The Low Pay Commission and the National Minimum Wage 2006

1
The Low Pay Commission and the National Minimum
Wage2006
2
Overview

• Process
• Impact
• Issues

3
Process

• The underlying pressures for an NMW
• The way the LPC operates
• Necessary conditions for success

4
Underlying Pressures for a NMW

• Wages Councils 1909
• limited sectors
• weak enforcement
• diminishing bite by 1980s
• Abolished 1993
• except Agricultural Wages Boards
• but in 1990s growing need for floor to wages
  arising from

5
Growing need for a wage floor?

• Increasing income inequality Percentile earnings
  increases 199297
• Increasing child poverty
• Increasing burden on the Exchequer of in-work
  benefits

6
The purpose of the LPC

• LPC set up in 1997 to define the National Minimum
  Wage and recommend its introductory level
• NMW introduced in April 1999
• Our aim is to have a minimum wage that helps as
  many low-paid workers as possible without any
  significant adverse impacts on inflation or
  employment
• LPC Report (2005)

7
The way the LPC operates

• Social partnership
• 9 commissioners, of whom
• 3 trade union background
• 3 employer background
• 2 academic labour economists
• Paul Myners as Chair

8
Sources of information

• Get data as reliable as possible
• Listen to interested parties
• LPCs own statistical and economic analysis
• Helping ONS to improve survey data
• LPCs own employers survey
• Invited written evidence and secretariat meetings
• Formal oral consultation hearings
• Commissioned research
• Commission visits to the regions

9
Commissioned research

• Over 80 research projects since 1999
• High quality academic and consultancy studies
• Early studies on immediate impact and adjustment
  case studies and interviews
• Later research using statistical survey data for
  more rigorous analysis
• Essential for LPC decision-making and for
  credibility with experts

10
Regional visits

• Around 10 visits per year
• Meeting low-payers and low-paid
• Responding to complaints
• Learning about new developments
• Essential for wider credibility and LPCs own
  understanding

11
Enforcement by HMRC

• Employer belief in enforcement is sine qua non to
  success of NMW
• HMRC is a credible enforcer
• Still areas of weakness

12
What makes effective social partnership
policy-making?

• Independence of government
• High quality, wide-ranging research
• Widespread, on-site consultation
• Effective, proactive enforcement

13
Impact of the National Minimum Wage

• Focus on
• Earnings
• Employment
• But also investigate
• Prices
• Costs
• Profits
• Productivity
• Household income

14
Gross hourly earnings excluding overtime
distribution for those aged 22 and over, 20042005
Source ASHE with supplementary information, 2004
and 2005. Gross hourly earnings excluding
overtime for those aged 22 and over. NMW labels
are for adults in April of the given year.
15
Earnings growth 1992-2005
Source ONS, New Earnings Survey 19921997 and
19982003. Annual Survey of Hours and Earnings
(ASHE) without supplementary information, 1998
and ASHE with supplementary information, 2005.
Gross hourly earnings excluding overtime. There
is a change of definition in ASHE in 2004 so
comparisons using identical data definitions
between 1998 and 2005 are not possible. We make
such a comparison for illustrative purposes only.
Consistent NES data is available from 1992 to
2003 and is also shown.
16
Gender pay ratio by percentile, 19982005
Source ONS. ASHE without supplementary
information, 1998 and 2004. ASHE with
supplementary information, 2005. Gross hourly
earnings excluding overtime. There is a change of
definition in ASHE in 2004 so comparisons using
identical data definitions between 1998 and 2005
using ASHE are not possible. We make such a
comparison for illustrative purposes only.
17
Value of actual adult NMW compared with initial
NMW (3.60) uprated by indices of average
earnings and prices
Source ONS. The Adult NMW uprated using various
quarterly measures of average earnings (GB) and
prices (UK). AEI including bonuses (ONS code
LNMQ) and excluding bonuses (ONS code JQDW) RPI
(ONS code CHAW), RPIX (ONS code CHMK) and CPI
(ONS code D7BT). Values for October 2006 are
those for October 2005 uprated by appropriate
forecasts from the Treasury Panel of Independent
Forecasts. In April 2006 average earnings were
forecast to grow by 4 in 2006, CPI by 2, RPI by
2.4 and RPIX by 2.3.
18
Employment

• Employment growth (employee jobs) UK Sept
  1998Sept 2005
• Change in aggregate employment 2.094m
• Change in employment in low-paying
  sectors 0.429m
• Unemployment
• 19992001 falling
• 20012005 stable
• Employment Shares
• No evidence of a kink in shares during life of
  NMW
• Employment Shares by Age
• No evidence of substitution away from 1821 year
  olds to 1617 year olds 19992004

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Employment (continued)

• Bite of NMW and area employment change
• NMW is national, so bite varies by area (county)
• No evidence of association between change in area
  employment and bite
• Individuals
• Compare change in employment probability of
  individuals affected by NMW with control group
  just above NMW
• No evidence of differential changes
• Detailed case study of care homes
• Weak negative elasticity of employment with
  respect to wage bill change
• Very low-paid sector, cannot easily raise prices
• Conclusion
• Weight of evidence suggests no adverse employment
  effects

20
Issues for the short medium term

• Migration
• Enforcement
• The Level of the Minimum Wage

21
Migration

• Significant increase in migrant workers in the
  low-pay sectors
• Impact on the labour market
• Impact on wage inflation
• New issues arising
• Accommodation
• Enforcement

22
Enforcement

• Effective enforcement crucial to the success of
  the NMW
• Current HMRC Initiatives
• Targeted Enforcement
• Prosecutions
• Strengthening the deterrent to non-compliance

23
The level of the minimum wage

• The growing bite of the NMW
• Level of future upratings
• Extending the statutory holiday entitlement to
  include bank holidays
• Pensions

24
Conclusion

• The minimum wage has worked well so far but is
  approaching a watershed
• Continued success depends on
• Effective enforcement
• Caution attention to detail
• An effective, independent Commission