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The National Minimum Wage, low pay and London

Conor D’Arcy

9 June 2014

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• Assessing the minimum wage – what it has and hasn’t achieved

• Reforming the minimum wage – the recommendations

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Assessing the minimum wage

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• No general impact on employment or unemployment

• Large positive effects on the earnings of the lowest paid workers

Debates on the NMW’s impact on earnings and employment are now largely settled

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……………………………………………………………………………………………………..Effect of the US minimum wage on employment1,500 estimates from 64 academic studies

While some studies show unemployment effects, the balance of academic opinion is clear

-20 -15 -10 -5 0 5 100

50

100

150

200

250

300

<-- Negative Estimated employment effect Positive -->

Stati

stica

l acc

urac

y (1

/SE)

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The NMW has grown at a faster rate than average earnings and inflation

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Extreme low pay has collapsed but low pay more generally remains high

……………………………………………………………………………………………………..Long-term trends in low pay and extreme low payPercentage of all employees below two thirds and half of median pay, 1968-2011

0%

5%

10%

15%

20%

25%

Low paid

Extremely low paid

Introduction of minimum wage

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While some level of low pay is inevitable, the share of the workforce who are low paid varies considerably Percentage of full-time workers earning below two-thirds of the median wage

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And for most, low pay doesn’t provide a first step on the ladder

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London

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……………………………………………………………………………………………………..The pattern seen nationally also plays out in London

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The gap between London and the rest looks less dramatic when we consider who gets stuck on low pay

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Reforming the minimum wage

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• The minimum wage has been highly successful—but it is clearly a settlement designed for the late 1990s

• As we have seen, it was narrow and focused – the LPC set the UK’s first minimum wage with little evidence and concentrated on worst exploitation

Important to recognise the successes of the NMW and LPC while acknowledging the built-in limitations

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Short-term: taking one step at a time, not looking too far ahead • The lack of direction mattered less in the early years but now there’s reason to

think it’s more important

The path of the minimum wage over time£ per hour, constant prices, adjusted for CPI

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The growing spike at the minimum wage% of employees by 5 pence pay bands

0 2.05 4.099999999999996.149999999999998.199999999999980%

1%

2%

3%

4%

1997

2007

2012

Passive – taking a hands-off approach – the minimum wage plus a penny

• The spike at the NMW is larger than expected—and it’s growing despite falling value. Many employers face little pressure to go further.

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Broader: Tackling low pay should be an objective of economic policy, backed by a powerful OBR-style low pay watchdog

Low pay across OECD countriesPercentage of full-time workers earning below two-thirds of the median wage

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1. Government sets out ambitions on the minimum wage– Proportion of median earnings– Medium-term horizon, e.g. five years– 60% a reasonable lodestar for what can and cannot be achieved– An expression of intent…

2. Low Pay Commission is evidence-based but more pro-active– Recommends rate that’s possible from year to year– Notes the gap with the government’s ambition– Points out blockages and advises on policy to support higher rate

More far-sighted: We suggest a two-pronged approach—more ambition from government, more support from LPC

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• Inevitable constraint of a single national minimum wage– Set for the most vulnerable part of the labour market– Many employers could afford a higher wage-floor

• Becomes a problem if employers take it as the going rate

• Some argue for mandatory sector rates. But…– Risk of complexity/enforcement problems– Practical difficulties

More assertive: The NMW is a blunt tool. We need pressure points above it to avoid a strategy of ‘NMW plus a penny’

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More assertive: The LPC should do more to inform the debate about which parts of the economy could afford to pay moreThe affordability of eliminating low pay by sectorAverage wage increase by industry if wage floor had been raised to low pay threshold

190k 400k 1.4mCumulative #of low paid workers: 1.5m

Easier to afford Sectors Harder to afford

Food and drink, accommodation, residential care

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• While the bite of the NMW varies by region, in most parts of the UK the NMW is equal to between 50 and 60 per cent of the hourly median wage. In London the bite is just 39 per cent

• Many national employers already have a specific London-weighting which they add to the wages of those working in the capital to recognise the higher cost of living

• Research already suggests that the London economy could bear a higher wage-floor.

No case for regional variation – more difference within than between – but London may be the exception

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• The LPC should commission similar research, not least to secure the legitimacy of the social partnership model

• It should then publish a figure for the minimum wage that London could bear without significant adverse effects on employment

• This rate should be published as a non-mandatory reference rate to inform wage negotiators, campaigners and public debate

• If employers did not respond to pressure to pay this rate, there may well be a case in future for granting the relevant authority in London the power to adopt the LPC’s recommendation as a mandatory

No case for regional variation – more difference within than between – but London may be the exception

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• A single legal National Minimum Wage recommended from year to year by the independent Low Pay Commission

• As part of a broader strategy to combat low pay, with the LPC as a powerful low pay watchdog

• Minimum wage set with more clarity and more balance of short-term flexibility and medium-term ambition

• A more assertive approach, pushing further in London and where sectors could afford to pay more

Summary: Retain the core of today’s settlement but strengthen it – broader, more far-sighted and more assertive

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The National Minimum Wage, low pay and London

Conor D’Arcy

9 June 2014

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……………………………………………………………………………………………………..The impact - why didn’t the NMW cause unemployment?• Reducing pay gaps between low paid and better paid

workers

• Cutting non-wage benefits and hours, though not enough to offset the upsides

• Pushing up prices (slightly) in sectors like take-away food, canteens and hotels

• Squeezing profits, though with no identifiable effect on the rate of business failure

• Boosting productivity in low paying sectors, particularly in large firms