“We carefully weighed the risk of doing too little to raise the earnings of the lowest paid against the risk of recommending more than business and the economy can afford. Our recommendation that the adult minimum wage increase by 3 per cent to £6.70 an hour is likely be the largest real-terms increase in the NMW since 2007 taking its estimated real value three-quarters of the way back to its highest ever level. It should also represent a further increase in the value of the minimum wage relative to average earnings, which is already at a record level.
We judge that the improved economic and labour market conditions mean once again that employers will be able to respond in a way that supports employment. However, our recommendation this year is predicated on a forecast which foresees lower costs for business in fuel and energy, a strong economic performance, significant recovery in earnings across the economy and rising productivity. If these expectations are not borne out over the year we will take this into account when considering next year’s recommendation.
The National Minimum Wage (NMW) is the UK’s pay floor – designed to protect as many low-paid workers as possible without hurting jobs or the economy. The Low Pay Commission is an independent body whose role is to advise the Government on the NMW. Every February, it makes recommendations for the value of the NMW based on a careful review of evidence including economic analysis, submissions from stakeholders, research and a programme of visits.
The LPC submitted its recommendations to the Secretary of State for Business, Innovation and Skills, the Prime Minister and the Deputy Prime Minister accompanied by its 16th Report setting out a detailed review of the evidence on which they are based. The report as a whole will be published on 17 March 2015.
- The LPC works on the basis of an official remit. This year the Government asked the LPC to:
- monitor, evaluate and review the levels of each of the different NMW rates and make recommendations on the levels which should apply from October 2015;
- consider whether any changes can be made to the Apprentice Rate to make the structure simpler and improve compliance and also consider whether the structure and level of the Apprentice Rate should continue to be applied to all levels of apprenticeship, including higher levels; and
- consider whether, as concluded in our 2014 Report, the UK is entering a new phase where real increases in the NMW can be afforded. We should review the conditions that need to be in place to allow the value of the minimum wage to increase in real terms, including an update on our previous advice on the future path of the NMW.
As well as its recommendation for the adult rate, the Low Pay Commission has also recommended:
- an increase of 3.3 per cent to £5.30 in the Youth Development Rate, which applies to 18-20 year olds;
- an increase of 2.2 per cent to £3.87 in the 16-17 Year Old Rate;
- an increase of 2.6 per cent to £2.80 in the Apprentice Rate, which applies to all apprentices in year one of an apprenticeship, and 16-18 year old apprentices in any year of an apprenticeship;
- an increase of 27 pence in the accommodation offset to £5.35. The offset is the one benefit-in-kind that can count towards the minimum wage. This is the maximum daily sum employers who provide accommodation can deduct towards those costs.
The Accommodation Offset is the maximum daily sum employers who provide accommodation to NMW workers can deduct towards those costs. We recommend that the offset increases by 27p from £5.08 to £5.35.
The members of the Low Pay Commission comprise:
- David Norgrove, Chair
- Kay Carberry, Assistant General Secretary, TUC
- Neil Carberry, Director of Employment and Skills, CBI
- Peter Donaldson, Managing Director, D5 Consulting Ltd
- Richard Dickens, Professor of Economics, Sussex University
- Bob Elliott, Professor of Economics, Aberdeen University
- John Hannett, General Secretary, Usdaw
- Neil Goulden, Neil Goulden Consulting Ltd
- Brian Strutton, National Secretary, GMB
In April 2014 there were 1.4 million minimum wage jobs in the UK. 5.3 per cent of the UK labour force was paid within 5p of the minimum wage. This included: 1.2 million NMW jobs held by those aged 21 and over; 139,000 NMW jobs held by 18-20 years olds; and 40,000 NMW jobs held by 16-17 year olds.
The LPC has commissioned around 140 research projects since 1999 on the impact of the NMW. They show that, over the period, the low paid have received higher than average wage increases, with the NMW having little adverse effect on employment or the economy.
Over the course of the recession the real value of the NMW fell because of high inflation - as did wages for all other workers. But its relative value compared to other wages increased. This was the first recession going back to at least the 1970s when the lowest paid didn’t fare relatively worse than everyone else.
The relative value of the NMW is now at its highest ever. Its bite - the value relative to median earnigns - is 53 per cent for workers aged 22 and over. It is at nearly 80 per cent for low-paying sectors. It is at 92 per cent for the lowest paid 10 per cent of the UK workforce.
The NMW is now beginning to recover its real value. If accepted by the Government, the 2015 recommendation could restore three-quarters of the fall in the real value since its peak in 2007 (based on CPI inflation, and the Bank of England’s February 2015 inflation forecast of 0.5 per cent for Q4 2015).
One factor influencing this year’s recommendation has been strong employment growth. Total employment has continued to grow in the economy as a whole and in the low-paying sectors with the year to September 2014 showing the highest annual (September-September) increases in employment and jobs since the introduction of the NMW, as well as strong growth in hours and vacancy levels. Indeed, although the bite has risen sharply in the low-paying sectors since 2007, the number of employee jobs in this part of the economy has grown more rapidly than those elsewhere – 4.3 per cent over the last year compared with 3.1 per cent for other sectors. Employment growth has generally been strong across all firm sizes. Furthermore, the employment performance of most groups of workers particularly affected by the minimum wage – women, older workers, disabled workers, ethnic minorities, and migrants – has been better since 2008 than that of others not so affected by the NMW.
In April 2014, 0.8 per cent or 208,000 employees aged 21 and over were paid less than the NMW. Some employees are legitimately paid below the hourly rate of the NMW, such as when employers deduct small sums for accommodation costs up to the maximum daily legal limit, the accommodation offset. Others are not. There is high NMW non-compliance among employers of apprentices and in sectors like social care.
- There are four main rates of the NMW. The current and recommended value is shown in the table below.