National minimum wage at the limits of its effectiveness

The national minimum wage (NMW) has significantly helped reduce income inequality in Britain over the last six years, yet the time is fast approaching when further sharp increases in its level could adversely affect the employment prospects of the most disadvantaged. Instead, fresh policy ideas are needed to tackle low pay.

In a new paper, David Coats, associate director at The Work Foundation, who sat on the Low Pay Commission between 2000 and 2004 (the body which advises the government on the level of the NMW), argues that contrary to a widely held belief, the NMW, along with the tax credit regime, has returned income inequality to a level last seen in 1987.

Today, the NMW bears favourable comparison with minimum wages across the developed world - both in terms of real spending power and as a percentage of the median (the mid-point of the earnings distribution where 50% earn more and 50% earn less). After a cautious start in 1999 when the pay floor was introduced at a low level, the NMW has risen fast since 2003 - outstripping rises in both average earnings and prices. Households in the lowest third of the earnings distribution have gained significantly as a result: 68 per cent of beneficiaries are women, while the biggest single group of gainers are women working part-time.

The government is expected to announce the level of the NMW that will take effect from October 2007 shortly.

David Coats says: ëThe minimum wage is one of Labourís crowning economic achievements - a redistributive policy that really works. Today, no sane politician of any party would want to scrap it.

ëHowever, the time has come for a period of consolidation in the real value of the wage. To preserve the precious coalition of social partners on which the success of the NMW has been built, a relatively cautious rate rise for 2007 should be recommended - of about 5.60 for adults (up from 5.35 today). At some stage, every commentator knows the point is reached when the health of the labour market suffers. The LPC should maintain the real value of the NMW but test this level thoroughly before recommending any more real-terms increases.í

The paper rejects the idea that the NMW should be converted into a ëliving wageí of 7.00 or more. At such a level, the minimum wage would be higher than any pay floor anywhere in the world. Furthermore, the idea takes no account of the needs of different types of households (a single person is in a radically different position to a household with children). While living wage campaigns are a good way of shaming individual employers into paying more, they are not an effective instrument of national policy. For the foreseeable future, combining the NMW and in-work benefits will remain necessary, the paper argues.

Coats also says ëyouth ratesí (payable to 16-17 year olds and workers aged 18-22) should become permanent features of the NMW regime. Young people are most at risk of unemployment, while the effects of early unemployment can scar an entire working life. Paying the full adult NMW from age 18 would also be unsustainable, because the adult rate may have to fall to minimise the adverse impact on youth employment.

ëIt is far better then to have the highest possible adult rate and recognise the powerful case for treating young workers differently,í the report says.

Making further attempts to tackle low pay should come from other ideas than the NMW itself. These include:

Concluding a ëcompactí on public service employment standards, and covering such issues as advice, training, skills and access to trade unions. It should be enforced by contracts when public services are outsourced.

A renewed emphasis on enforcing the NMW - especially in sectors suspected of significant non-compliance (eg in those employing a large number of migrant workers).

A new standard of good employment practice, as envisaged in the Warwick Agreement. This would aim to wean employers off paying low wages and refocus their business models on providing higher quality work.

Tailored support for low wage workers, aiming to help them ëget oní and discover routes to better paid work.

The establishment of ësector forumsí, bringing together the social partners in a low wage sector to identify and apply best practice to boost productivity and improve organisational performance.

Implementing the recommendations of the Women and Work Commission and making further progress on the gender pay gap.

Extending the role of the Low Pay Commission, so that it has broad terms of reference to investigate the causes, consequences and cures of low pay, offer advice to sector forums, and shape government policy on business support interventions to improve productivity and performance.