The Low Pay Unit formula for the minimum wage

The choice of a minimum wage rate and the method for setting it depends on the objectives of the minimum wage policy. A desire to simply eradicate the most extreme cases of exploitation might produce a lower rate than attempts to tackle poverty or inequality and enable the low paid to achieve earnings and living standards closer to the average.

The UK has the third highest percentage of its population with incomes below 60 per cent of the median, of all the EU countries (European Community Household Panel, Eurostat). Nearly 12 million households live in poverty, and of these, 30 per cent are households with at least one wage from employment.(Social Trends 2001, ONS)

A minimum wage protects individual workers from exploitation and sets a 'floor' below which wages must not fall.

Justifying the formula

A minimum wage formula related to male median earnings means that people in paid work receive sufficient renumeration to meet their basic needs and participate in society around them. Click here for information on low pay thresholds. This formula is based on principles of equity and equality, as it creates a link between the earnings of the lowest-paid workers - many of whom are disadvantaged and vulnerable to discrimination - and the majority of employees.

The formula automatically includes a transparent, predictable and objective method of uprating. As male median earnings increase, so will the minimum wage, ensuring that low-paid workers do not get left behind.

Calculating the formula

Male earnings are used to avoid further entrenching existing structural pay inequalities in a measure that should be tackling them. Median earnings (the median being the point where half of workers earn below and half above) are used instead of average earnings because any figure based on average earnings will increase as wages increase, making it an unattainable tartet. Full-time earnings are used to tackle the substantial inequality between full- and part-time pay. Overtime pay is included in the benchmark of weekly male earnings used, as it is makes up a large part of manual workers' earnings.

Recommended rate for minimum wage: £5.11 per hour

This represents half male median earnings, calculated:

• £386.6 (median gross weekly earnings for men) divided by 2 = £193.3 per week
• £193.3 divided by 37.8 (average hours worked by all full-timers, excluding overtime hours) = £5.11 per hour

Source: Low Pay Unit's calculations based on New Earnings Survey 2000 (This is the latest data available. The NES 2001 will be released in January 2002)