Long reads

Two decades on, has the minimum wage worked?

28 Sep 2019 By Elizabeth Howlett

It was supposed to cost thousands of jobs; instead, it looks like a never-ending good news story. We asked the experts whether businesses should fear further pay hikes

For a concept that today appears relatively uncontroversial, it seems strange to recall that when it was first mooted in 1997, the idea of paying a minimum wage provoked a furious reaction. A lengthy debate on the topic in the House of Commons descended into a shouting match as Labour MPs were warned their proposed legislation – designed to end abuses at the margins of the labour market and ensure all employees were guaranteed a minimum standard of pay – would cause unemployment, particularly among young people, to skyrocket.

Damian Green, a Conservative MP and later a minister, branded the move “actively immoral” and said the “most dedicated people in society” would bear the brunt of job losses. The government admitted it could not guarantee employers would not react with redundancies and economists were markedly divided on the likely fallout. Come the new law’s enactment in 1999, what could have been a technical economic exercise was front page news.

Two decades on, we can confidently say the sky didn’t fall in with the introduction of minimum wages. The underlying trend has been for unemployment to fall – it is currently at a record low – while baseline pay has risen faster than average earnings and has generally outstripped inflation without provoking industrial unrest or bankruptcies. 

Of course, that isn’t the whole story. The introduction of the more nuanced, and expensive, national living wage (NLW) in 2016 upped the ante even further. The brainchild of then chancellor George Osborne, it was designed to wrongfoot Labour and position the Tories as the champions of the working class. More practically, it pegged wages for those aged 25 and over at £7.20 per hour.

The NLW has caused consternation among smaller employers, particularly retailers, who say it has squeezed their margins to an unbearable degree. It has also exacerbated ongoing issues around the differentials between grades of employee. 

And the economic effects of the NLW have, in many ways, only just begun. It currently stands at £8.21 per hour, but the broader aim is for it to reach 60 per cent of median earnings by 2020. The aim is to redistribute income and increase fairness by ensuring the labour market is flatter, but it will require some major adjustments: while the future trajectory of the NLW depends on what happens to average earnings, it is predicted that by next year it will be pegged at between £8.75 and £9 at a time of unprecedented economic uncertainty. 

Jeremy Corbyn, for his part, says that a future Labour government would raise the rate to £10 and extend it to under-18s. The question, then, is just how far minimum wages can be raised before we see the apocalyptic effects we were warned about in the last millennium? Or will business always protect its lowest paid no matter how high their earnings rise?

According to research from the Low Pay Commission (LPC), which makes recommendations to the government on minimum wages, the NLW would stand at £6.54 today if it had risen in line with average earnings, suggesting it has had a positive effect in lifting up the lowest paid. It found that up to seven million people – which amounts to 30 per cent of the UK workforce – now directly or indirectly benefit from the increases. 

And it’s worth remembering that the UK has been both a leader and a testbed for these ideas. Among comparable countries in the Organisation for Economic Co-operation and Development, only New Zealand has set its minimum wage so high or allowed it to grow so rapidly over time. 

“We don’t yet know the limit [of what sort of minimum wage the economy can bear],” says Nye Cominetti, economic analyst at the Resolution Foundation. “It’s hard to say what would happen if it were pushed to the limit. But our argument is that the UK should have that ambition, but it should be done at a cautious enough pace so that any negative effects can be corrected.”

Clearly, there are different stories to be told depending on whether you examine the NLW on a macro or micro level, and which sector of the economy you are working in. Broadly, employers have coped with wage rises by absorbing the costs: a CIPD survey, submitted to an LPC consultation on the topic, found that the most popular employer response to the introduction and subsequent increases in the NLW was to accept lower profits (31 per cent), followed by raising productivity (24 per cent).

But productivity is a broad term and 25 per cent of the more than 1,000 employers surveyed said they had resorted to worker intensification, increasing the workload of NLW recipients by giving them extra tasks. Charles Cotton, the CIPD’s senior reward adviser, says this points to potential problems with further increases in minimum wages: “Eventually [the NLW] will have an impact on employers. The effect of that impact is either going to be job losses or increased productivity. If you are able to boost productivity with smarter working rather than harder working, then it does become easier to finance. 

“But if that’s not an option you will eventually see organisations adopting things such as cutting back the number of hours, so hourly pay goes up but the number of contracted hours goes down and people aren’t necessarily any better off. However, the NLW has gone up quite significantly so far and it’s not had a negative impact.” 

When the NLW was introduced, it was assumed its effects would create a broadly positive ripple through the economy, but the reality has been a series of “unintended consequences” according to Cotton, most notably a compression in pay structures. “The difference between what an ordinary worker would be earning and what their supervisor would be earning has fallen,” he says. 

“In certain sectors such as retail and hospitality, employees may not want additional responsibilities without receiving significantly more money – especially if they can get more money by just working more hours, rather than accepting a promotion.”

The terminology of wages

  • National minimum wage: Set by the government on the recommendation of the independent Low Pay Commission – made up of trade unions, business figures and academics – the NMW is the minimum pay per hour almost all workers are entitled to, and is enforced by legal action.
  • Living wage: This independent voluntary accreditation scheme, also known as the ‘real living wage’, is an hourly rate for those aged 18 and over, based on the basic cost of living in the UK. The figure is updated annually and takes into account the cost of housing, transport and essentials. It consists of the UK living wage at £9 per hour and the London living wage at £10.55.
  • National living wage: Not to be confused with the living wage, the NLW was introduced by George Osborne in 2016 and is the minimum pay per hour for workers over 25. It is calculated with reference to UK median earnings and currently sits at £8.21 per hour – but proposed increases could see it rise to as much as £10 in the next couple of years.

The CIPD’s data indicates that while 19 per cent of all employers maintained pay differentials among employees since the NLW, 20 per cent have reduced the rates between those affected and their supervisors or managers. It found variations across sectors as differentials were particularly squeezed in retail (28 per cent), hospitality (28 per cent) and healthcare (26 per cent). 

This has had some striking effects. One national supermarket has replaced in-store supervisory jobs with a ‘section leader’ role, packed with additional responsibilities but paying only £1 above basic pay, according to an LPC report in 2018. Similarly, a hospitality worker in Scotland who progressed from waiter to head waiter and later wedding supervisor did so without receiving a pay rise.

For the Resolution Foundation, this is one of the great “known unknowns” of the minimum wage’s introduction, though while Cominetti says it is a “fair concern”, he adds: “Employers want to preserve differentials by protecting the gap between minimum wage jobs and those on slightly higher pay, but we think there has also been some squeezing in some cases. It’s a potential risk but we don’t think it is having 
a big effect yet.”

The CIPD believes this is an area where HR professionals can help by improving management practices and thinking more strategically and holistically about reward. It has also called for changes in government policy, including broadening and increasing the coverage of the apprenticeship levy into a training levy and increasing funding for further education colleges, all in the name of promoting progression and development. 

But what if there is a further set of unintended consequences from the introduction of minimum wages that is not being captured by a top-level view of economic and demographic data? Tony Dobbins, professor of employment relations and HR management at the University of Birmingham, fears that in particular the NLW is papering over the cracks of – and may even be encouraging – in-work poverty and age discrimination.

“The NLW is important for regulating low pay but it’s just not dealing with bigger economic and social issues because it is biased and weighted in favour of London,” says Dobbins. 

“It’s not dealing with the causes of low pay, it’s just dealing with the consequences – actually, it’s not even doing that. You can keep raising the NLW but if everything else is rising alongside it then it’s just a sticking plaster.”

Dobbins is one of a number of critics who fear the decision to split minimum wages into different rates depending on age (see chart, page 40) has been ill-considered. It’s perfectly feasible, he points out, for a 17-year-old to have the same housing issues as a 25-year-old, yet they will be paid differently for the same role. There has been anecdotal discussion, too, that unscrupulous employers in some sectors find reasons to axe workers at 25 to keep their wage costs down.

TUC research revealed that 21 to 24-year-olds on the minimum wage earn £800 less per year than the over-25s. And compared to 20 years ago, it found, younger workers are only £42 per week better off compared to £95 for over-25s. 

“The success of a minimum wage depends entirely on a worker’s class background and family circumstances,” says Dobbins. “A 22-year-old from a middle class family where everyone is employed is entirely different from a 22-year-old single parent from a working class background. Those are important factors that will change your ability to survive on a minimum wage.

“You can keep on increasing the NMW, but as long as cost of living increases keep happening there will be struggles, especially if other social policies aren’t addressed, such as more social housing and cutbacks to the welfare state. As a standalone economic policy measure, the NMW can only do so much if other social policy issues are left unaddressed.” 

Dobbins is an advocate of the voluntary living wage, designed to reflect what economists believe to be the real cost of living. Others would prefer to see the commitment to raising the real level of the NLW further scrapped until the UK’s economic outlook is more certain. The dichotomy between these views is indicative of the fierce debate around the topic, and the way wage data can be interpreted in radically different ways to support specific arguments. Where it all leaves Britain’s lowest-paid workers may never be fully clear, but at the very least those who feared the legislation would lead to the unwinding of the labour market have been conspicuously silent over the past couple of decades.

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