfairly denied the opportunity to benefit from salary-sacrifice arrangements, trade unions felt that by allowing these employees to contribute their salary to these benefits, the value of the NMW would be diminished.
In its review, the LPC concentrated on the arrangements currently in place for childcare voucher schemes, as childcare was felt to be the most important benefit for workers. It concluded that most low-paid employees are adequately supported by claiming for childcare provision through the working tax credit system. Meanwhile, salary-sacrifice arrangements for home computers - now abolished under the 2006 Budget - and bicycles saw a low take-up and provided no advantage to the low paid, because workers whose low pay means they pay little or no tax or national insurance contributions would receive no benefit. The LPC recommended that salary-sacrifice arrangements should not count towards the NMW, concluding that "it is clear to us that allowing salary-sacrifice schemes to count towards the minimum wage would depart from the principle and would complicate the definition of the minimum wage."
The accommodation offset
The accommodation offset is a set limit that employers can deduct from workers' pay in respect of the NMW to pay for provision of accommodation. This is a particularly common arrangement in the hospitality and social care sectors. It was accepted under recommendation from the LPC that this limit be increased to £4.15 a day (£29.05 a week), effective from 1 October 2006, from the current rate of £3.90 a day (£27.30 a week).
The LPC's report reviewed the operation of the accommodation offset, along with its enforcement when accommodation offered is not explicitly art of an employee's terms and conditions of employment. It acknowledged that the current guidelines for enforcing the accommodation offset were unclear to employers, and recommended that greater awareness and increased publicity by the government was necessary. Despite calls by employers for a significant uplift to the accommodation offset, the LPC concluded that the current system was working "reasonably well", and a significant rise to the current level would "fail to strike a fair balance between the interests of employers and low-paid workers, who, without the protection of the offset, might face significant reductions in their take-home pay".
The LPC also commented on concerns that migrant workers were being exploited, quoting evidence that suggested that the vulnerability of migrant workers led to poor employment practices, such as high deductions from pay for transport, uniforms and equipment. It therefore recommends that the government is more assertive in enforcing the NMW in low-paying sectors that employ large numbers of migrant workers, and that these sectors are prioritised in HM Revenue and Customs' programme of targeted enforcement.
Table 1: National minimum wage rates, 1999-2006
|
Effective date |
Adult rate for workers aged 22 and over, £ph |
% increase on previous year |
Development rate for workers aged 18 to 21, £ph |
% increase on previous year |
Rate for workers aged 16 and 17, £ph |
% increase on previous year |
|
1 April 1999 |
3.60 |
- |
3.00 |
- |
- |
- |
|
1 June 2000 |
3.60 |
0% |
3.20 |
6.7% |
- |
- |
|
1 October 2000 |
3.70 |
2.8% |
3.20 |
0% |
- |
- |
|
1 October 2001 |
4.10 |
10.8% |
3.50 |
9.4% |
- |
- |
|
1 October 2002 |
4.20 |
2.4% |
3.60 |
2.9% |
- |
- |
|
1 October 2003 |
4.50 |
7.1% |
3.80 |
5.6% |
- |
- |
|
1 October 2004 |
4.85 |
7.8% |
4.10 |
7.9% |
3.00 |
- |
|
1 October 2005 |
5.05 |
4.1% |
4.25 |
3.7% |
3.00 |
0% |
|
1 October 2006 |
5.35 |
5.9% |
4.45 |
4.7% |
3.30 |
10% |
|
Total % increase |
- |
48.6% |
- |
48.3% |
- |
10% |
1. National minimum wage - Low Pay Commission report 2006, available from www.lowpay.gov.uk.
