National Minimum Wage

What is the national minimum wage?

The national minimum wage (NMW) is the hourly rate below which adult workers in most sectors of the British economy must not be paid. Full entitlement applies to workers aged 21 and over, while a lower minimum rate applies to 18 to 20 year-olds. Following a recommendation from the Low Pay Commission, some 16 and 17-year-old workers also qualify for a minimum wage.

When it was first introduced in April 1999, the rate of the NMW was £3.60 per hour (£3.00 for 18 to 21-year-olds). At that time, 1.9 million people were believed to be paid less than that.

The NMW is reviewed annually by the Low Pay Commission with any changes made on the 1st October. Entitlement to the main rate was reduced from aged 22 to aged 21 on 1st October 2010 and an apprentice rate was also introduced at that time.

Current rates (2010/11) are £5.93 for workers aged 21 and over, £4.92 for 18-20 year olds, £3.64 for 16-17 year olds and £2.50 for apprentices aged under 19, or over 19 if in their first year of apprenticeship.

The NMW is enforced by HM Revenue and Customs, which requires employers to pay at least the NMW and to keep records to show that this is being done. Failure to do either is a criminal offence. Along with pay arrears, employers in breach of the law are fined twice the hourly rate per day per worker that they fail to pay the NMW. They can also be prosecuted under one of six criminal offences, which carry a maximum fine of £5,000.

Background

Prior to the union reforms of the early 1980s, wages in many areas of business were controlled by government incomes policies and wages councils. The dismantling of union closed shops and bargaining power under the Thatcher governments, during a period of very high unemployment, shifted the balance of power towards employers, with the result that by the 1990s, when most of the last wages councils were abolished, pay for many workers in a number of sectors was well below what was considered to be a living wage.

Throughout its period in opposition, Labour was committed to introducing a minimum wage as a means of combating poverty, but the pro-market Conservative governments - resolutely supported by most businesses - strongly opposed the idea.

Labour's 1997 election manifesto pledged to introduce a minimum wage at the earliest opportunity. In July that year, the government set up the Low Pay Commission (LPC), with a remit to advise on the rate of the NMW, and in November, the national minimum wage bill was introduced to parliament.

The LPC submitted its first report in June 1998, and the government accepted its recommended rate of £3.60 per hour, but rejected the proposed youth rate of £3.20, opting instead for £3. The Act received royal assent in July 1998.

Between September and November that year, extensive consultations on the draft regulations setting the rates and other details of the scheme (subsequently the National Minimum Wage Regulations 1999) took place. They were eventually approved in March 1999, and the NMW came into force on April 1st 1999.

Since that time, the LPC has reported annually and the government has responded with new regulations uprating the NMW and amending eligibility for it. In its 2008 report the Low Pay Commission recommended that 21 year olds should be entitled to the NMW adult rate, but this was rejected by the Government. LPC chairman Paul Myners said the LPC was "disappointed" by the rejection, adding "we look forward to hearing the detailed reasoning behind the Government's decision." The change was subsequently introduced in October 2010.

Controversies

Today, the NMW is broadly accepted as a political and economic fact of life, but it was highly controversial in the run-up to its adoption. Business, the Conservative party and many economists were opposed to the NMW, claiming that it would destroy jobs and reduce economic competitiveness.

The debate hinged upon the orthodox economic assumption that paying more for staff than the market rate would lead employers to cut jobs. This was confirmed by successive studies of foreign minimum wage regimes: 1990s evidence from the US suggested that a ten per cent increase in the minimum wage was directly correlated to a 1.4 per cent reduction in employment levels. Comparable evidence was forthcoming from France, the Netherlands and Spain. Prior to the NMW's introduction, many economists were predicting that it would cost 80,000 jobs over its first three years.

This assumption is contested by proponents of "new economics", who argue that minimum wages in fact correct underpayment by employers, so that while costs rise, employers have no incentives to cut jobs. This position has been corroborated by a succession of recent reports from countries whose previous figures had been unambiguously negative.

In the UK, the NMW has adhered to the latter pattern, having no significant effect on employment in most sectors. Neither has it had a significant effect across the board on productivity. As such, as the LPC put it in February 2003: "It has ceased to be a source of controversy and become an accepted part of our working life." This led the Conservatives to reverse their policy of abolishing the NMW in February 2000.

Nonetheless, some elements of the NMW remain controversial. Each year, the government and LPC have to balance the demands of unions to increase wages further (heartened by the failure of the anti-NMW lobby's predictions to come about) and the demands of employers to keep costs down. At the same time, pay rates must be set against the benefit system so as to avoid creating poverty traps of the sort that were common before the NMW, and which many warned a low opening rate would maintain.

Necessarily, the NMW has had the greatest effect in those sectors that were historically low-paid. The LPC has focused its attention on retail, hospitality, cleaning and security, social and child care, textiles, clothing and footwear, and hairdressing in this regard. The policy had a gender aspect insofar as women (and some ethnic minorities) were predominant in these sectors. LPC evidence suggests that the gender differential at the low end of the income scale has been closed considerably by the NMW.

There was particular concern about the large uprating of October 2001 (an increase of 40p per hour), which in many ways actually caused greater difficulties for employers than the introduction of the NMW itself, according to the LPC. Nonetheless, this was largely contained, primarily through the abandonment of pay differentials.

The youth rate remained a source of disappointment for many. Ostensibly intended to offset the training costs that employers incur with many young workers, it had been widely criticised as encouraging poor employment practices, and the substitution of younger workers for those eligible for the full adult rate.

Although there are no sectoral exemptions, members of the armed forces are excluded as are people working in the context of a family. The Royal Household was strongly criticised shortly after the NMW came into force for underpaying staff, many of whom were claiming benefits, on the grounds that they were provided with lodgings - although it has since altered its practices in this regard. Many business areas, particularly hospitality, demanded exemption from the NMW prior to its introduction.

The national aspect of the NMW is also a source of controversy. Costs of living vary widely across the UK, so that on the one hand, in better-off areas, the NMW provides nothing like a living wage; while on the other, it represents a much heavier burden on employers in poorer areas.

The London Living Wage Unit's sixth annual report calculated that workers in the capital needed to earn a minimum of £7.85 per hour in 2010, a 3.3 per cent increase on 2009, in order to offset the high cost of living in London.

Statistics

NMW historical rates:

Adult rate (aged 22+) - April 1999 £3.60; October 2000 £3.70; October 2001 £4.10; October 2002 £4.20; October 2003 £4.50; October 2004 £4.85; October 2005 £5.05; October 2006 £5.35; October 2007 £5.52; October 2008 £5.73; October 2009 £5.80; October 2010 (aged 21+) £5.93.

Development rate (aged 18-21) - April 1999 £3.00; October 2000 £3.20; October 2001 £3.50; October 2002 £3.60; October 2003 £3.80; October 2004; ££4.10; October 2005 £4.25; October 2006 £4.45; October 2007 £4.60; October 2008 £4.77: October 2009 £4.83; October 2010 (aged 18 to 20) £4.92.

Aged 16-17 rate - October 2004 £3.00; October 2005 £3.00; October 2006 £3.30; October 2007 £3.40; October 2008 £3.53; October 2009 £3.57; October 2010 £3.64.

Source: Low Pay Commission - October 2010

Quotes

"Our recommendations this year were, as ever, based on sound economic evidence and took account of the prospects for the UK economy. We are pleased that the new Government has accepted our recommendations, including on the introduction of an apprentice minimum wage. We believe the apprentice arrangements will be simple, robust and straightforward to administer and enforce.

"We are also pleased that by giving us a new remit, the Government has shown support for an independent Low Pay Commission. More than ten years on, the Commission's work is still highly valued and respected. Our commitment to an evidence-based approach aims to ensure this will continue".

Chair of the Low Pay Commission, David Norgrove - June 2010