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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 less than. Full entitlement applies to workers aged 22 and over, while a lower minimum rate applies to 18 to 21 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 (£3.10 for 18 to 21-year-olds). At that time, 1.9 million people were believed to be paid less than that.

As of October 2006, the national minimum wage is £5.35 (£4.45).The rate for 16 to 17-year-olds is £3.30. The rate of the NMW is determined by the trade and industry secretary, and has been increased every year since its introduction on April 1st 1999.

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 (for example, £10.10 per day for over 22s after October 2006) 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 the 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.


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 remains a source of disappointment for many. Ostensibly intended to offset the training costs that employers incur with many young workers, it has 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, apprentices are excluded, as are members of the armed forces and 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 Campaign believes workers in the capital need to earn a minimum of £7.05 to offset the high cost of living.


Statistics

  • The main NMW rate rose to £3.70 in October 2000; to £4.10 in October 2001; to £4.20 in October 2002; £4.50 in October 2003; £4.85 in October 2004; £5.05 in October 2005; and £5.35 in October 2006.
  • The large uprating of October 2001 affected between 1.1 million and 1.5 million jobs, and increased the aggregate national wage bill by 0.11 per cent
  • The small October 2002 uprating affected only about one million jobs

    Statistic 1: (Source: DTI, 2006); Statistics 2 and 3: (Source: Low pay commission, fourth report, February 2003)


    Quotes

    "(1) A person who qualifies for the national minimum wage shall be remunerated by his employer in respect of his work in any pay reference period at a rate which is not less than the national minimum wage…(3) The national minimum wage shall be such single hourly rate as the secretary of state may from time to time prescribe."

  • National Minimum Wage Act 1998, Section 1

    "The next Conservative government will not repeal the national minimum wage."

  • Michael Portillo MP, then shadow chancellor, February 2000

    "The national minimum wage has brought benefits to over one million low-paid workers. It has done so without any significant adverse impact on business or employment."

  • Adair Turner, low pay commission chairman, foreword to the fourth report, February 2003 End of story