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Minimum wage Tuesday, 30 March, 1999, 17:44 GMT 18:44 UK
Q & A: Making sense of the minimum wage
BBC Economics Correspondent Evan Davis eases confusion over the minimum wage.
Will the minimum wage cost jobs?

It may cost a few - but economists are loathe to put numbers to it. In general, there is a simple rule about job losses and the minimum wage: the more powerful the employer relative to employees, the more likely it is that he is paying cut-price wages, and the more likely it is that he can afford a minimum wage without cutting jobs. The weaker the employer, the more likely it is that he is already paying as much as he can afford, and the more likely it is that he will have to shed workers to afford the minimum.

Minimum wage
In some cases with very strong employers, it can be possible that a minimum wage creates jobs. After all, if an employer was reluctant to take on extra staff because to do so would require some pay increase, the minimum wage can make it easier because the pay increase has occurred anyway!

In practice, most experts suspect that the minimum wage will cost some jobs in some sectors and areas of the economy. The most pessimistic analysis has been produced by the National Institute of Economic and Social Research. It has no political agenda and has suggested that the extra labour costs of the minimum wage would normally lead to about a quarter of a million fewer jobs than otherwise. Other commentators have been a more circumpsect. The Bank of England simply described its best guess of the impact as "small".

Will the it cause problems for certain industries and certain regions of the UK?

Yes, probably. Because the minimum wage is uniform across the country, while pay is far from uniform, it may hit employers in the low paying areas most. Merseyside, the North-East of England, Wales and Northern Ireland are the three areas most affected. At the last count, in each of these areas, over 10% of the workforce was on pay below the minimum. London is clearly the least affected area - only 4.3% of workers are affected.

As for particular industries affected, those employing part-time women are most likely to be hit - half the people to be affected by the minimum wage fall into that category. A classic example of an industry expected to be hit is textile manufacture. Farm workers are already covered by a minimum wage arrangement, so will not be affected.

How ready is British business?

Business never really wanted the minimum wage but is more or less ready to accept it - particularly at a rate of 3.60. But recently, companies have been more concerned with some of the technical details. In particular, the biggest employer organisation, the CBI had objected to government proposals for companies to issue a statement of the minimum wage to all employees, and a demand for detailed minimum wage records to be kept about low-paid employees.

The government listened to the CBI, and has lifted many of the administrative burdens. As a result, in practice, companies will have to keep sufficient records to demonstrate compliance with the minimum wage, but they will not have to keep special records. They will not have to pay the minimum for each and every hour of the week - they have to ensure that over a 12-month period, the minimum wage has been paid.

Another area of concern to employers has been in the definition of pay. According to the regulations, pay includes basic pay, overtime pay, productivity bonuses or piece rates and tips paid through the pay-roll. All these taken together have to come up to the minimum. However, employers cannot add in other benefits they give to employees in order to hit the minimum. So, if a restaurant gives its staff free meals for example, or if it allows them to pocket tips which are not paid with the basic pay, then the true staff benefits may exceed the minimum, while formal pay may be below it. (Staff accommodation can be counted as a benefit.)

A third worry for some was that the minimum wage may lead to the displacement of live-in nannies or au-pairs. The government has thus chosen to exempt people working as part of a family from minimum wage coverage.

How will the it be enforced/policed?

Details of the enforcement regime for the minimum wage have yet to be finalised. For now we do know that the Inland Revenue will be the department responsible for catching rogue employers. Its efforts to do so will primarily rely on low-paid employees blowing the whistle on their mean-spirited employers. In addition, inspectors will carry out spot checks on companies. Fines, or even prosecution, await any that try to shirk their minimum wage responsibilities.

Other countries have been through the same process, what was the impact on their economies?

Other countries have had minimum wages for a long time. Some, such as the United States, have low unemployment and others, in continental Europe have high unemployment. It's hard to draw general rules, except that if a minimum wage is set too high, it will displace workers and make employers less competitive; but if it is set at a moderate level it need not be too disruptive to an economy, and can be beneficial.

One famous study of the effect of an increase in a minimum wage in New Jersey found that among fast food workers, a higher wage led to more employment. Another general finding is that minimum wages can be particularly disruptive to the employment prospects of young, inexperienced workers, and care needs to be taken to mitigate that.

The UK minimum wage represents about 55% of the median hourly wage, and 45% of the male median hourly wage. That makes it effectively higher than the minimum in the US, and lower than the minimum in France.

Given that many working in retail and public sector jobs already earn 3.60+ ph, isn't this all a bit meaningless?

The minimum wage is no anti-poverty panacea. Many of the very poor do not have jobs, and no minimum can help them at all. Others are paid more than the minimum, but are still poor.

However, it would be a mistake to argue that the minimum achieves nothing in helping the poor. Some 1.9 m workers will be be affected by it - that is one in 12. On average, assuming they are elevated to the minimum, they will be paid about a third more than at present. In addition, other policies - such as the government's proposed enhancements to Family Credit (to be renamed the Working Families Tax Credit) - should put extra money into the pay-packets of some low paid workers.

Why are newcomers to the job market (18-21 year-olds) being penalised with a lower rate?

Young workers tend to get paid less than older workers. That sometimes reflects the fact they are given training by employers - and hence get paid for their time in the form of extra skills as well as in cash.

Sometimes it reflects the fact they are inexperienced and untried, and hence are worth less than older staff. Sometimes it may be that employers can get away with paying them less, because they tend not to have mortgages and families to keep up.

Whatever the reason, if employers want or need to pay less to young workers, a miniimum wage law that forces them on to the same rates of pay as older colleagues could potentially damage their employment prospects more than that of their older colleagues.

So, it can make sense for young workers to have their own, lower minimum. It should not be seen as a penalty for being young; the penalty for being young already exists. Instead, the special "development rate" can be seen as ensuring that the young do not take their penalty in the form of higher unemployment, but in the form of lower wages.

In a sense the lower rate simply shows that in balancing the risks of low pay against the risks of unemployment, as far as young people are concerned, governments are disproportionately worried about youth unemployment. One reason for that may be that there is plenty of evidence to show that the best way for the young to get into a well-paid job is get into any job at all, and progress from there. The other reason is that the needs of young workers are probably smaller than those of older workers.

Will trade unions be expecting a rise in the level of the minimum wage within the next two years?

There is no provision for the minimum wage to be raised each year, along with wages generally. There is no annual pay round with regard to the minimum. In effect, this means that those stuck on exactly the minimum will fall further and further behind their colleagues as the years pass.

However, the Low Pay Commission which first suggested the rate of 3.60 still exists, and is charged with the task of monitoring the effect of the minimum wage and reporting to the government by December this year.

If after seeing 3.60 in practice, the commission decides the 3.60 rate is about right, it could presumably suggest a mechanism for raising the rate each year.

Links to more Minimum wage stories are at the foot of the page.


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