Minimum Wage Factsheet

Introduction

Britain's first National Minimum Wage was introduced in April 1999, after many years of campaigning by the Low Pay Unit, unions and others working in the field of low pay and employment rights.

A national minimum wage is an essential feature of a modern labour market. It sets a floor below which wages must not fall and prevents gross exploitation of workers who have the least bargaining power.

Rates

The National Minimum Wage was introduced at a relatively low rate of £3.60 for those aged 22 and above and £3.00 for those between 18 and 22 years. A development rate was set for those in work but undertaking accredited training. No rate was set for those aged 16 and 17.

In October 2000 the adult rate was raised to £3.70 and the development and youth rate to £3.20. The 10p rise on the adult rate represented an increase of just 1.8% over the eighteen months since its introduction.

In October 2001 the adult rate was increased to £4.10, and the development rate and youth rate to £3.50. At these rates, the minimum wage is equivalent to 40 per cent and 33 per cent of male median earnings.

In October 2002 the adult rate was further increased to £4.20, and the development rate and youth rate to £3.60. These are the second stage of the increases recommended in the Third Report of the Low Pay Commission.

Coverage

Before its introduction, the Low Pay Commission (LPC) estimated that that the NMW would affect around 2 million workers (9% of the workforce). Since then the LPC has revised its estimate of the number of workers affected, to 1.5 million in February 2000 and 1.3 million in March 2001. This constitutes around 5.4% of workers: 5.3% of adults and 6.6% of young workers. The difficulty in accurately predicting the numbers affected is due to limitations in official survey data.

The number of workers affected has also been influenced by the low level at which the NMW was set.

Impact

All the evidence shows that the introduction of the National Minimum Wage has been a success. It has had a substantial impact in increasing the earnings of those in the bottom decile. In 1998/1999 and 1999/2000, earnings growth in the bottom decile outstripped increases in the top decile.

Lowest decile earnings across all low-paying sectors - agiculture, clothing and footwear, retail, hospitality, security, cleaning, residential care and hairdressing - increased about twice as fast as those across all sectors in 1998/99.

Increase in earnings for different deciles (%)

Despite fears that business would adapt to the legislation by shedding labour, there has been no evidence of this. Economic activity has continued to improve in both the service sector and in manufacturing, and employment has expanded even in traditionally low-paying sectors like retail and hospitality which were most affected by the NMW. This was the conclusion reached by the Low Pay Commission, set up by the Government to monitor the NMW, after reviewing evidence right across the economy in Spring 2001.

Women account for over 70% of those who benefited from the introduction of the minimum wage. Two-thirds of these are part-time workers. As a result, between 1998 and April 2000 the minimum wage reduced the gender pay gap by 2%. Between April 1999 and April 2000 women's average part-time earnings increased by 8%.

Many young workers between 18 and 21 also saw significant increases in their wages due to the NMW. For example, between April 1998 and April 1999 the proportion of young hairdressers earning below £3 an hour fell from 10 to 1 per cent, and the proportion of unqualified childcare workers earning less fell from 12.5 to 1 per cent.

Workers aged under 18 are excluded from minimum wage protection. As a result there was a danger that employers would substitute younger for older workers, but in fact employment rates for 16 and 17 year olds have fallen, possibly due to other employment and education policies.

The NMW has had the biggest impact on earnings in hairdressing, hospitality, cleaning and security sectors. Waitresses saw their wages rise by 9% and female bar staff and kitchen hands got increases of 8% with its introduction.

In clothing and textiles, another low-paying sector, a 'shadow' pay floor of between £4 and £5 emerged as firms boosted their starting rates to stay ahead of the NMW in order to attract staff.

Regional differences in pay rates were also redressed by the introduction of the NMW. The New Earnings Survey 1999 showed that the biggest increases in median earnings over the previous year were in Wales and the North East of England, 2% percentage points more than the national average.

Subsequent increases

Overall wage growth, coupled with falling unemployment and a tight labour market, meant that fewer workers were affected by the small increase in the minimum wage in October 2000 than the initial introduction. The Low Pay Commission recommended a larger rise in October 2001 in order that more people would benefit from it.

Numbers and proportions of adults estimated to benefit from an increase in the NMW to £4.10

The October increase was announced in Spring 2001 to give companies time to prepare. Many companies with lowest rates around the level of the minimum wage used their spring or summer pay reviews, or a two-stage approach, to comply, with larger percentage increases for the lowest paid.

Many companies and public sector employers have again increased their lowest rates to be more competitive than the minimum wage level, creating a 'lower mezzanine' wage floor around £4.50 an hour and an 'upper mezzanine' around £5 an hour, according to Income Data Services. However, the increase in the adult rate has led some companies, particularly fast-food chains, which employ large numbers of young staff to re-introduce age-related pay differentials.

Enforcement

The NMW is one of the most widely known pieces of legislation, the result of publicity and advertising campaigns.

The Inland Revenue is responsible for enforcing the national minimum wage legislation, acting on complaints received through the National Minimum Wage Helpline or information obtained through visits to employers by its Regional Compliance teams. Between April 1999 and 2001, the NMW helpline received around 200,000 enquiries and over 6,500 complaints. In 2000/1, a total of over £3 million was secured in wage arrears by NMW enforcement officers, although less complaints were received than the previous year, indicating the way that the NMW has become an accepted feature of the labour market.

The New Earnings Survey 2000 showed there were 300,000 jobs paying less than the adult minimum wage. The TUC estimated that some 130,000 of these employees were not getting the adult rate for legitimate reasons (for example, on accredited courses and thus the development rate), leaving 170,000 who should have been receiving the minimum wage but who were not.

Moreover, it is too simplistic to measure the impact of the minimum wage purely by the numbers receiving it. Research shows that some workers have not got the net increase in pay they would expected from the NMW, either because wage increases are offset by benefit reductions, or because their employers compensate for a higher hourly rate by withdrawing perks, amalgamating bonuses or reducing hours. This is despite the fact that workers have the right not to suffer detriment or dismissal for a reason connected with the NMW.

Non-payment most frequently affects those working in hairdressing and retail, in clothing manufacture, personal services, and in the black economy; homeworkers and pieceworkers; women, young people, and ethnic minority workers. (Click here for more information about the NMW enforcement and groups at risk of non-payment).

A higher rate

The Low Pay Unit is continuing its campaign for a higher minimum wage rate, based on half male median earnings, and a linking mechanism to ensure that increases in the NMW keep pace with increases in average earnings. (Click here for the LPU NMW formula.) It is also recommending the inclusion of 16 and 17 year olds in minimum wage legislation to give them statutory protection against exploitation.

At its current level, the NMW does not provide a living wage. Full-time workers on the NMW still have to rely on means-tested support provided through the Working Families Tax Credit. A higher-rate NMW, linked to median male earnings, would ensure that work pays in its own right.

Refs:
The Case for a Decent Minimum Wage, LPU, Oct 2000
The National Minimum Wage: Making a Difference, 3rd Report of the Low Pay Commission, March 2001
National Minimum Wage: Compliance and Enforcement, West Midlands Low Pay Unit, July 2001
'The Impact of the NMW in 2001', IDS Report 844, Nov 2001

(This page was last updated November 2001)