speri.comment: the political economy blog

The national minimum wage: more than setting a wage floor

The current focus on the level of the national minimum wage provides an opportunity to consider a wider range of issues associated with low pay

Sarah Brown, Associate Fellow of SPERI and Professor of Economics, University of Sheffield

Sarah BrownLabour’s pledge to increase the national minimum wage to over £8 an hour by 2020 was announced just a week or so before the next increase in the adult national minimum wage comes into effect on 1 October 2014.  This will take the figure to a minimum hourly wage of £6.50.  This represents an increase of a mere 19 pence an hour.  It’s difficult, of course, for many of us to comprehend just how significant this still is for individuals and households experiencing working poverty.  The prospect of future increases in the national minimum wage rate, as now promised by Labour, will clearly therefore be welcomed by many who are struggling in the current financial climate.

The Low Pay Commission (LPC) manifestly has a difficult job.  Its remit is determined by ‘the Government’s aim of having national minimum wage rates that help as many low-paid workers as possible , while making sure that we do not damage employment prospects’.  Given the levels of uncertainty currently prevailing in the economy (just think about possible increases in interest rates, let alone the outcome of the next general election), there is clearly a fine line to be drawn between doing too little and doing too much in terms of setting the national minimum wage.  Uncertainty itself can lead to increases in job insecurity: individuals may be more concerned about getting and retaining a job than the wages it pays.

From the employer’s perspective, it is necessary to draw attention to the potential benefits of paying more, especially in the context of the low-paying sectors of the economy.  Such benefits come in the form of enhanced recruitment, retention and productivity and lower absenteeism.  Importantly, Riley and Rosazza Bondibene found some evidence that suggested that the national minimum wage had resulted in productivity increases in the UK among low-paying firms in low-paying industries. It has to be acknowledged, however, that it’s hard to increase productivity in some low-paying areas, such as social care.

An important part of the debate about potential productivity effects concerns the development of skills to help prevent individuals ending up in low-paying jobs.  Given that the transition from education to employment is particularly problematic in the UK, the development of the skills of young people is absolutely crucial.  The setting of minimum wages for young individuals has important implications for choices at this early stage of the life cycle – choices which can determine their future wages, occupations and levels of job satisfaction and well-being.  As stated in the LPC (2014) report, minimum wage rates for young people should prevent them being exploited, but not provide an incentive to leave full-time education or training which potentially has considerable long-term benefits to their future labour market outcomes.

The apprentice system can play an important role here, with the overhaul of the organisation, structure and funding of apprenticeships in England following the Richard Review being particularly timely.  However, the setting of the national minimum wage for apprentices – ‘the Apprentice Rate’ – at only £2.73 an hour from 1 October 2014 (an increase of 5 pence per hour) does not seem particularly tempting for young individuals (compared, that is, to £3.79 for ‘the 16-17 Year Old Rate’).  Moreover, the most recent figures available on non-compliance referred to in the LPC’s (2014) report estimate that 40% of 16-17 year old apprentices were paid less than the Apprentice Rate in 2012.  Such shockingly high levels of non-compliance clearly need to be tackled urgently to bring about a more welcoming entry into the labour market for these young people.

Another area which has attracted limited attention in the debate over the setting of the national minimum wage rate concerns how individuals move out of low-paying jobs.  The provision and take-up of training and skills development play important roles here.  It is crucial that training budgets do not get squeezed and that employees have an incentive to engage in training.  One area of particular concern derives from evidence that suggests that wage compression in low-paying sectors has led to reduced incentives for employees to take on extra responsibilities, such as supervisory roles.  What, after all, is the point of taking on more responsibility if you do not get paid that much more?   However, what this then means is that these individuals are less likely to develop their skills and move out of low-paying jobs, thereby creating greater persistence in these jobs and bringing about other damaging longer-term consequences for the labour market.

The discussion of low pay in the UK often focuses on the low-paying sectors of the economy, such as retail and hospitality.  A focus on sector of employment, rather than occupation (i.e. type of job), is understandable from the perspective of employers and policy-makers.  But, in order to find out more about duration in low-paying jobs, occupational effects are also important.  For example, does a cleaner employed in the retail sector earn less than a cleaner in the hospitality sector?  Is it the sector, the type of job, or both, that lead to low pay?

From the perspective of living standards, the national minimum wage is, then, only one part of the story, even though the level at which it is set will rightly continue to attract political attention and debate.  At the same time, it interacts with other government policies and ways to tackle low pay, such as the setting of the levels of national insurance contributions and personal tax allowances.  A broader debate over how take-home pay is affected by a whole host of government policies is surely needed in the context of the continuing financial stress and vulnerability being experienced by some individuals and households in our society.

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Categories: Economics, Politics and policy, SPERI Comment, Welfare | Tags: | 1 comment

Articles and comments posted on this blog reflect the views of the author(s) and not the position of SPERI or the University of Sheffield.

Comments (1)

  1. If moving individuals out of low paying jobs is seen as important then maybe greater understanding is needed of why people might be choosing those jobs.For example,one reason might be that they allow for a balance between care responsibilities with the need for an income.

    With education becoming increasingly expensive and bills still needing to be paid, how do those that need some additional qualifications prior to starting higher education even see starting the process as rational?

    Also, how can paying young people a low wage be justifiable as a way to encourage them into education?It is still exploitative. If they do equal work they should get equal pay. Apprenticeships for working in retail /hospitality really need to be examined as well.Are these skills that require govt funding? Or is the govt subsidising part of an employers normal training process and associated costs?

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