Onwards and upwards? The 2006 national minimum wage

With the Low Pay Commission due to confirm its recommendations for the next national minimum wage increases in February 2006, we look at the views from employers' organisations and trade unions. Particular consideration is given to the as yet undetermined recommendation for the wage floor for 16- and 17-year-old workers.

The latest uprating of the national minimum wage (NMW) took the minimum rate for adult workers above £5 an hour for the first time. Currently, the NMW is set at £5.05 an hour for workers aged 22 or over, effective from 1 October 2005, after the government accepted the February 2005 recommendations from the independent Low Pay Commission (LPC). The increase, a rise of 4.1% from the previous NMW of £4.85 an hour, is the lowest rise in three years.

Commentators note the continuing trend of above-inflation increases for the NMW, with the total rise since its introduction in April 1999 worth more than 40% (see table 1). In making the recommendation for the rise to £5.05 an hour from 1 October 2005, the LPC reported that the actual impact of the NMW on wage bills had been minimal¹. The LPC did note, however, that the 2005 uprating should be modest to allow those employers affected to adjust to the large increase of 7.8% to £4.85 an hour in October 2004.

With NMW increases reviewed every two years by the LPC, attention has now turned to the 2006 recommendations announced in February 2005. Subject to viable economic conditions, and the forthcoming age discrimination legislation:

These increases are subject to confirmation by the government after the LPC submits its final recommendations in February 2006.

2006 recommendations for the adult minimum wage

Full support for an increase in the NMW to £5.35 an hour comes from the Trades Union Congress (TUC). In its latest submission to the LPC, the TUC notes that while economic growth has slowed, this has had no effect on profitability, and that employment has continued to grow despite the NMW breaking the £5-an-hour barrier. The TUC cites an example of an increase of 42,000 jobs in the wholesale, retail and repairs sector one of the sectors most affected by the NMW in the year since June 2004. The submission concludes that "the UK labour market has shown that it has the capacity to deal with moderate minimum wage rises with ease on a regular basis."

Meanwhile, employers' organisations have expressed the need for extreme caution with uprating the NMW by a further 5.9% in 2006. The country's largest employers' organisation, the CBI, feels that the potential increase will have a large impact on industry, particularly those sectors that feel the effects of the NMW. The British Chamber of Commerce has urged the LPC to reassess the recommended uprating to £5.35 an hour, condemning the recommendation as "too risky" amidst the recent economic downturn.

Retail employers' federation the British Retail Consortium (BRC) has found in its most recent survey of the impact of the NMW that 11% of retailers would consider cutting staff if the NMW were to be uprated to £5.35 an hour. The BRC feels that the NMW has now reached the "tipping point", and the proposed uprating could cost the retail sector £1.13 billion. BRC director-general, Kevin Hawkins, commented: "In-depth discussions about whether the costs are now outweighing the benefits need to include a review of the ultimate goal of the NMW."

The development rate

A main cause of controversy throughout the life of the NMW has been the development rate applied to workers aged between 18 and 21 years. The development rate was increased to £4.25 an hour from 1 October 2005, and the rise to £4.45 an hour from 1 October 2006 is subject to confirmation by the LPC and the government. The LPC has stood firm over the existence of the development rate, believing that it promotes flexibility for employers and gives scope for a higher adult rate for those employees covered by the standard NMW. However, the LPC continues to voice its recommendation that the development rate should apply to workers aged between 18 and 20 years, with the adult rate made applicable to workers aged 21 and over. The government has so far rejected this proposal.

Employers' organisations have backed the LPC's recommendations to keep the development rate in place, but trade unions have long supported its abolition, instead applying the full adult rate to workers from at least the age of 18. In its submission to the LPC, the TUC calls for the adult rate to apply to workers aged 21 or over from October 2006, before going further to state that it could "be phased down to age 18 over a number of years". The GMB considers the development rate useful as "a means of incentivising the provision of accredited training", but argues that the application of this rate should not be linked to age. Unison, the country's largest trade union, advocates the abolition of the development rate for workers aged 18 to 21.

Young workers

A national minimum wage of £3 an hour for workers aged 16 and 17 years was introduced from 1 October 2004, more than five years after the adult NMW. Calls had been made in previous years by trade unions to include young workers in the NMW guidelines. Retail trade union Usdaw uncovered evidence in its 2003 investigation of youth rates that young workers were being paid as little as £1.25 an hour. Usdaw, along with the GMB, the TUC and Unison warmly welcomed the introduction of the youth rate, while employers' bodies such as the BRC and the CBI noted that they were not in principle opposed to an NMW for this age group.

The LPC had previously rejected calls for an NMW for young workers, saying that this particular group of workers were not full participants in the UK labour market. It noted that the majority of young people were either in full-time education or part-time education and training, which should not be discouraged by imposing a high wage-floor. In its 2004 report, however, the LPC was concerned about low pay rates on offer to young workers, along with a lack of training and development prospects, and concluded that this needed to be addressed; but not at the cost of pricing young workers out of the labour market. The LPC therefore recommended an NMW of £3 an hour to "prevent exploitation" of young workers, but at the same time identified that there was "no reason to automatically link it to the youth development rate".

Calls to increase youth rate

Despite the uplift of both the adult and development rates from 1 October 2005, the government accepted the LPC's request to review the youth rate throughout 2005 and report in 2006 with a recommendation, effectively freezing the youth rate at £3 an hour until October 2006. According to the LPC, this decision was due to the fact that "the evidence on which to base a judgment is not yet available."

The CBI, which in its 2004 submission of evidence to the LPC commented that no increase to the rate for 16- and 17-year-old workers should be applied, applauded the LPC's decision. The BRC has expressed no real concern over the youth rate, with employment policy executive James Harborne commenting that: "As long as the LPC continues to increase [the youth rate] separate from the adult NMW and at an appreciably lower rate than any adult NMW increase, retailers should be able to cope." Trade unions meanwhile expressed disappointment over the LPC's decision.

In its submission to the LPC, Unison calls for the youth rate for 16- and 17-year-olds to principally become the development rate of £4.25 an hour, following from the view that workers aged 18 and over should be paid the full adult rate. Using case study examples, the union promotes "the rate for the job", stating that if the full job is undertaken by a worker, then the adult rate is payable regardless of age. Unison therefore concludes that there is scope in the future for the adult NMW to be paid from the age of 16.

In its response to the LPC, the GMB also calls for a higher NMW for young workers, standing "in favour of standard minimum wage coverage for under-18s, and against age-related differentials". The union goes on to say that it finds no evidence of adverse impact from the introduction of the youth NMW on employment, and that the LPC "should not allow excessive caution to prevent it from recommending progressive catch-up increases to the 16- and 17-year-old rate, in order to roll it up into the rate for older workers". In its 2005 report, however, the LPC asserts that the adjustment of both the youth rate and the development rate to match the full adult rate "would damage [younger people's] employment prospects".

¹ National minimum wage: Low Pay Commission Report 2005, available from www.lowpay.gov.uk .

Table 1: National minimum wage rates, 1999-2006

¹Subject to confirmation by the Low Pay Commission in February 2006.